What Can Slot Machines Tell Us About the Treatment of NOLs under Pennsylvania’s Corporate Net Income Tax?

pa-taxIn December of 2015, Pennsylvania’s Commonwealth Court issued an important decision holding that the structure of the net loss carryover deduction for the Corporate Net Income Tax violated the uniformity clause of the Pennsylvania Constitution. Nextel Communs. of the Mid-Atlantic, Inc. v. Commw., 129 A.3d 1 (Pa. Commw. 2015). Specifically, the court held that the cap on the deductibility of losses violated the uniformity clause by treating taxpayers in a disparate fashion based on their taxable income without any reasonable justification. Nextel, 129 A.3d at 9-10. The court ordered a refund to remedy the violation. Id. at 12-13. Currently, the case is on appeal to the Supreme Court of Pennsylvania; all briefs have been filed and the matter is awaiting further action from the court.… Read More

Tax Procedure: Special Estate Tax Liens and Administrative Expenses

tax-lienCongress created statutory liens to assure that taxes are collected. Federal tax liens function very much like judgments, although there is no judge involved. Instead, the administrative determination by the IRS becomes a lien after notice and demand. I.R.C. § 6321; see also Treas. Reg. § 301.6321-1. The lien becomes immediately effective against the taxpayer, but it only has priority against third parties if a notice is filed. I.R.C. § 6323(a). Even then, the general federal tax lien can be primed by certain other types of interests. See I.R.C. § 6323(b).

Estate taxes are treated differently. There is a special tax lien that applies specifically to estate taxes.… Read More

State and Local Taxation: PA Supreme Court Invalidates Local Share Assessment Levied Against Casino’s Slot Revenue Outside Philadelphia

slotsThe Pennsylvania Constitution requires 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. While this provision sounds similar to the equal protection clause of the Fourteenth Amendment, in practice, it is much more robust.

On September 28, 2016, the Pennsylvania Supreme Court ruled that the local share assessment imposed under Section 1403 of the Pennsylvania Race Horse Development and Gaming Act violated the uniformity clause of the Pennsylvania Constitution because casinos were taxed differently based upon the amount of their gross revenue.… Read More

Charitable Deductions: Appraisals, the IRS and Substantial Compliance

charitable-deductionsSection 170 of the Internal Revenue Code provides a tax deduction for any charitable donation. Cash donations are relatively straight-forward, but donations of property are not. If the value of the donated property exceeds $5,000, there are qualified appraisal rules that apply under the Treasury Regulations. See Treas. Reg. § 1.170A-13(c)(3). The requirements are technical, and they give rise to a fair volume of litigation.

On September 20, 2016, the Tax Court issued a taxpayer-friendly ruling in a case that illustrates both how technical the qualified appraisal rules are and how hard the IRS will fight to enforce them. Cave Buttes, LLC v.Read More

Tax Procedure: The Eleventh Circuit Sustains Penalty Defense Based upon an Accountant’s Advice

accountantTaxpayers frequently rely upon an accountant to prepare their returns, and that involves more than just filling out forms. In preparing a return, an accountant will need to make judgments about the appropriate treatment of tax items, including whether income represents capital gain or ordinary income and whether expenditures should be capitalized or treated as business expenses.

If the IRS concludes that one of these judgment calls is incorrect, the taxpayer can be exposed to penalties, such as the accuracy-related penalty under section 6662 of the Internal Revenue Code. Taxpayers frequently point to the accountant’s role in an effort to avoid liability for the penalty; the Code provides a defense where the taxpayer shows that that there was “reasonable cause” for the position taken on the return and that she acted in good faith.… Read More

A Peek Behind the Curtain: How Tax Return Information Is Disclosed in an Investigation Involving Non-Tax Crimes

behind-the-curtain-taxBy their nature, tax returns contain highly sensitive information. Consequently, the Internal Revenue Code makes return information, which is broadly defined, confidential. I.R.C. § 6103(a). This confidentiality provision comes with real teeth:

  • If an employee of the federal government inspects or discloses a return or return information, either “knowingly, or by reason of negligence,” in violation of section 6103, the taxpayer may sue the United States for damages. I.R.C. § 7431(a). If the taxpayer wins, she can recover statutory damages of $1,000 per violation, actual damages if greater, and, if the violation is either willful or the result of gross negligence, punitive damages.
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Partnership Taxation: The Tenth Circuit Holds that the Good Faith/Reasonable Cause Defense Should Be Determined at the Partner Level

partnership level auditTEFRA died in 2015, but the wake is still going on.

While the Bipartisan Budget Act of 2015 repealed TEFRA (or the Tax Equity and Fiscal Responsibility Act of 1982) for tax years ending after December 31, 2017, courts continue to grapple with cases governed by its partnership audit and assessment procedures. Tuesday, the Tenth Circuit issued an interesting opinion on when a good faith/reasonable cause defense to a penalty determination can be raised by an individual partner in a refund action. McNeill v. United States, No. 15-8095, 2016 U.S. App. LEXIS 16343 (10th Cir. Sept. 6, 2016).

TEFRA’s audit process works like this:

  • There is a partnership-level audit that results in a final partnership administrative adjustment.
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Taxation of Long-term Contracts: Little Pigs, the IRS, and the Completed-Contract Method

pigsLittle pigs get fed. Big pigs get slaughtered.

Most litigators are familiar with this truism, which is a pithy way of explaining that overreaching is dangerous. A recent Tax Court case shows this principle in operation; the IRS overreached in a real estate developer’s tax case, and it wound up with a determination on income recognition that it almost certainly regrets. Shea Homes, Inc. v. Comm’r, Nos. 14-72161, 14-72162, 14-72163, 2015 U.S. App. LEXIS 15570 (9th Cir. August 24, 2016), aff’g, 142 T.C. 60 (2014).

Income is taxable under the Internal Revenue Code in the year that it is received, unless the taxpayer’s accounting method calls for a different result.… Read More

Like-Kind Exchanges: The Tax Court Upholds a Reverse Deferred Exchange that Took Over Two Years

like kind exchange, deferredLike-kind exchanges under section 1031 of the Internal Revenue Code permit a taxpayer to defer the recognition of gain associated with the disposition of property used in a trade or business or held for investment purposes, thereby deferring tax liability associated with the disposition of property. I.R.C. § 1031(a)(1). The rationale for the deferral of taxes is that the taxpayer’s economic position remains unchanged: She had funds invested in a particular type of property both before the exchange and afterwards. See Comm’r v. P.G. Lake, Inc., 356 U.S. 260, 268 (1958).

There are a variety of technical rules under section 1031: For example, inventory held for sale won’t qualify for like-kind treatment, and neither will securities, such as stocks or bonds.… Read More

Criminal Fines, Civil Forfeitures and Collected Proceeds; More on Mandatory Whistleblower Awards Under the Internal Revenue Code

whistleblower, taxThis will provide further analysis of the Tax Court’s opinion in Whistleblower 21276-13W v. Comm’r, 147 T.C. No. 4, 2016 U.S. Tax Ct. LEXIS 20 (Aug. 3, 2016). As discussed previously, the court held that in calculating a mandatory whistleblower award under section 7623(b)(1) of the Code, criminal fines and civil forfeitures count, even though they cannot be used to pay an award because they are committed to other purposes. This result rested upon the court’s construction of the term “collected proceeds” in section 7623(b)(1), which drives the determination of a mandatory award. The relevant portion of the Code provides for a mandatory award to be calculated as “at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action .… Read More