Tag Archives: U.S. Supreme Court

Supreme Court Allows Foreign Tax Credits for U.K. Windfall Tax

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us-supreme-courtThe U.S. Supreme Court has resolved a split in the circuits on the U.S. tax treatment of U.K. windfall tax payments made by U.S. utilities. In a unanimous opinion authored by Justice Thomas, the Court held that the windfall tax qualified as a “creditable tax” for U.S. foreign tax credit purposes. The result is that the appellant here, PPL, and Entergy, who had the companion case, will be able to take a credit against their U.S. income taxes for the amounts paid to the United Kingdom.

The central issue was whether the U.K. tax was a tax on income, the general standard for creditable foreign taxes. The ultimate decision was a bit more nuanced and scholars surely will continue to debate the issue including the algebra (don’t see that often in the tax world) and the potential distinction between the regulatory phrase “in the U.S. sense” and Justice Thomas’ phrase “if enacted in the U.S.”

Practitioners, being the practical folks that they are, will look to expand the decision for the benefit of other clients that may have paid taxes similar to the windfall tax but not received the benefit of foreign tax credits against their U.S. income.

This is what happens when the Supreme Court issues a tax opinion. There will be more to come, as the estate tax case that may decide the fate of DOMA has been heard and likely will be decided this year and another tax case (on overpayment penalties) is being briefed for the Supremes right now. Expect a decision in the latter case, U.S. v. Woods, sometime in 2014.

Read the PPL opinion here:
PPL Corp. v. Commissioner, Docket No. 12-43 (U.S.S.C. May 20, 2013)

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

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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.

Today: Supreme Court to Hear Arguments in DOMA Tax Case

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Seal_of_the_United_States_Supreme_Court.svgToday, the United States Supreme Court will hear arguments about the Constitutional rights of homosexual couples courtesy of the Internal Revenue Code.

The Court may rule on a variety of grounds in United States v. Windsor including standing (was the couple’s marriage recognized under New York law) and the proper Constitutional standard (does Intermediate Scrutiny apply to homosexuals) but the case started with a tax return.

Edie Windsor and Thea Spyer were New York residents and a couple for over 40 years. In 2007, they were married in Canada where same-sex marriage was legal. Upon Thea’s death, Edie filed a federal estate tax return, Form 706. Thea’s estate paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC §2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes paid. When that claim for refund was denied she filed suit in federal district court.

The refund denial was reversed by the U.S. District Court for the Southern District of New York and the Second Circuit Court of Appeals. Read opinions published in those cases here and here.

Whether not the Supreme Court issues a sweeping or narrow opinion on the rights of homosexuals, there is little question that the tax code touches everyone. After all, that’s where this case started.

U.S. Supreme Court to Hear Tax Penalty Case

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us-supreme-courtThe Supreme Court has granted the government’s petition for certiorari in United States v. Woods, No. 12-562. The high court will decide whether the IRC §6662 overstatement penalty applies to underpayments of tax that are “attributable to an overstatement of basis” when the basis has been disallowed because the transactions that established the basis lacked economic substance.

The Court also asked the parties to brief an additional issue related to the procedural history of the case. Specifically, the Court is interested in whether the district court had jurisdiction under IRC §6226 to consider the substantial valuation misstatement penalty. This question, which arises under the procedural guidelines that govern large partnerships in TEFRA, has been raised in many cases over the course of the last decade. The heart of the matter is what issues are appropriate for resolution in a partner-level proceeding and which should be resolved at the partnership level.

Read the court’s order here:
12-562 U.S. v. Woods

Petition for Writ of Certiorari Filed in Historic Boardwalk Hall Tax Credit Case

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us-supreme-courtThe taxpayers in Historic Boardwalk Hall are seeking review in the United States Supreme Court. As reported here last summer, the Third Circuit Court of Appeals reversed the Tax Court and denied the public/private partnership between the New Jersey Sports and Exposition Authority (“NJSEA”) and Pitney Bowes the benefit of historic rehabilitation tax credits because the two parties were not bona fide partners.

The petition faces an uphill battle to gain a hearing at the Supreme Court. There is no split in the Circuit Courts of Appeal on this issue and the high court seems reluctant to tackle tax matters without that prompt. The petition rightly argues that this is the first case “where the Internal Revenue Service has made a broad based challenge to the allocation of Congressionally-sanctioned federal historic rehabilitation tax credits by a partnership to a partner.” The public policy implications of the Third Circuit’s decision are broad and the impact has already been felt in the historic rehabilitation context and beyond. Many parties will be watching to see what happens with this petition.

Read the petition for writ of certiorari here:
Historic Boardwalk Hall Petition for Writ of Certiorari

Tax Question May Determine Supreme Court’s Position on Same-Sex Marriage

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Last week, the U.S. Supreme Court granted certiorari in two cases that may decide the constitutionality of same-sex marriage. One of the two cases, U.S. v. Windsor, came to the Court by way of the tax code. In Windsor the high court will consider whether the decedant’s same-sex spouse qualified for the unlimited marital deduction under IRC Section 2056(a). Whether, and how, the court ultimately rules remains to be seen but the tax code may once again be the basis for a far-reaching decision out of the Supreme Court.

6th Circuit: Severance Payments Not Subject to FICA Withholding

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In a long-awaited decision, the Sixth Circuit has held that severance payments following involuntary lay-offs were not wages for FICA reporting purposes. The decision is an opportunity for refund claims by corporate taxpayers who have made similar severance payments after shutting down a physical location or line of business. Neither a bankruptcy or complete business closure is necessary. Taxpayers should contact their tax advisors to review their facts before filing a claim.

The facts of this case are as follows. Quality Stores, Inc., the operator of Central Tractor Farm & Country, went through bankruptcy proceedings beginning in the fall of 2001. Quality Stores closed all locations and operations. As part of the closures, the company filed pre- and post-petition severance plans for its employees that included payments for job losses. FICA and Federal income taxes were withheld from the payments.

Quality Stores later filed a claim for refund of over $1 million for the employer and employee portions of the remitted FICA taxes. The claim was denied by the IRS and the taxpayer sought relief in the Bankruptcy Court. The Bankruptcy Court found that the severance payments were supplemental unemployment compensation benefits (“SUB payments”) and therefore not wages for purposes of FICA withholding. The refund was proper. The District Court affirmed. The government appealed.

The Court of Appeals was asked to determine whether the payments were SUB payments, and if they were, whether or not they were also wages for purposes of FICA withholding. IRC Section 3402(o) provides for the “[e]xtension of withholding to certain payments other than wages.” The Court’s decision turned on the question of whether or not the SUB payments were “other than wages” as suggested by Section 3402(o). If the payments were not wages for FICA purposes, then the refund should be granted.

The Court of Appeals reviewed the matter de novo and agreed with the lower courts’ determinations that the payments were SUB payments. This was an important determination because it was a point of distinction between the Sixth Circuit’s analysis and that of the Federal Circuit. In CSX Corp. v. U.S., 518 F.3d 1328 (Fed. Cir. 2008), the Federal Circuit Court of Appeals held that similar severance payments were wages subject to FICA withholding.

The Sixth Circuit held that the Quality Stores payments were SUB payments as defined by a five-part test drawn from IRC Sec. 3402(o)(2)(A). In the Sixth Circuit’s view a payment meeting the following requirements was a SUB payment:

(1) an amount paid to an employee; (2) pursuant to an employer’s plan; (3) because of an employee’s involuntary separation from employment, whether temporary or permanent; (4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and (5) included in the employee’s gross income.

It further opined that the payments need not be tied to the payment of unemployment compensation and that there was no distinction between payments made in a lump sum and those made over a period of time.

By contrast, the Federal Circuit had determined that a SUB payment must meet an eight part test that was set forth in a 1956 IRS Revenue Ruling. The Sixth Circuit rejected this approach, found that the severance payments were SUB payments, and proceeded to determine the meaning and purpose of Section 3402(o).

The Sixth Circuit held that “the necessary implication” of the phrase “shall be treated as if it were a payment of wages” in Section 3402(o)(1) is “that Congress did not consider SUB payments to be “wages,” but allowed their treatment as wages to facilitate federal income tax withholding for taxpayers.” It then recognized the possibility that the language may be ambiguous, a concession to the Federal Circuit’s contrary conclusion, and reviewed the title and intent of the statute. The Court’s review yielded the same conclusion – Congress did not intend that SUB payments be treated as wages for FICA purposes and they should not be treated as such.

The Sixth Circuit’s ruling, like the CSX opinion, considered the Supreme Court’s holding in Rowan Cos. v. United States, 452 U.S. 247 (1981)(holding the definition of wages is the same for FICA and income tax purposes). It also distinguished government arguments based on the Supreme Court’s decisions in Environmental Defense v. Duke Energy Corp., 549 U.S. 561 (2007), and Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. ___, 131 S. Ct. 704 (2011), and its own decision in Appoloni v. United States, 450 F.3d 185 (6th Cir. 2006).  It also rejected the IRS administrative guidance that played a more significant role in the CSX decision.

This opinion has set up a clear split in the circuits and it is likely that the government will pursue further review of this case. A petition for rehearing is due on October 22. A petition for certiorari to the United States Supreme Court would be due on December 6.

Read the opinion here:
U.S. v. Quality Stores, Inc., No. 10-1563 (6th Cir. Sept. 7, 2012)

U.S. Supreme Court Upholds the Healthcare Individual Mandate under the Taxing Clause

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The United States Supreme Court has just ruled that the individual mandate in the Patient Protection and Affordable Care Act (Obamacare) may be upheld as within Congress’s power under the Taxing Clause. The opinion of the court was delivered by Chief Justice John Roberts.

Read the full text of the slip opinion here:
NFIB v. Sebelius, Docket No 11-393 (U.S. Sup. Ct. June 28, 2012)

U.S. Supreme Court: Six-Year Statute of Limitations Does Not Apply to An Overstatement of Basis

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In a huge win for the taxpayers in this case and many other similarly situated taxpayers, the U.S. Supreme Court handed down its opinion in United States v. Home Concrete & Supply, LLC yesterday. The Supreme Court affirmed the decision of the 4th Circuit Court of Appeals holding that the six-year statute of limitations applicable to unreported income, IRC 6501(e), did not apply when a taxpayer overstated basis, and thus understated income. The Supreme Court embraced the principle of stare decisis and followed its opinion in Colony, Inc. v. Commissioner, 357 U. S. 28 (1958) to decide the question.

The case was selected for consideration to resolve a split in the circuits that ostensibly began with the 9th Circuit’s decision in Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir. 2009) but soon became known as the “Intermountain issue” after the Tax Court’s decision in Intermountain Insurance Service of Vail LLC v. Commissioner, 134 T.C. 211 (2010) which followed Bakersfield. The Intermountain decision came to exemplify a series of cases that received disparate treatment in the Courts of Appeals. The Court of Appeals came down in favor of the government in the 7th Circuit, the D.C. Circuit and the Federal Circuit though for different reasons. The 4th and 5th Circuit sided with the Tax Court and the 9th Circuit deciding that the 6 year statute of limitations did not apply to overstated basis. These cases attracted particular attention from both tax practitioners and the government because the overstated basis in each instance was the product of tax strategies (mostly Son of Boss transactions) that the government had listed or deemed abusive as a tax shelter.

The Supreme Court’s decision determined the straightforward question of whether an understatement of basis extends the traditional 3-year statute of limitations to 6 years under IRC 6501(e). It does not. However, many scholars and tax procedure wonks were hoping that the court would provide some guidance on the procedural validity and applicability of Treasury Regulation 301.6501(e)-1. Treas. Reg. 301.6501(e)-1 was promulgated as a temporary regulation in 2009 with a retroactive date of application to “correct” the 6-year statute of limitations controversy. The Temporary Regulation was published simultaneously with a Proposed Regulation to the same effect but without a pre-publication comment period. Some argued that such a move violated the Administrative Procedures Act (APA), notably among them Tax Court Judges Halpern and Holmes. (See their concurrence in the Tax Court’s Intermountain opinion.) The concern of many observers was not only the procedural validity of the regulation as promulgated but also whether an agency could promulgate a regulation that would have the effect of invalidating a Supreme Court interpretation of an ambiguous statute (which presumably this regulation would have done). The Supreme Court’s decision in National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005), certainly suggested that the latter outcome was possible and the parties and amici briefed that issue extensively.

In the end, the Supreme Court invalidated the regulation on the narrow ground that did not apply because of the precedent established in Colony, Inc. It did not address the validity of the regulation’s promulgation under the APA or the broader question of whether a regulation could invalidate a Supreme Court interpretation. Presumably those questions will be left for another day.

Read the Supreme Court Opinion here:
U.S. v. Home Concrete & Supply, LLC., Docket No. 11-139 (April 25, 2012)

Is Tax Litigation Irrational?

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According to Supreme Court barrister Robert A. Long it may well be.

Our beloved world of tax litigation had its 15 minutes of fame this morning as the first argument challenging President Obama’s health care law involved the applicability of the Anti-Injunction Act. Probably best known among tax procedure wonks as the statute that prevents Federal district courts from hearing state tax disputes, the Anti-Injunction Act basically denies jurisdiction to challenge the merits of a tax until it has been paid. The argument facing the Court was whether the penalty provision for not participating in the Obama health care plan, which is enforced through the Internal Revenue Code, had to be imposed against an individual before the Court had jurisdiction to determine the Constitutionality of the law. Alas, early reports indicate that the assembled Justices were not impressed by the argument.

All of that aside, what really caught our attention was this exchange, reported by Politico, between Justice Scalia and counselor Robert A. Long:
Justice Scalia: …If it’s not jurisdictional what’s going to happen is you are going to have an intelligent federal court deciding whether you are going to make an exception. And there will be no parade of horribles because all federal courts are intelligent…
Mr. Long: Well, and, Justice Scalia, I can’t predict what would happen, but I would say that not all people who litigate about federal taxes are necessarily rational.

Gee, Mr. Long, we’re not gonna take that to heart.