Congress has passed legislation to address the “fiscal cliff” and the President is expected to sign it. If you are interested in the details of what stayed in and what was left out, a link to the text of the bill that was passed by the House today is below.
Read the text of the American Taxpayer Relief Act of 2012 here:
American Tax Relief Act of 2012
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.
In a memorandum opinion related to a division opinion we reported earlier this year, the Tax Court has found that underpayment and accuracy-related penalties asserted against investors in a “Son of Boss” tax shelter, did not apply to the participant taxpayers because they established reasonable cause under IRC § 6664(c)(1). However, the Court did sustain the government’s determination, which apparently was uncontested by the taxpayers, that they had underreported tax because of their involvement with the Son of Boss transactions.
The opinion offers a thorough discussion of the taxpayers’ conduct and the applicable standards for reasonable cause. The language and findings may provide useful guidance for taxpayers, and their counsel, seeking to avoid penalties by establishing reliance upon their advisors.
Read the entire opinion here:
Rawls v. Commissioner, T.C. Memo. 2012-340
With tax provisions set to expire on payroll taxes, capital gains rates, income tax rates, AMT exemptions, estate taxes, and nearly everything else, the tax picture for 2013 is anything but clear.
One thing that we can expect with certainty on January 1, 2013, is the introduction of the 3.8% investment tax under new Internal Revenue Code Section 1411. The new provision adds a 3.8% tax on the “net investment income” of individuals, estates, and trusts with modified adjusted gross income in excess of the threshold amounts of:
Until now, there was little guidance on the details of this provision from the Patient Protection and Affordable Care Act (Obamacare). The Internal Revenue Service has now provided guidance in the form of proposed regulations and Frequently Asked Questions (FAQs).
Ambitious practitioners have until March 5, 2013, to submit comments on the proposed rulemaking.
The Michigan Court of Appeals has ruled that the Multistate Tax Compact (MTC) election is not available for Michigan taxpayers. The appellate tribunal affirmed the trial court’s decision that IBM could not elect to apportion its income according to the three-factor MTC formula. The Court of Appeals held that apportionment under the Michigan Business Tax (MBT) is mandatory and “the possibility of electing a different apportionment formula as a matter of right is simply not permitted.” The court held that the mandatory language of the later enacted MBT repealed the MTC election by implication.
This decision further muddies the water around the viability of this popular state tax planning strategy for large multi-state corporations. The California Court of Appeal recently allowed an MTC Election in a case that is almost certainly headed to the California Supreme Court. Savoy taxpayers can, and should, expect that each state will view this election differently.
The Michigan opinion contained a couple of interesting litigation notes too. First, the opinion was issued as an unpublished, per curiam decision. Under Michigan law unpublished opinions do not have the force of stare decisis – that is, no binding precedential value. For a case that prompted two amici curiae briefs, one might have expected a decision that would have firmly established the law for other taxpayers. This one, however, was not it.
The per curiam (“by the court”) designation is also interesting in that it is often reserved for opinions of lesser importance. Per curiam decisions often imply a collective view of the prevailing law by the reviewing court.
However, that wasn’t exactly the case here. The per curiam decision was accompanied by a concurring opinion. The author of the concurrence, Judge Riordan, agreed with the court’s determination that IBM was required to use the MBT apportionment method, but wrote to note his disagreement with idea that the MTC election had been impliedly repealed by the passage of the MBT. The concurrence is interesting in that its reluctance to embrace the idea of “repeal by implication” was similar to the reasoning applied by the California court in the Gilette case, mentioned above, that upheld that the MTC election. Corporate taxpayers who have taken the MTC election in some states, or are considering it, would be well advised to track these cases closely.
Read the Court of Appeals per curiam decision here:
IBM v. Dept. of Treasury, No. 306618 (Nov. 20, 2012) per curiam
Read judge Riordan’s concurring opinion here:
IBM v. Dept. of Treasury, No. 306618 (Nov. 20, 2012) concurrence
The Tax Court has denied the deductibility of legal fees incurred to defend a wrongful death suit brought against the sole shareholder of an S Corp. Authored by Judge Holmes in inimitable style, the opinion offers a good discussion of the various instances when a corporation can, and cannot, deduct legal fees incurred on behalf of its employees.
Read the opinion here:
Cavanaugh v. Commissioner, T.C. Memo. 2012-324
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
An amended return is required for each year for which the retroactive election is made.
Please refer to the announcement for additional filing requirements.
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.
