Tax Procedure: Sometimes Even Bad Advice Is Helpful

bad adviceBad tax advice can be expensive, but sometimes it’s better than no advice at all.

Last week, the Tax Court issued an opinion in a complicated international tax case that illustrates the principle that incorrect advice can still help a taxpayer, as it may support a defense to a penalty. Grecian Magnesite Mining, Indus. & Shipping Co. v. Comm’r, No. 19215-12, 2017 U.S. Tax Ct. LEXIS 36 (July 13, 2017).

In Grecian Magnesite, the taxpayer was a foreign corporation formed in the Hellenic Republic and based in Athens. 2017 U.S. Tax Ct. LEXIS 36 at *3. The taxpayer had an interest in Premier Chemicals, LLC (“Premier”), which was its sole connection to the United States.… Read More

State and Local Taxation: Pennsylvania Taxing Authorities Cannot Limit Assessment Appeals to Commercial Property

pa-taxThe Pennsylvania Constitution imposes a requirement that taxes be uniform: “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Pa. Const. Art. VIII, § 1. On July 5th, the Pennsylvania Supreme Court unanimously held that a tax authority cannot selectively target commercial property for assessment appeals in light of this uniformity requirement. Valley Forge Towers Ap’ts N. LP v. Upper Merion Area Sch. Dist., No. 49 MAP 2016, 2017 Pa. LEXIS 1520 (Pa. July 5, 2017).

Taxpayers who owned commercial property in Upper Merion School District brought an action for declaratory and injunctive relief asserting that the school district had a practice of discriminating against commercial properties by targeting them for assessment appeals, while ignoring the fact that many single family homes were significantly under assessed to a greater degree than commercial properties.… Read More

Tax Procedure: The Tax Court Holds that a Partner-Level Defense to an Accuracy-Related Penalty Can Be Considered in a Collection Due Process Hearing

TEFRA, CollectionTaxpayers who are the subject of collection action by the IRS have the option of requesting a collection due process hearing before the IRS either files a tax lien or pursues a levy against the taxpayer’s property. I.R.C. §§ 6320; 6330. The Tax Court then has jurisdiction to review the administrative disposition. I.R.C. § 6330(d). Typically, these hearings (and the court’s subsequent review) focus on issues concerning the propriety of the proposed collection action, as well as potential collection alternatives.

The underlying merits of the tax assessment are usually not at issue because, in most cases, the taxpayer will have had a prior opportunity to seek Tax Court review of the assessment.… Read More

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

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