The Supreme Court of Pennsylvania Upholds Philadelphia’s Soda Tax

Philadelphia Soda TaxPhiladelphia’s “soda tax” has generated some degree of local controversy; the beverage industry lobbied against the tax in City Council and then challenged it in court. Last week, the court challenge came to an end when the Supreme Court of Pennsylvania sustained the tax, with two justices dissenting. Williams v. City of Phila., Nos. 2 & 3 EAP 2018, 2018 Pa. LEXIS 3668 (Pa. July 18, 2018).

Despite all of the furor, Williams is a very simple case that turns on two basic issues: The scope of the preemption clause in the Sterling Act (which grants the City power to enact taxes) and the test for the “incidence” of a tax.… Read More

You Just Keep Me Hanging On: Continuing Tax Levies and the Motown Sound

Gold Forever Music, Inc. v. United StatesEddie Holland is a famous songwriter who wrote for the Supremes and other Motown acts; his hits included “Stop in the Name of Love,” and “Baby Love.”

Eddie Holland also owes the IRS over $19,000,000. When you owe the federal government that much money, the collection effort can spawn interesting issues:

  • In 2017, Mr. Holland had a big win, defeating the government’s effort to reach royalty assets transferred in a securitization transaction. United States v. Holland, 265 F. Supp. 3d 722, 727-29 (E.D. Mich. 2017).
  • 2018 was an off year, however, as a music publishing company owned by Mr. Holland lost a wrongful levy case.
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Tax Procedure: No Quick Fix for Graev Problems

divisible-taxesAs noted earlier, the question whether the IRS has complied with the approval requirements for penalty assessments has received significant attention recently. To summarize, section 6751(b)(1) of the Internal Revenue Code provides (subject to certain exceptions) that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” I.R.C. § 6751(b)(1). In 2017, the Second Circuit ruled that it was not sufficient if the penalty was approved at some point before the relevant tax assessment was finalized.… Read More

Tax Procedure: Unencumbered Funds and the Trust Fund Recovery Penalty

Trust fund tax penaltySection 6672 of the Internal Revenue Code imposes personal liability for employment taxes on “responsible parties” associated with a business if its taxes are not paid. Specifically, it provides:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

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Tax Procedure: Good Faith Is Not A Defense if the IRS Willfully Violates the Automatic Stay under the Bankruptcy Code or a Bankruptcy Court’s Discharge Order

Good faithSection 7433 of the Internal Revenue Code provides taxpayers with a potential cause of action for damages against the United States in the event that IRS employees violate either a provision of the Code or of the Treasury Regulations. I.R.C. § 7433(a). It also provides a damage remedy for debtors in bankruptcy cases, who can recover damages “[i]f, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service willfully violates any provision of section 362 (relating to automatic stay) or 524 (relating to effect of discharge) of title 11, United States Code.” I.R.C.… Read More

An Opinion About Nothing? Seinfeld Meets the Due Process Clause

Alan Berkun v. CommissionerOn May 25th, the United States Court of Appeals for the Eleventh Circuit did something unusual, electing to publish an opinion without any substantive ruling:

Given the lack of any substantive ruling on our part, this may seem like an opinion “about nothing.” Cf. Seinfeld: The Pitch (NBC television broadcast Sept. 16, 1992). And maybe it is. But we have chosen to publish it because the issues that Mr. Berkun attempts to raise on appeal may deserve attention from the bench and bar.

Berkun v. Comm’r, No. 17-11216, 2018 U.S. App. LEXIS 13910, *12-*13 (11th Cir. May 25, 2018).

Berkun is a collection due process case focused on notice.… Read More

Tax Procedure: Disregarded Entities Are Partners Too

Mellow-Partners-v.-Comm’r-No.-16-1454Single-member entities are classified for tax purposes under the check-the-box regulations; “an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.” Treas. Reg. § 301.7701-3(a). Most single-member LLCs do not elect to be treated as an association; instead, they are disregarded for tax purposes, and the owner simply reports the income and expenses of the LLC on Schedule C to Form 1040.

Disregarded, however, does not mean non-existent. Single-member LLCs that are “disregarded” are still pass-thru partners for purposes of TEFRA, as the D.C. Circuit ruled on May 22nd.… Read More

Tax Procedure: What’s the Point of Unenforceable Rights?

facebook v. IRSIn 2015, a formal Taxpayer Bill of Rights was added to the Internal Revenue Code; it provides as follows:

In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including-

   (A) the right to be informed,

   (B) the right to quality service,

   (C) the right to pay no more than the correct amount of tax,

   (D) the right to challenge the position of the Internal Revenue Service and be

         heard,

   (E) the right to appeal a decision of the Internal Revenue Service in an

         independent forum,

   (F) the right to finality,

   (G) the right to privacy,

   (H) the right to confidentiality,

   (I) the right to retain representation, and

   (J) the right to a fair and just tax system.

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Whistling Past the Graevyard: Penalties, Partnerships and Section 6751(b)

Partnership TaxationAs with every human endeavor, litigation has fads, although lawyers tend to use more elevated language, such as “trending issues” or “new developments.”

In the context of tax litigation, a major trending issue is section 6751(b), which provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” I.R.C. § 6751(b)(1). There are limited exceptions; the approval requirement does not apply to “any addition to tax under section 6651, 6654, or 6655,” or to “any other penalty automatically calculated through electronic means.” I.R.C.… Read More

Full Payment and Fairness: An Extreme Penalty Case

Larson v. USCan the government require a taxpayer to pay a $61,534,027 penalty to obtain judicial review?

The short answer is yes, as the Second Circuit ruled on April 25th. Larson v. United States, No. 17-503, 2018 U.S. App. LEXIS 10418 (2d Cir. Apr. 25, 2018), aff’g Larson v. United States, No. 16-cv-00245 (VEC), 2016 U.S. Dist. LEXIS 179314 (S.D.N.Y. Dec. 28, 2016).

How can this be possible? That’s a little more complicated.

In deficiency cases (income, estate, gift and a limited group of excise taxes), the taxpayer has the right to file a petition to the Tax Court and receive judicial review prior to paying the contested tax or penalty.… Read More