Late last week, the IRS filed a petition for rehearing en banc with the 6th Circuit Court of Appeals in U.S. v. Quality Stores. As we originally reported, the three judge panel that heard the case decided in favor of the taxpayers, triggering a potential refund opportunity for many corporate taxpayers.
The government’s petition confirms the magnitude of existing refund claims. Eight refund suits are pending in the district courts with a total of over $120 million at issue and that there are administrative refund claims totaling over $127 million from taxpayers within the jurisdiction of the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee). The IRS projects that the total amount in controversy over this issue is more than $1 billion.
Read the IRS’s Petition for Rehearing here:
Quality Stores Petition for Rehearing
The Second Circuit Court of Appeals has affirmed the ruling of the U.S. District Court for the Southern District of New York that Clause 3 of the Defense of Marriage Act (DOMA) is unconstitutional.
The case originated with a refund claim for overpaid estate taxes. Edie Windsor and Thea Spyer were a married homosexual couple from New York. Upon Thea’s death, Edie paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC Section 2056(a) – a benefit routinely applied to married couples of different sexes. When Edie’s claim for refund of the estate taxes was denied she filed a refund action in U.S. District Court.
The trial court held that DOMA denied Ms. Windsor equal protection under the law as guaranteed by the 5th Amendment to United States Constitution. The three judge appellate panel agreed. It added that “homosexuals have suffered a history of discrimination” and thus the proper legal standard for determining Constitutional protections is intermediate scrutiny. The court held that DOMA could not meet that standard and thus Edie’s 5th Amendment right to equal protection under the law was violated when the provisions of the Internal Revenue Code applied differently to her than to other surviving spouses.
Read the opinion here:
Windsor v. U.S., No. 12-2335 (2d Cir. Oct. 12, 2012)
Following the recent California Court of Appeal decision affirming Gillette’s election to apportion income under the Multistate Tax Compact (MTC), the California Franchise Tax Board (FTB) has issued guidance for taxpayers who wish to preserve the statute of limitations by filing amended returns that elect the MTC method retroactively.
The FTB has made clear its position that a taxpayer cannot elect to utilize the methodology contained in the MTC on an amended return. The FTB also is clear that it will only take action on the claims once Gillette has been fully resolved. Nonetheless, taxpayers wishing to file a protective claim retroactively electing to utilize the apportionment method contained in the MTC should mail an amended return or a letter claim to the FTB at:
Compact Method 347 MS: F381
Franchise Tax Board
C/O FTB Notice 2012-01
P.O. Box 1673
Sacramento, CA 95812-1673
The amended return should include
- a revised Schedule R
- a computation of the refund amount, and
- “COMPACT METHOD” should be written in red at the top of the amended return.
An amended return is required for each year for which the retroactive election is made.
Please refer to the announcement for additional filing requirements.
FTB Notice 2012-01
On rehearing, the California Court of Appeal has reaffirmed its earlier (vacated) decision and reversed the decision of the Franchise Tax Board (“FTB”) in Gillette v. Franchise Tax Board. The Court of Appeal concluded that the 1993 amendment that attempted to repeal the Multistate Tax Compact (MTC) election was invalid and the taxpayer could elect to apportion under the three-factor MTC formula.
On July 24, 2012, the Court of Appeal released an opinion and decision that reversed the decision of the FTB. The FTB dismissed the taxpayer’s request for refund based on an election to apportion income according to the three-factor Multistate Tax Compact (MTC) formula. On August 9, 2012, the Court of Appeal vacated its opinion and decision and ordered a rehearing. The rehearing was held and the Court of Appeal is standing by its earlier decision: the FTB construction is invalid, the MTC election was not repealed, and the taxpayers could elect to apportion income under the three-factor MTC method.
The opinion after rehearing is substantially and substantively similar to the original opinion issued by the Court of Appeal. The following minor additions to the new opinion are notable. The new opinion notes the enactment of California Senate Bill No. 1015 on June 27, 2012 (which repealed the MTC election) and makes clear that the effect or validity of this later enacted statute was not before the court. It also recognizes that it was the “clear import” of the legislature to override the MTC election and mandate exclusive use of the double-weighted sales formula but that such a construction is invalid. Finally, the court strengthened the language in its conclusion:
The Legislature did not repeal, amend or reenact any part of the Compact at the time, and thus neither the public nor the legislators had adequate notice that the intent of this amendment was to eviscerate former section 38006.
Read the opinion on rehearing here:
Gillette v. FTB (Rehearing) 10.2.12
If you’d like to compare this opinion with the original, vacated, opinion please visit our earlier post on the order for rehearing.
On September 1, the IRS unveiled the details of a new program to encourage more offshore account holders to file U.S. income tax returns and the associated Reports of Foreign Bank and Financial Accounts (FBAR). This program is a departure from the current Offshore Voluntary Disclosure Program and its predecessors in at least one significant aspect – there are no mandatory penalties.
Taxpayers must meet a number of qualifications to take advantage of the initiative and avoid penalties. The new procedure is limited to non-residents subject to U.S. filing requirements who have not been filing U.S. income tax returns. Dual citizens meeting the non-resident, non-filing requirements also may participate. Qualifying taxpayers must have lived abroad since January 1, 2009 and not filed a U.S. tax return in that time.
Eligible taxpayers also must present a low level of compliance risk. All applications will be reviewed and the IRS will determine whether the taxpayer presents a low compliance risk. The determination will be made on the basis of returns filed under the procedure and a two-page questionnaire that each applicant must complete. High risk factors include material economic activity in the United States, ongoing IRS investigation or audit, and previously assessed FBAR penalties.
Applications will be processed in a streamlined manner if no high risk factors are present and the returns show tax due of less than $1,500 per year. The low tax liability may be within reach for many non-resident taxpayers if they are eligible for the foreign earned income and foreign housing cost exclusions under IRC Section 911.
Two important notes for taxpayers who may be considering this program. First, participation in the program does not provide protection from criminal prosecution. Second, once a taxpayer files a submission with this procedure they will no longer be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). Taxpayers interested in this program should contact a well-qualified tax professional to discuss their facts and the details of this program.