Tax Court: Challenge to Underlying Liability Does Not Extend Period for CDP Appeal

In a rare division opinion supplementing a previous division opinion, the Tax Court offers a primer on the definition of “deficiency” and its meaning for jurisdictional purposes. This opinion is not for the meek of heart nor for those not ready to tackle the nuance of Tax Court jurisdiction.

In response to a motion to certify an interlocutory appeal, Judge Joseph Gale lays out the statutory requirements for the court’s jurisdiction over deficiencies as well as collection actions. He also discusses the statutory grounds for variances in the 30-day response required for collection due process review (e.g., innocent spouse relief, interest abatement) and other non-deficiency actions (e.g., employment taxes, frivolous return penalties) in U.S. Tax Court.

The court did not certify the interlocutory appeal and affirmed the proposition that a challenge to the “underlying tax liability” in a collection due process hearing does not extend the period in which to file a petition for review with the Tax Court.

Read the entire opinion here:
Gray v. Commissioner (Gray II), 140 T.C. No. 9 (2013)

Tax Court: Second FPAA Invalid, Cannot Confer Jurisdiction

us_tax_courtIn Wise Guys Holdings v. Commissioner, the Tax Court has ruled that a second Final Partnership Administrative Adjustment (FPAA) issued to the same Tax Matters Partner for the same tax period is invalid where the issuance was not a result of fraud, malfeasance, or misrepresentation of material fact. The invalid FPAA cannot confer jurisdiction on the court in a TEFRA action where neither the Tax Matters Partner nor a notice partner filed a timely petition in response to the first FPAA. The petition was dismissed.

Find out why the Wise Guys lost their bet on the second FPAA here:
Wise Guys Holdings, LLC v. Commissioner, 140 T.C. No. 8 (2013)

Mark Your Calendars: IRS Closes for 5 Days Under Sequestration

UPDATE 7/17/2013: The IRS has announced that it is canceling the furlough day scheduled for Monday, July 22, 2013 mentioned below. According to the press release “the IRS will be open for taxpayers that day as scheduled.” Presumably all functions and services will be available. The press release indicates that the IRS also may cancel the scheduled August 30, 2013 furlough day but a decision has not been made.

Four Fridays and a Monday. Those are the days that the IRS will be closed under the budget cuts imposed by sequestration. Rather than rolling employee furloughs, the IRS has decided to take a few three-day weekends and close shop entirely for five days in 2013. Acting Commissioner Steven Miller make the announcement on Friday.

In addition to regular federal holidays, the IRS will be closed on the following days in 2013: May 24, June 14, July 5, July 22 and Aug. 30. IRS employees will not be paid for these days and IRS offices will not open.

IRS Announces Special Filing Extension for Boston Area Taxpayers

On Wednesday, the Internal Revenue Service announced a three-month tax filing and payment extension to Boston area taxpayers and others affected by Monday’s Boston Marathon explosions.

This relief applies to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.

The IRS will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013. By law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.

The IRS will automatically provide this extension to anyone living in Suffolk County, Mass. No further action is necessary for Suffolk County, Mass., taxpayers to obtain this relief.

Eligible taxpayers living outside Suffolk County, Mass. must call (866) 562-5227 starting Tuesday, April 23, and identify themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call (866) 562-5227 to request penalties abatement. Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013. Visit for more information.

Our hearts and prayers go out the victims and families.

Donald Says “File!”

No, not Mr. Trump, but an older (and more patriotic?) icon of American culture reminds citizens of their duty to file their taxes in this 1943 video produced for the War Activities Committee of the Motion Pictures Industry.

Individual income tax returns are due today. If you still haven’t made it to the bottom of that shoebox of receipts, then make sure to get in your automatic extension to file by the end of the day.

Can the IRS Read Your Email?

IRS_logoThe IRS thinks that they can.

The IRS maintains that its agents can read taxpayers’ emails, texts, and other private electronic communications without a warrant according to a story by Brendan Sasso in The Hill. According to the story, the IRS has maintained that taxpayers “do not have a reasonable expectation of privacy in such communications.”

The report is based on documents acquired in a Freedom of Information Act request filed by the American Civil Liberties Union.

Read the story here:
IRS: We can read emails without warrant

Hat tip: Beau Howard

New York’s Highest Court Affirms Constitutionality of Click-Through Nexus

500px-Seal_of_the_New_York_Court_of_Appeals.svgClick-through nexus is a well-known term in the world of sales and use tax. It refers to the proposition that an internet vendor may be required to collect and remit sales tax on sales that originate from links placed on the websites of independent affiliates if that affiliate has nexus with the taxing jurisdiction. It is also known as affiliate nexus but may be most commonly known as the “Amazon tax” or “internet tax.”

Here’s how it works. Large internet retailers like and often maintain a physical presence in only a handful of jurisdictions thereby limiting their obligation to collect and remit sales tax on sales in those states where they have no physical presence. These large internet retailers also allow independent websites to enter into affiliate sales agreements. The independent website agrees to put a link to the retailer on their website. In return, the independent website receives a commission on sales that originate from the link on their site. The commission is triggered when the customer “clicks through” the link on the independent website to make a purchase on the large retailer’s website. The tax issue is whether the physical presence of the independent website in a particular state can be attributed to the larger company for sales tax collection purposes.

New York was one of the first states to enact a statute creating a sales tax obligation based on click-through nexus. In 2008, New York amended the definition of “vendor” for sales tax purposes to include referring website links:

a person making sales of tangible personal property of services taxable under this article (‘seller’) shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods. Tax Law § 1101(b)(8)(vi)

The amendment created a presumption that New York residents who received commissions from sales generated by website referral links were soliciting business in the state on behalf of the party who paid the commission. Shortly after the statute was amended, the Department of Taxation and Finance (DTF) issued guidance indicating that placing a link to another website on a website owned by a resident would not trigger the statutory presumption because it was “mere advertising.” However, if the link generated sales commissions for the resident owner of the independent website, then the link would not be considered mere advertising and the sale would be subject to sales tax.

Amazon and Overstock each filed suit arguing that the statute was unconstitutional on its face (i.e., as written) and as applied under the Due Process and Commerce Clauses of the U.S. Constitution. The New York Supreme Court (New York’s trial court) granted DTF’s motion to dismiss for failure to state a cause of action in both cases. The Appellate Division affirmed the dismissals on the facial challenges but reinstated the as-applied challenges, calling for further discovery. The parties stipulated to the discontinuance of the as-applied constitutional challenges to set the stage for the New York Court of Appeals (New York’s highest court) to review the merits of their facial challenge. The Amazon and Overstock cases were consolidated for consideration by the high court.

Facial constitutional challenges face a high hurdle and this case followed in suit. The Commerce Clause question came down to whether New York’s statute satisfies the “substantial nexus” test set forth by the U.S. Supreme Court in Complete Auto Transit, Inc, v. Brady, 430 U.S. 274 (1977) and Quill Corp. v. North Dakota, 504 U.S. 314 (1992). Most observers would note that the Complete Auto test applies to income taxes and the Quill test applies to sales and use taxes. The New York court did not make such a distinction. This is notable because the sales tax test under Quill requires a physical presence in the taxing jurisdiction to satisfy the substantial nexus requirement.

The Court of Appeals distinguished Quill‘s physical presence requirement based on its own jurisprudence. Citing its opinion in Matter of Orvis Co. v. Tax Appeals Trib. of State of N.Y., 86 N.Y.2d 165 (1995), the high court noted that

although an in-state physical presence is necessary, it “need not be substantial. Rather, it must be demonstrably more than a ‘slightest presence'”. The presence requirement will be satisfied if economic activities are performed in New York by the seller’s employees or on its behalf. [internal citations omitted]

The court explained that “the world has changed dramatically in the last two decades” and expounded on the parallels between the mail order business (Quill) and online retail (Amazon and Overstock). In affirming the constitutionality of the New York statute under the Commerce Clause, the Court of Appeals held that

Viewed in this manner the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence'” under Orvis.

The Court of Appeals’ analysis of the Due Process Clause was more direct. It affirmed the statutory presumption that resident affiliates will solicit local sales by reaching “out to their New York friends, relatives and other local individuals” was rationally related to the facts proved and the facts presumed.

The opinion of the court included a dissent from Judge Robert S. Smith who observed that the New York statute “tries to turn advertising media into an in-state sales force through presumption.” The consequence, in Judge Smith’s view, “would be to nullify the rule that advertising in in-state media is not the equivalent of physical presence.” The dissent concluded that the statute should be held unconstitutional under the Commerce Clause.

Some observers may question whether the New Court of Appeals has skirted Quill’s physical presence standard with this decision. In all events, click-through nexus is the law of the land in New York. Whether the parties will seek review in the U.S. Supreme Court remains to be seen.

Read the opinion here:
Overstock v. New York Taxation and Finance

4th Circuit: District Court Abused Discretion by Allowing Evidence of CPA’s Personal Tax Situation in Tax Shelter Promoter Case

The Fourth Circuit Court of Appeals vacated portions of a jury’s findings, including imposition of a $2.6 million penalty, because the District Court allowed the introduction of evidence of the defendant CPA’s personal tax situation (he didn’t file returns) during the penalty phase of the trial.

The Fourth Circuit held that the District Court abused its discretion by permitting the evidence into the record over the defendant’s objection. The Court of Appeals further held that the personal tax information was not relevant to the tax shelter promotion penalty in question and the effect of allowing it into evidence was highly prejudicial. The lower court’s error was not harmless.

The appellate court concluded that the evidence “bears all the indicia of garden-variety “bad acts” evidence with no other purpose than to emotionally inflame the jury against the defendant.”

Read the opinion here:
Nagy v. U.S., No. 10-2072 (4th Cir. Mar. 29, 2013)

Two Weeks Left to File 2009 FICA Refund Claims for Severance Payments

url2The deadline for filing 2009 FICA refund claims based on U.S. v. Quality Stores, Inc. is fast approaching. Corporate taxpayers who experienced layoffs, reductions in force, and/or facility closures in 2009 or thereafter may file a protective refund claim for FICA taxes withheld from severance payments made to involuntarily terminated employees. Taxpayers have until April 15, 2013, to file a protective refund claim for all four quarters filed in 2009.

The refund claims are predicated on the Sixth Circuit Court of Appeals’ holding in U.S. v. Quality Stores, Inc., previously reported here, which held that certain severance payments are not subject to FICA withholding. The ruling specifically applies to taxpayers in Kentucky, Michigan, Ohio, and Tennessee (the states within the jurisdiction of the Sixth Circuit) but taxpayers across the country have been filing claims to protect their right to potential refunds.

The government is still considering whether to challenge the decision in the United States Supreme Court. The original deadline for filing a petition for writ of certiorari was April 4, 2013, but last week the Supreme Court granted the government’s request for a 30-day extension. Those waiting to see if government would seek the high court’s review before filing a protective claim will now have to make a decision without that knowledge. The government’s deadline for filing a petition is May 3, 2013.