The 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
The 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
When 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
Pfizer, Inc. v. United States District 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
Marijuana 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
Partnerships 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 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
In 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
Employers are required to deduct federal income tax from employees’ paychecks. I.R.C. § 3402(a)(1). While the employer will be liable if it fails to withhold, I.R.C. § 3403, in cases where the employees were improperly classified as independent contractors, the prospect exists that they have independently paid their income taxes directly after receiving a 1099. As a consequence, the Internal Revenue Code provides a partial defense to the employer: The employer will not be liable for income taxes to the extent that the improperly classified employees paid them, but will remain liable for any interest and penalties associated with its failure to deduct the taxes from the employees’ wages.… Read More
Some people will go to extraordinary measures to avoid paying their taxes. Recently, the First Circuit addressed a case where a business owner attempted to use a Son-of-BOSS tax shelter to avoid paying tax on gains from the sale of several fitness centers; when that did not work, he and his wife entered into a sham divorce, using the property settlement as a means to shelter assets from the IRS. United States v. Baker, No. 16-1415, 2017 U.S. App. LEXIS 5234 (Mar. 24, 2017). The Court of Appeals had to unravel a complex web of transactions to determine what property owned by the couple was subject to a federal tax lien.… Read More