State Tax Highlights

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FEDERAL CASES OF INTEREST

  
U.S. supports Tulalips in lawsuit over taxes 
The U.S. Justice Department filed a motion on August 4, 2015 asking to join the Tulalip Indian Tribes in a federal lawsuit seeking to stop Washington state and Snohomish County from collecting millions of dollars in taxes from non-Indian businesses and people on tribal land. The Tulalip Tribes filed a lawsuit in U.S. District Court in Seattle in June against Gov. Jay Inslee, the state and Snohomish County, arguing that they don’t have a legal right to the $40 million collected annually in property, sales, use and other taxes for activities on reservation land that was developed and is managed by the tribe. Tulalip Tribes v. Washington, U.S. District Court for the Western District of Washington, Case No. 2:15-cv-00940. The lawsuit filed by the Tribe asks the court to issue an order holding the state and county taxes in violation of the Indian Commerce Clause and permanently stop the state and county from collecting the funds at issue.

The motion states that the United States seeks to intervene in this action on its own behalf and as trustee for the Tulalip Tribes to protect the Tribe's right under the United States Constitution and federal law to collect tribal tax revenues within a tribally chartered municipality designed, financed, built, regulated, and managed by the Tribe and the United States on land within the Tulalip Reservation that the United States holds in trust for the Tribe. The motion seeks to restrain the state and county from taxing the economic activities on these lands in a manner inconsistent with federal law. In its motion, the Justice Department said the tribes have a constitutional right to develop reservation resources without “unlawful interference from state and local taxation.” The Justice Department’s motion said the tribe “has the inherent and federally recognized sovereign right to make its own laws and be ruled by them.” It argues that outside collection of taxes interferes with the Tribe’s inherent right of self-governance and its ability to further economic self-sufficiency.

DECISION HIGHLIGHTS

Sales and Use Tax Decisions

Warning Sirens Are Fixtures Subject to Use Tax
The Michigan Court of Appeals has held that outdoor severe weather warning sirens attached to wooden poles and sunk into the ground became fixtures subject to use tax.

The taxpayer is a distributor of outdoor warning sirens that alert people of impending dangerous weather. Most of taxpayer’s customers are municipalities that had the sirens installed on public rights-of-way. Petitioner typically installs the sirens and attaches them to 50-foot wooden poles placed into 8-foot deep holes with the assistance of an industrial crane. An electrician hooks the sirens up to a local power source. According to an affidavit filed by the taxpayer’s president, the poles are designed to be removed easily. According to the affidavit, the installation process is meant to be fluid to allow easy relocation when necessary to accommodate changing road structure and coverage needs. The taxpayer argued that the sirens were not fixtures, but, instead, tangible personal property and it was a retailer and not a contractor. The Department of Revenue (DOR) argued that the sirens were fixtures and the taxpayer was a contractor subject to the use tax.

The court noted that while there was no bright - line test for determining whether an item has become sufficiently attached to real property so as to constitute a fixture, courts in the state have traditionally examined three factors on a case-by-case basis, finding that property is a fixture if (1) it is annexed to the realty, whether the annexation is actual or constructive; (2) its adaptation or application to the realty being used is appropriate; and (3) there is an intention to make the property a permanent accession to the realty. The court also said the fact that it is possible to remove an item is not dispositive, particularly where the evidence does not establish that the item has been removed or disassembled on a regular basis.

The court applied these factors to the present case and concluding that the sirens and poles were fixtures. It said that the poles were physically annexed to the realty, noting that the wooden poles were placed, using a crane, into an eight-foot hole in the ground, taking steps to affix the poles directly to the realty. The court rejected the taxpayer’s argument that the poles were not fixtures because it did not use concrete, cables, wires or bolts to affix them to the ground, finding that the poles remained securely in place without the assistance of concrete, cables or wires and that securing them further was likely unnecessary given their size and immobile nature.

With regard to adaptation, the court said there is no dispute that the land on which the poles and sirens were placed was devoted for public use as a public right-of-way and in a broad sense, the poles and sirens are also dedicated for public use. The poles and sirens are consistent with the purpose to which the right-of-way is devoted and can be considered as useful adjuncts to the realty, akin to road signs or other warning signs that are often present in public rights-of-way. The court also found that the objective, visible facts show an intent that the poles and sirens be a permanent accession to the realty.

The court said the visible facts revealed that the poles were large and were only moved through the use of heavy equipment. The facts showed that taxpayer installed the poles by using heavy equipment to first dig an eight-foot hole into the ground, then, using a crane, hoisted the 50-foot pole into the freshly dug hole. The court said that the effort required to move the large poles suggested a degree of permanency and the purpose of the sirens as a warning system manifested an intent that the poles and sirens remain in place.

The court rejected the taxpayer’s argument, raised for the first time on appeal, that the poles and sirens cannot be fixtures because they were primarily installed on rights-of-way, which the taxpayer contends were personal property, not realty. While the court said it did not need to consider this argument because it was not raised at the lower court level, it also noted that the taxpayer did not cite an authority that would support the proposition that improvements on rights-of-way cannot constitute fixtures attached to real property under either the state’s property tax or use tax statute. West Shore Servs. Inc. v. Dep't of Treasury, Michigan Court of Appeals, No. 321085. 7/21/15
  

OTCs Must Remit Sales Tax on Charges to Customers
The District of Columbia Court of Appeals ruled that online travel companies (OTCs) are responsible for remitting sales tax based on the retail price the companies charge customers to book hotel rooms. It also held that amounts sent to hotels as sales tax reimbursements passed on to the District should not be included in the taxable sales price.

The District’s sales tax statute defines “retail sale” to include certain enumerated services subject to the sales tax, including “the sale or charge for any room furnished to transients by any hotel. The District argued that the OTCs are vendors liable for sales tax on the entire amount they collect from their customers, including the "sales tax reimbursement" amount that the OTCs have been passing on to the hotels, which the hotels, in turn, remit to the District as the sales tax due on the amount the hotels earn on the deal. The OTCs argue that the only taxable transaction under the statute is the one that occurs between the customer and the hotel and therefore sales tax is not due on the retail margins the OTC retains for itself.

The OTCs also argue that the sales tax reimbursement amount should be excluded from the taxable sales price pursuant to the express language in the statute that excludes the amount of reimbursement of tax paid by the purchased to the vendor. The District argued that this exclusion does not apply here because the OTCs failed to separately state the sales tax when they collected that amount from their customers, which the District claimed was a requirement under the statute.

The OTCs operate under the merchant model in their dealings with area hotels. The OTCs contract with hotels for the right to sell hotel rooms to online customers at a retail rate, while paying the hotels that actually furnish the rooms some lower, negotiated net rate." A customer uses an OTC's website to search for and select a hotel room and enters payment information directly into the OTC's website. The OTC forwards the reservation request to the hotel, and the hotel determines whether to accept the request based on factors like availability. If the hotel accepts the booking, it sends a confirmation number to the OTC, which then charges the customer's credit card and forwards that confirmation number to the customer. No money changes hands directly between the customer and hotel, unless the customer chooses to purchase incidental items like room service or valet parking. When charging the customer's credit card, the OTC collects an amount that consists of the net room rate that it will later forward to the hotel, along with a tax recovery charge, and a retail margin that the OTC keeps as profit. The hotel remits the tax recovery charge to the District. When it charges the customer, the OTC does not isolate the "sales tax" as a separate amount, but instead calls the sales tax a "tax recovery charge," which it combines with a "service fee." As a result, the customer does not know how much sales tax has been paid on the transaction.

Pursuant to the District’s statute, the total tax rate imposed on the sale of or charges for any hotel rooms is 14.5% of the "gross receipts." Gross receipts are defined as the total amount of the sales prices of the retail sales of vendors and the tax imposed on the vendor is to be separately stated and collected from the purchaser on these sales. The sales price is defined as the total amount paid by a purchaser to a vendor as consideration for a retail sale. The District’s sales tax statute was amended since this litigation began and added a definition of “room remarketer” to the statute and clarified that the sale or charge includes net charges and additional charges for transient accommodations.

The court here said that following the rules of statutory construction in general and case law in particular, the first step in resolving the OTCs' contested sales tax liability is to determine whether the statutory language is plain and unambiguous. The court agreed with the lower court’s finding that that the plain meaning of the statute is open to two reasonable, yet opposing, interpretations and the court, therefore, looked at the statute’s purpose and legislative history and determined that they favor the District’s interpretation. The court found that the purpose of the sales tax statute, to tax the enumerated transactions, and to tax them in their entirety, overshadows fine points like the tense of the words.

The court said that the provision in question appears to be just one way of imposing a tax on the amount of money that people pay to stay in hotel rooms in the District of Columbia and the OTCs retail margins are a part of that sale. It found that the legislative history of the provision supports that conclusion. The court said that because it determined that the statute has always extended to reach the OTCs' retail margins, the 2011 amendments to the statute were not critical to the outcome of the case.

The court also rejected the OTCs argument, bolstered by two cited cases, that, in order to be a "vendor" liable for sales tax, the seller must provide the underlying service in addition to merely selling or charging for it, finding that neither case that the OTCs cite regarding intermediaries squarely supports that proposition. The court said that whether or not the OTCs actually "furnish," they sell or charge for hotel rooms in the District of Columbia. They are therefore "vendors" liable for sales tax, and neither case cited forecloses that result.
Finally, the court rejected the OTCs’ argument that the imposition of back sales taxes is unfair and foreclosed by the four affirmative defenses of laches, waiver, equal protection, and the statute of limitations. It found that any laches argument the OTCs might have is severely undermined by the OTCs' own failure to seek guidance from the District concerning their potential sales tax obligations for more than ten years. It found that the fact that the District accepted sales tax indisputably owed to it on one part of a transaction in no way suggests waiver of a prospective claim for sales tax on another part of the transaction. It also found that it does not violate equal protection principles for the District to make enforcement decisions based on whether successful litigation will yield sufficient revenue to make legal action worthwhile, which is what appears to have happened in this case. Finally, it rejected the limitations argument noting that the statute provides a clear exception to the three-year limitations for a vendor who fails to file and required sales tax returns.

The final issue was whether the OTCs owed tax on the "sales tax reimbursement" amounts passed on to the hotels, ultimately to be remitted to the District as the tax due on the "net rate,” which they had not separately stated. The court said that the statute does not make compliance with the separate statement requirement a prerequisite to the exclusion of tax provision, noting that Congress knew how to condition an exclusion on an amount being separately stated and did so for certain transportation charges. The District also argued that the tax reimbursement amounts collected by the OTCs are not "reimbursements" at all, because the word reimbursement implies the customer's knowledge of the amount at issue. The court disagreed, finding that a sum of money collected from the customer to make up for the amount remitted to the District as sales tax is sufficient to make it a tax reimbursement in the normal sense. It also said that the customer did know there was a reimbursement being made when it paid the “tax recovery charge.” The court rejected the trial court’s finding that the OTCs "substantially complied" with the separate statement requirement, pointing out there is no general rule that substantial compliance is good enough when it comes to the formalistic and often technical requirements of the tax code, but did find that the plain language reading of the section at issue provided no basis for the District's contention that the tax recovery charge should be included in the calculation of the “sales price.”

One Justice concurred in part but dissented from the holding that the OTCs are not liable for sales tax based on the full amount the OTCs charged purchasers. Expedia Inc. v. District of Columbia, District of Columbia Court of Appeals, Nos. 14-cv-308; 14-cv-309. 7/23/15
  

Partial Use Tax Exemption for Electricity Transmission Granted
The Michigan Supreme Court determined that the generation and delivery of electricity constituted both use tax-exempt industrial processing activities and nonexempt distribution and shipping activities. It found that the electric utility was entitled to a partial exemption from the state's use tax.

The state’s use tax statute provides an exemption for property sold to an industrial processor for use or consumption in industrial processing. At issue in this case is whether and to what extent an electric utility is entitled to the industrial-processing exemption for tangible personal property located outside its generation plants. The taxpayer is an electric utility that is responsible for generating, transmitting, and distributing electricity to residential, commercial, and industrial consumers. The electricity is initially generated at approximately 15,000 to 25,000 volts within each of the taxpayer’s generation plants. However, to transmit electricity throughout the electric system, taxpayer increases the voltage to between 115,000 and 500,000 volts as the electricity is transmitted from the generation plant to substations from which the electricity is then distributed to consumers. Electricity is not usable at the high voltage levels at which it exists when it is initially generated and as it moves throughout the electric system. Consequently, the electric system employs tangible personal property, such as transformers, at the substations to "step down" the voltage as the electricity nears the consumer. In addition to transformers, the electric system employs a variety of other tangible personal property, including fuses, circuit breakers, cables, and poles, to monitor the voltage levels and ensure that the consumer receives a useable product.

The Department of Treasury (DOT) determined that the taxpayer had a use tax deficiency when it claimed the industrial-processing exemption from the use tax for tangible personal property located outside its generation plants and assessed taxpayer for the deficiency which taxpayer paid under protest and filed a claim for refund. The court said the industrial processing exemption was enacted as part of a targeted legislative effort to avoid double taxation of the end product offered for retail sale to avoid pyramiding the use and sales tax. The statute specifically provides that electricity constitutes tangible personal property and therefore constitutes tangible personal property for the purposes of the industrial-processing exemption. There is also no dispute that the taxpayer qualifies as an "industrial processor" because by generating electricity it performs the activity of converting or conditioning tangible personal property for ultimate sale at retail. The issue in this matter is whether taxpayer’s tangible personal property outside the generation plants is exempt from the use tax under the industrial-processing exemption, that is, whether altering the voltage of the electricity after it is transmitted by the generation plant satisfies the statutory requirement for converting or conditioning by changing the form, composition, quality, combination or character for sales at retail. The court concluded that altering the voltage conditions the electricity for ultimate sale at retail, citing agreement by both parties that the voltage levels at which the electricity is initially generated are not in their final form, such that they would be appropriate for ordinary use by the consumer. The court also concluded that industrial processing of electricity does not become complete until final distribution to the consumer because there is no point within the electric system at which "finished goods first come to rest in finished goods inventory storage," a requirement for the exemption, before that point. The court, therefore, affirmed the lower court’s conclusion that the electric system is used for exempt "industrial processing" activity.

The exemption for industrial processing also provides, however, that it does not include the activity of distribution and shipping, and found that the movement, or flow, of electricity constitutes "distribution" and "shipping" of the electricity from the generation plant to the consumer. The court, in affirming the lower court decision, said that from the time when electricity leaves the generation plant until it is finally distributed to the consumer, the electric system is simultaneously involved in "industrial processing activity" and "distribution" and "shipping" activities. The court rejected the state’s argument that the “general/specific” rule of statutory interpretation applied here to deny taxpayer the exemption, saying that it was inapplicable in the present case. The court said the rule only applies when there is some statutory tension or conflict between two possible treatments of a subject, and there is no such conflict or tension here. Instead, the court said that there are subjects or activities that fall within the category of "industrial processing," and there are other subjects or activities that do not fall within the category of "industrial processing" and these categories are separate and distinct, and there is nothing to suggest that one category can be viewed as being more "general" or "specific" than the other.

The court emphasized Department of Treasury’s role in approving a reasonable formula or method to determine the "percentage of exempt use to total use" pursuant to the statute. It said that the "percentage of exempt use to total use" will in many cases be a highly fact-specific inquiry that depends on a multitude of considerations. The court remanded the matter to the Court of Claims for Treasury to approve a "reasonable formula or method" for determining the "percentage of exempt use to total use" consistent with the principles set forth in the opinion and subject to the initial review of the Court of Claims.

The dissent argued that the taxpayer was not engaged in industrial processing in this case and, instead was simply distributing its product most efficiently. Detroit Edison Co. v. Dep't of Treasury, Michigan Supreme Court, No. 148753. 7/22/15

Personal Income Tax Decisions

Court Determines In-State Domicile for Individual Living in the Netherlands
The Maryland Court of Special Appeals, in an unreported decision, has determined that an individual taxpayer who traveled between the Netherlands and Baltimore for work was domiciled in the state for income tax purposes. The taxpayer leased his home in the state to his brother and the court found that the taxpayer did not show intent to remain in the Netherlands indefinitely.

The taxpayer worked for Under Armour in Baltimore, Maryland and, when the company decided to establish an office in Europe, he was offered the position of Director of European Operations with the company’s office in the Netherlands. The Assignment Letter negotiated between the company and the taxpayer indicated that the length of the assignment would be two years. Because of the state of the real estate market in the area in 2006, the taxpayer decided to lease his home in Baltimore to his brother rather than put the property on the market. During the assignment in Europe he returned to the area several times, but elected to stay in area hotels or in temporary housing each time. The taxpayer sold his vehicle, closed his banks accounts in the state and arranged to ship certain other possessions to the Netherlands. The Netherlands issued him a fixed term employment permit on December 6, 2005 to work as Director of European Operations for Under Armour, valid from January 2, 2006 until January 2, 2009. He was also granted a residence permit for approximately the same period, but for the limited purpose of his employment with Under Armour. The taxpayer rented an apartment in Amsterdam and purchased an automobile there and obtained a Dutch driver’s license. While living in the Netherlands he renewed his Maryland driver’s license, signing the application, under the penalties of perjury, that he was a Maryland resident and listing the home he owned in the state as his address. The taxpayer returned to Maryland in December 2007 and was offered another position with Under Armour, effective January 1, 2008. Taxpayer filed a part year Maryland resident return for 2006, but did not file a Maryland return for 2007 relying on advice of his accountants that he had effectively abandoned domicile in the state. In April 2011, the Comptroller of Maryland issued an estimated income tax assessment for tax year 2007 which is the subject of this appeal.

The state statute provides that an individual is considered a state resident for tax purposes if they are domiciled in the state on the last day of the taxable year or, alternatively, maintained a place of abode in the state for more than 6 months of the taxable year. In looking at the definition of domicile, the court cites Shenton v. Abbott, 178 Md. 526, 530 (1940) stating that domicile "is well defined as that place where a man has his true, fixed, permanent home, habitation and principal establishment, without any present intention of removing therefrom, and to which place he has, whenever he is absent, the intention of returning." That case also said that in order to establish a change of domicile, the taxpayer must show not only that a new residence was acquired, but also that the old residence was abandoned with no intention of returning.

The taxpayer argued that the lower court applied an incorrect legal standard in his case that caused the court to ignore factors indicating that he had established a new domicile in the Netherlands. In Comptroller of the Treasury, Income Tax Div. v. Haskin. 298 Md. 681 (1984) the court said that the controlling factor in determining a person's domicile is his intent, i.e. does the individual have the intent of remaining there permanently or for at least an unlimited time. In making this determination courts can look at both subjective and objective factors.
The court in the present case looked at the factors referenced by the lower court in making the determination and noted that the lower court weighed the taxpayer’s subjective testimony regarding his intent to establish a new domicile against other objective factors suggesting that he never abandoned his Maryland domicile and determined that the court did not err in applying an incorrect legal standard to the facts of the taxpayer’s case.

The court then found that there was substantial evidence in the case record to support the lower court’s finding that the taxpayer was domiciled in the state in 2007. Despite the taxpayer’s testimony that he arrived in the Netherland with the intent to live there indefinitely, the lower court found that he was an at-will employee of Under Armour who had agreed to a work assignment in the Netherlands for an expected length of two years. The lower court gave little weight to the subsequent amendment to the Assignment Letter purporting to change the length of the taxpayer’s assignment.

The court here cited other factors reviewed by the lower court in making their determination, including that the taxpayer retained his Maryland driver’s license, failed to make any social, civil, or other connections in the Netherlands, his continued attendance at a Baltimore church when he was present in Maryland for business and the taxpayer’s failure to affirmatively cancel his Maryland voter registration. McDermond v. Comptroller of the Treasury, Maryland Court of Special Appeals, No. 1299. 7/9/15

  
Corporate Income and Business Tax Decisions

Compact Case Remanded for Reconsideration
The Michigan Supreme Court has remanded a case dealing with whether a taxpayer properly used the elective three-factor apportionment formula provided by the Multistate Tax Compact and ordered the court of appeals to consider its decision in light of state legislation retroactively repealing the compact. Lorillard Tobacco Co. v. Dep't of Treasury, Michigan Supreme Court, 150664. 7/28/15
  

Taxpayer’s Attempt to Use MTC Apportionment Formula Denied
The Texas Court of Appeals, Third District, determined that the state's franchise tax is not an income tax and therefore a taxpayer may not use the Multistate Tax Compact's three-factor apportionment formula to determine its franchise tax liability.

The taxpayer is a corporation headquartered in Georgia and sells packaging for consumer products throughout the United States. Since the taxpayer operates in multiple states, the amount of its Texas franchise tax liability is assessed and apportioned based on its "taxable margin" attributable to Texas.

The taxpayer initially filed its 2008 and 2009 Texas franchise tax reports using the single-factor formula for apportionment provided in the state statute. The single-factor formula multiplies a taxpayer's margin by a gross-receipts fraction, which generally is the taxpayer's gross receipts from its business conducted in Texas divided by its gross receipts from the taxpayer's total business. On its 2010 state franchise tax report the taxpayer apportioned its margin to Texas using the three-factor formula found in the Multistate Tax Compact in the state statute and filed refunds for tax years 2008 and 2009 using this same apportionment factor. Since the taxpayer does not own or operate any manufacturing operations in Texas and only engages in retail and wholesale activities in Texas, applying the three-factor formula that includes payroll and property factors as well as a sales factor reduced its franchise tax liability lower than the single-factor formula would have yielded. The Comptroller denied the taxpayer’s refunds and assessed additional tax, concluding that the taxpayer was required to use the single-factor formula.

The taxpayer argues in this case that a taxpayer has the option to choose either three-factor formula or the single-factor formula to apportion its margin to Texas for franchise tax purposes because the Texas franchise tax is an 'income tax' as defined and is within the scope of the Multistate Tax Compact's applicability. Section 141 of the state statute adopts the Multistate Tax Compact. Article III of section 141.001 is titled "Elements of Income Tax Law," and states in relevant part that any taxpayer subject to an income tax whose income is subject to apportionment may elect to allocate the income in accordance with state law or, alternatively, in accordance with the provisions of the Compact. The Comptroller argued that the Compact formula is not available to the taxpayer because the franchise tax is not an income tax. The pertinent provision of section 141.001 defines "income tax" as "a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions." The court found that the plain meaning of the statute makes it clear that the franchise tax does not fall within chapter 141's definition of "income tax." Among the alternative tax bases for franchise tax purposes are "total revenue" and 70% of "total revenue" and the court said that reading the plain language of these alternatives for determining a taxpayer's tax base, they could not conclude that either can fairly be read to mean "net income." And the court said that subtracting a fixed amount from "total revenue" is not the same as "deducting expenses from gross income." It also noted that the cost-of-goods-sold and compensation alternatives in the statute for determining a taxpayer's margin allow subtractions only for select costs. The court also cited other provisions of chapter 141 that provided support for the interpretation of chapter 141's definition of "income tax" as not including the Texas franchise tax, including the provision that allows a taxpayer that does business in Texas to be eligible to apportion its net income to a member state that has an income tax because Texas has a "franchise tax for the privilege of doing business."

The court said that it assumed that the legislature was aware of chapter 141 and its definition of "income tax" when it restructured the franchise tax in 2006 and enacted chapter 171. Section 171.106(a) expressly states that the single-factor formula applies "[e]xcept as provided by this section" and chapter 141's three-factor formula is not listed among the alternative formulas in section 171.106. The court said that had the legislature intended for chapter 141's three-factor formula to be an alternative for apportioning margin for franchise tax purposes, it could have included it as one of the expressed alternatives in the section.

The court rejected the taxpayer’s argument that the legislature's deletion of section 171.112(g), which stated that chapter 141 did not apply to the chapter, in the 2006 franchise tax restructuring supported its argument, finding that the deletion of this section was entirely because that section addressed gross receipts for taxable capital and the restructured franchise tax replaced capital and earned surplus with "margin" as the franchise tax's main tax base. The court also noted that the legislature also contemporaneously enacted a separate section that expressly stated that the franchise tax imposed by chapter 171 was not an income tax.

The taxpayer also argued that the franchise tax does not fall with chapter 141’s definition of a gross receipts tax and must, therefore, be an income tax. While the court agreed that the franchise tax did not fall within the chapter’s definition of a gross receipts tax, it did not agree that the franchise tax, therefore, falls within the definition of income tax. The court held that the franchise tax is not "a tax imposed or measured by net income" and, therefore, that it does not fall within chapter 141's definition of an "income tax" and, therefore, the three-factor formula was not an alternative apportionment formula for the taxpayer. Graphic Packaging Corp. v. Hegar, Texas Court of Appeals, No. 03-14-00197-CV. 7/28/15
  

Court Bars Refund Claim Following IRS Adjustment
The South Dakota Supreme Court denied a refund, holding that the taxpayer failed to request its refund within the statute of limitations despite filing for refund within days of a federal adjustment to its net income. The court said that department regulations do not create an exception to the standard statute of limitations.

The taxpayer filed a tax refund claim with the state’s Department of Revenue (DOR) in 2012 requesting a return of a portion of bank franchise taxes paid for the tax years 1999, 2000, 2001, and 2002. DOR denied the tax refund claim and, on appeal, the Office of Hearing Examiners (OHE) found that the refund claim was time-barred by the three-year statute of limitations contained in the state statute. The circuit court affirmed the OHE decision and taxpayer filed this appeal.

Taxpayer timely filed United States federal income tax returns with the Internal Revenue Service (IRS) on behalf of itself and its consolidated group for taxable years 1999, 2000, 2001, and 2002. It also filed timely bank franchise tax returns with the state DOR for the same years. The IRS subsequently conducted an audit of the federal returns, and during the course of the audit, the taxpayer requested a reduction in its taxable income for the taxable years 1999 and 2000 because it changed its method of accounting beginning with the 2001 tax year. The new accounting method resulted in the double reporting of interchange fees that were previously reported on its 1999 and 2000 tax returns. The IRS and the taxpayer agreed to extend the federal statutory period of limitations for auditing the Federal Tax Returns to June 30, 2012, for assessments, and December 31, 2012, for claims for refunds. As part of a settlement with the taxpayer, the IRS agreed in 2012 to reduce the taxpayer’s taxable income for the taxable years 1999, 2000, 2001, and 2002.

The parties to this action stipulated that the state did not have personal knowledge of the Federal Tax Returns until March 2012. On March 16, 2012, within 60 days of the IRS's final decision, the taxpayer filed amended bank franchise tax returns with the DOR reflecting its reduced taxable income for tax years 1999 and 2000 and requested a refund of the bank franchise taxes on returns that were due and paid in 2000, 2001, 2002, and 2003, for taxable years 1999 through 2002.

The issue before the court here is whether OHE correctly granted DOR’s motion to dismiss for lack of jurisdiction because the taxpayer filed to comply with procedural requirements in the statute when it filed its tax refund request. The parties stipulated to all the material facts in the matter. The court noted that in prior case law the courts have consistently required strict compliance with statutes of limitation. It is undisputed here that the taxpayer filed for a refund of bank franchise taxes with DOR after the three-year statute of limitations expired.
A taxpayer must comply with the provisions of state statute, chapter 10-59 which establishes a three year statute of limitations from the date the tax was paid or the date the return was due, whichever is earlier, for tax refund claims and provides that a court does not have jurisdiction of a suit to recover taxes unless the taxpayer complies with the provisions of the statute.

The taxpayer’s argument that the refund claim was timely filed is based on a regulation promulgated by DOR pursuant to legislature authority to promulgate rules regarding the bank franchise tax. The Secretary of DOR promulgated ARSD 64:26:02:06 that addresses the procedure for filing a tax refund claim when there has been a subsequent decrease in net income or taxable income and provides that the taxpayer may file a supplementary return with the department for the tax year in which the decrease occurred. The taxpayer contends that this regulation permits a taxpayer to seek a refund of bank franchise taxes after an IRS adjustment to federal taxable income irrespective of the timing of the federal adjustment for good reason. The court rejected this argument, finding that a plain reading of the state statute confirms that the three-year statute of limitations imposed under SDCL 10-59-19 applies to bank franchise taxes and that there is no language in SDCL 10-59-19 permitting an exception to the three-year limitation period.

The court further said that the plain language of ARSD 64:26:02:06 makes clear that the regulation merely establishes the procedural framework for filing a supplementary return for overpaid bank franchise taxes. The regulation designates generally when a supplementary return may be filed and when it need not be filed. Even if the court were to recognize that the regulation carves out a limited exception to the three-year limitation period, it pointed out that case law has held that an administrative regulation adopted in contravention of a statute is invalid.

The court also rejected the taxpayer’s argument that the lower court decision should be reversed because the specific statutes and rules governing the bank franchise tax apply rather than the general three-year limitations period, pointing out that the taxpayer cites to no authority supporting the rule of construction that a specific regulation takes precedence over a general statute.

The taxpayer also alleges that the regulation constitutes "written advice" and that by citing the three-year statute of limitations in the statute to deny its refund claim, the DOR is taking a position contrary to the written advice it provided in the regulation. The court rejected this argument for many of the reasons set forth above and said that DOR was not taking a contrary position to the regulations when it denied the refund claim. Taxpayer also claimed that the refund should be allowed because audits of large corporations are often not resolved within three years and the three-year statute of limitations, therefore, produces a "catch-22" because there can be no refund claim absent a final federal adjustment, but in virtually every case involving large banks, any refund claim brought after a final federal adjustment will be untimely. The court disagreed, noting that the three-year statute of limitations does not preclude the taxpayer from preserving a future refund before the statute of limitations expires by filing a supplementary return before the audit is resolved. Finally, the court rejected the taxpayer’s argument that the application of the three-year statute of limitations denies the taxpayer it constitutional due process rights, noting again that the taxpayer could have filed a supplementary return with DOR within the three year period to preserve its rights.

The taxpayer also raised an equitable tolling argument in this matter, asking that the case be remanded to either the circuit court or OHE for consideration of that issue, because DOR’s denial of another refund request for tax years 2009 and 2010 occurred even though DOR was aware of the pending IRS audit and that conduct affected the equitable tolling argument. Citing prior case law on the federal level, the court said that the government may rebut the presumption of equitable tolling by establishing that Congress opted to forbid it through evidence relating to a particular statute of limitations. The court said that if the time bar for a suit is jurisdictional, a litigant's failure to comply with the bar deprives a court of all authority to hear a case. The court said that the law of this State is clear that without specific “constitutional or statutory authority, an action cannot be maintained against the State, and the State in this case waived sovereign immunity only to the extent that the taxpayer followed the procedure established under the statute. The court found that the three-year statute of limitations imposed under the statute is jurisdictional and, therefore, equitable tolling was not available to the taxpayer. Citibank NA v. South Dakota Dep't of Revenue, South Dakota Supreme Court, 2015 S.D. 67; 26933-a-LSW. 7/29/15

Property Tax Decisions

No cases to report.

Other Taxes and Procedural Issues

Piercing of Corporate Veil Permitted for Unpaid Tax Debt Collection
The Alaska Supreme Court held that res judicata did not preclude the state from piercing the corporate veil to collect a corporate tax debt established in an earlier case. It held that a taxpayer's successor corporation was liable for the tax debt, even though the lower court's fraudulent conveyance analysis contained factual errors.

The State sought to hold the sole shareholder, director, and employee of a closely held Washington corporation personally liable for the corporation's unpaid tax debts. The lower court pierced the corporation's corporate veil and ruled that the shareholder's successor corporation was liable for the tax debt. It also voided two contract transfers as fraudulent conveyances, and ruled that the shareholder had breached fiduciary duties to the corporation and the State as the corporation's creditor. The shareholder and corporation appealed the lower court's decision.

The taxpayer is a physician who has practiced radiology in Alaska since 1977. In 1988 he incorporated his radiology business as a Washington corporation, and Washington administratively dissolved the corporation in 1990, although the taxpayer was apparently not aware of this until 1998. He wound up the affairs of his corporation from late 1998 into early 2001, and he incorporated a new Washington corporation in 2002 (corporation 2).

In 1997 the Alaska Department of Revenue assessed the original corporation for unpaid taxes, penalties, and interest for improper deductions between 1992 and 1995. In the ensuing litigation, the Office of Tax Appeals twice decided that the State could not assess corporate income taxes against Northwest Medical post-dissolution, "apparently relying in part on the notion that the taxpayer could be held personally liable for the actions of the dissolved corporation." The superior court twice reversed this determination, and in Northwest Medical Imaging, Inc. v. State, Department of Revenue, this court agreed that the corporation was responsible for unpaid corporate taxes because it had continued to contract and provide services under its corporate name after its administrative dissolution. In those cases, the court determined that under Washington law the imposition of personal liability requires actual knowledge that there was no incorporation. Subsequently, a judgment was entered against the corporation and the state began proceedings seeking to collect that judgment from the taxpayer personally under theories of piercing the corporate veil, successor liability and fraudulent conveyance. The lower court held for the state, ruling in part that the veil piercing claim was controlled by Alaska law, the state of incorporation, and could be pierced under Alaska’s mere instrumentality standard. The taxpayer has filed this appeal.

At issue in this case is whether the State's suit to pierce the corporation’s corporate veil stems from "the same cause of action" or "same transaction" as its previous suit to establish the corporation’s tax debt. The court found that the previous litigation between the State and the corporation concerned the propriety of certain deductions it had claimed as business expenses and its susceptibility to being taxed given its administrative dissolution. The State did not have to demonstrate that the taxpayer had ignored corporate formalities or used the corporate form to commit fraud or a crime in that case. The court said that piercing the corporate veil is a means of imposing liability on an underlying cause of action such as a tort or breach of contract and is a procedural rather than a substantive claim, and it is an equitable doctrine, premised on the court's ability to look past the legal fiction to do equity. The court noted that other courts that have considered this question have held that veil piercing should not be barred by res judicata and it was persuaded by the reasoning of these courts, which is consistent with the purposes served by claim preclusion. The court also noted that courts across the country have reached different conclusions about the proper law to apply when veil-piercing claims are brought against foreign corporations, but said that because it held that the lower court's findings justify piercing the corporation’s corporate veil under both Alaska and Washington law, it did not need to decide this question.

Alaska law provides that although corporate veils should be pierced "only in exceptional circumstances," it is appropriate to do so "if the corporate form is used to defeat public convenience, justify wrong, commit fraud, or defend crime." The lower court partially based its finding of misconduct sufficient to justify piercing the corporate veil on the way that the taxpayer used the business’s corporate form to avoid paying corporate and personal taxes. The corporation purportedly rented two offices from a family partnership the taxpayer controlled, Northwest Homestead Limited Partnership (Homestead), and deducted this rent as a business expense. The Office of Tax Appeals disallowed this deduction, in part because the corporation failed to provide any documentation to show that rent was actually paid to anyone. The superior court found that the rent the corporation claimed as a deduction significantly exceeded Homestead's underlying mortgage and lease payments, frequently resulting in rent deductions that were double or triple Homestead's actual costs. The rent amounts also varied dramatically year to year and seemed to reflect the corporation’s earnings, rather than the properties' value. In addition, Homestead was a flow-through entity that did not itself file tax returns, and the taxpayer did not report the full amount of the corporation’s purported payments, or in some years any payments, as rental income on his personal income taxes. The court found that these findings formed a sufficient basis to affirm the superior court's order piercing the corporation’s corporate veil.

Washington law provides that to pierce the corporate veil the plaintiff must show that the corporate form was used to violate or evade a duty and that the corporate veil must be disregarded in order to prevent loss to an innocent party. The taxpayer argued that the second element of Washington veil-piercing law is not met here because the superior court ruled that Skyrad is liable for the corporation’s tax debt. The taxpayer’s view is that because the state has a remedy against Skyrad, it is not necessary to disregard the corporation’s corporate form, and therefore Washington law would not permit veil piercing. The court rejected this argument saying that the taxpayer misconstrue the second element of Washington veil-piercing law because Washington courts have not described this second element as a requirement that the courts pursue every possible path to making a victim whole before piercing the corporate veil. The court described one appellate court decision in Washington that recently described the second element as "focus[ing] on the nexus between the abuse of the corporate form and the injury the plaintiff claims justifies the disregard of the corporate form,” and found in this case that the nexus requirement under Washington law is met in the present case.

The court also discussed the lower court’s finding that two contracts were fraudulently conveyed by the taxpayer and found that the first contract, instead, essentially expired. It held that the lower court’s findings had some clear errors in its evaluation of the second contract at issue, cut could not decide whether it was fraudulently conveyed based on the record before it. The court said that the lower court will have to make additional findings with respect to the adequacy of the consideration for that contract if the conveyance of the contract becomes material to the state’s ability to satisfy the judgment against the taxpayer. Pister v. Alaska, Alaska Supreme Court, Supreme Court No. S-15332. 7/24/15
  

Court Affirms Civil Fraud Penalty Against Amusement Machine Business
In an unreported opinion, the Maryland Court of Special Appeals held that a store renting out amusement machines had admitted to failing to pay its admissions and amusement taxes and was properly assessed a fraud penalty. The court said that the evidence supported the lower court's finding that the taxpayer committed fraud and that the Comptroller of Maryland’s (Comptroller) estimated assessment was valid.

From 1993 until 2009, the taxpayer owned and operated Nick's Amusements, a company that provided coin-operated entertainment machines to bars and restaurants, including jukeboxes, pool tables and video poker machines. The company retained ownership of the machines, and split the profits with the owner of the venue. With video poker machines, owners and managers of the locations made cash payouts to winning customers, with Nick's knowledge and approval, and these payouts were deducted from the profit they split. Nick's concedes that these payouts were illegal and the company kept no records of the payouts. The company was charged criminally as a result of the video poker business many times but none of these ever yielded a conviction.

It is lawful in the state to operate video poker machines without making payouts as long as machines are properly licensed and taxes are paid. Video poker machines and other "games of entertainment" are subject to an "admissions and amusement" tax of 10% in Baltimore County. Counties impose the admissions and amusement tax and set the rate, but the tax is administered by the Comptroller. The business did not consider illegal payouts to be taxable, and the route men did not include payouts when calculating the company’s tax liability and did not keep records that would allow anyone to calculate the taxes due on payouts. The route men tallied all of the revenue by location, net of payouts, and wrote down only that total before calculating taxes and license fees, and splitting the profits. As a result, when a route man returned to the company’s office with the day's receipts, video poker revenue was indistinguishable from revenue from jukeboxes, pool tables, or any other cash revenue.

In January 2009, after a lengthy investigation Baltimore County police seized eighty-three video poker machines owned by the taxpayer from twenty-nine locations. Police opened the machines and analyzed their motherboards in an effort determine how much money was paid into the machines and how much had been won (the "in-credits" and "out-credits," respectively). The police ultimately turned over this information to the Comptroller’s Office where it was independently analyzed to devise a “payoff percentage” in order to determine the admissions and amusement tax deficiency. The assessment was issued with interest and a 100 percent fraud penalty. The taxpayer filed an appeal of the assessment and fraud penalty. The tax court ultimately found enough evidence of fraud to uphold the fraud penalty, but expressed doubt about the accuracy of the assessment and adjusted the percentage of the fraud penalty to 50 percent to compensate for this doubt. Taxpayer appealed this decision to the circuit court that upheld the tax court’s decision. Taxpayer argued in this appeal that the tax court erred in assessing a penalty without finding intent to evade payment of the tax and erred in affirming the assessment when it was based on admittedly erroneous assumptions and other evidence that the Comptroller failed to preserve.

The Comptroller countered that the Tax Court properly assessed a fraud penalty under prior case law that set forth the badges of fraud and that substantial evidence supported the assessment, arguing in particular that a fully accurate assessment was impossible because the company failed to maintain adequate records. The Comptroller also argued that he could not be penalized for the destruction of the motherboards because he never possessed or even inspected them.

Citing Rossville Vending Machine Corp. v. Comptroller of the Treasury, 97 Md. App. 305 (1993), the court said it “is rare that a claim of ‘tax confusion’ can be refuted so thoroughly, let alone by a reported decision of an appellate court old enough to drink alcohol or gamble in a casino. This is just such a case.” In Rossville, decided three years before the taxpayer here was incorporated, the court stated that the admissions and amusement statute contained the operative phrase “gross receipts” since it was enacted in 1936 and that the plain meaning of the statute imputed tax liability for payouts of these machines. The court here notes that the taxpayer does not dispute that Rossville is binding or that the company owes some amount of taxes, but argues that despite the fact that he had a personal relationship with the owners of Rossville and knowledge of that business, no one at his company or his accountants knew about the Rossville decision until the assessment was levied. The taxpayer argued, therefore, that he could not have had the required intent to defraud the state.

In a prior case decided by this court, badges, indicia, or factors to look for in the tax fraud context were set forth and included (1) consistent and substantial understatements of income (or sales, in the sales tax arena); (2) failure to maintain adequate records; 
(3) implausible or inconsistent explanations of behavior, including the lack of credible testimony before a tribunal; 
(4) concealment of assets; 
(5) failure to cooperate fully with tax authorities; 
(6) awareness of the obligations to file returns, report income or sales, and pay taxes; and
(7) failure to file returns. The court in the present case found that there was substantial evidence to find badges one, two, and four in this case, and the presence of these badges was conceded. It pointed out that the Tax Court also found that number six was present in this case and the court here found that there was willful blindness by the taxpayer regarding its awareness of its obligation to pay the tax on payouts. The court held that the record before the Tax Court amply supported its finding l evidence of intent to defraud, and affirmed the penalty.

With regard to the actual amount of the assessment, the court noted the statutory requirement for the taxpayer to keep adequate records and the provision for the Comptroller to compute the tax due when the taxpayer fails to keep those records by use of “other means.” The court said that the use of those words suggests the legislature intended to vest broad discretion in the Comptroller to calculate assessments against parties that have not kept complete records.

The court said that as imprecise as the Comptroller's calculation might be in this case, the taxpayer’s alternative would reward exactly the sort of tax-evasive behavior the law is meant to deter and sanction. Finally, with regard to the destruction of the motherboards by the state police, the court noted that the Comptroller neither possessed nor had access to the motherboards. The Comptroller received a report from County Police based on their analysis of the motherboards and the taxpayer’s expert relied extensively on that report. The court said both parties had the same access to the same evidence, and there is no misbehavior to sanction. Zorzit v. Comptroller of Maryland, Maryland Court of Special Appeals, No. 0825. 7/8/15

The State Tax Highlights is a publication of the Federation of Tax Administrators for its members. If you have any comments on this publication, please send them to Linda Tanton at [email protected].

NEWS

Recent Criminal Convictions of Interest

The Beanie Babies avoided time in the Big House.  The Seventh Circuit affirmed a lower court sentence of two years’ probation and 500 hours of community service imposed on Beanie Babies creator H. Ty Warner after he pleaded guilty to tax evasion.  The government had challenged the sentence as unreasonable because it didn't include incarceration.  Warner earned more than $24.4 million of unreported interest income on assets in a Swiss bank account that resulted in a loss of $5.6 million in tax revenues. The circuit court noted that the district court wasn't required by statute to incarcerate Warner and that the sentencing guidelines are merely advisory.

Happy Pizza was not so fortunate.  Happy Asker, founder of regional pizza chain Happy's Pizza, was found guilty and sentenced to 50 months in prison and ordered to pay back $2.5 million in restitution to the IRS for a was characterized by the Justice Department as a “systematic and pervasive" income and employment tax fraud scheme. His co-conspirators in the scheme had all previously pleaded guilty.

Finally, a former IRS employee's extortion conviction in a tax fraud conspiracy has been affirmed by the Third Circuit, which also upheld her sentence in the conviction.  The court found that a rational juror could have concluded that an individual paid the IRS employee with the understanding that the employee would help her obtain a refund. The employee used her knowledge of the IRS's fraud detection procedures, including the fact that certain claims below $1,500 would not be flagged for review, in order to avoid suspicion.   The employee and her significant other enlisted others to recruit claimants who would provide their personal information in exchange for a portion of a cash refund.
 

FAQs issued for Wynne Refunds
The Maryland Comptroller's Office has issued FAQs to provide guidance regarding refund requests filed as a result of the decision in Comptroller of the Treasury v. Wynne, U.S. Supreme Court Docket Number 13-485.  The office has developed a new form, 502LC, to assist taxpayers in calculating the credit for local tax.  For those interested in the details, the FAQs can be found on www.marylandtaxes.com.

U.S. SUPREME COURT UPDATE

No cases to report.

FEDERAL CASES OF INTEREST

  
No cases to report.

DECISION HIGHLIGHTS

Sales and Use Tax Decisions

Aircraft Parts Subject to Use Tax
The Mississippi Court of Appeals found that a taxpayer is not entitled to a wholesale or use tax exemption on aircraft parts purchased out of state now that it is no longer required to collect sales tax on its gross income. The court said the taxpayer failed to show the repaired aircraft were used exclusively in interstate commerce.

The taxpayer repairs and services avionics equipment for aircraft. It purchases parts to perform these services from both in-state and out-of-state vendors and does not offer parts for sale. The Department of Revenue (DOR) issued a use tax assessment based on it conclusions that the taxpayer purchased these parts and equipment from out-of-state vendors and paid no sales tax. In 2006 the statute was amended to delete the requirement that businesses repairing or servicing aircraft were liable for the collection and payment of sales tax on gross income. Testimony at the trial on this matter was that the final version of the bill deleting this requirement did not amend the provision of the statute that would have altered a business’s obligation to pay sales or use tax on the parts purchased to perform these repairs or service. DOR issued a notice for all aircraft-repair facilities affected by this legislation on July 14, 2006. The notice specifically provided that sales or use tax was due on the purchase of all parts used in the repairing or servicing of aircraft. The notice was intended for delivery to all such repair facilities, but the lower court’s findings were that the taxpayer did not receive the notice. A subsequent call by the taxpayer to DOR advised that the business would be subject to the sales and use tax on its purchase of parts. The lower court found that this change in law created ambiguity in the statute and confusion for the taxpayer and vacated the assessment against the taxpayer.

The court said its standard of review here is limited to examining the legality of the decision. Citing prior case law the court said that an appellate court will reverse the decision of an administrative agency only if the decision was unsupported by substantial evidence, was arbitrary and capricious, was beyond the power of the agency to make or violated the statutory or constitutional rights of the complaining party.

DOR argued that the lower court improperly based its ruling in equity. The court here did not find that the statutory change enacted in 2006 created ambiguity, noting that the only possible ambiguity in the statutory scheme arose from a notation at the bottom of the last page of each version of the enacted legislation, which referenced exemption of parts from tax. The court said that this notation appears to be a nonsubstantive internal description used by the Legislature, which was not changed when the final version of the bill passed, and, citing prior case law, found that a footer may not be used to create ambiguity within an act. While the court agreed with the lower court that there were certain equities in favor of the taxpayer, it found that the taxpayer has not cited any authority that its tax obligation may be forgiven based on those equitable considerations.

Finally, the court found that the final plain language of the text in the bill unambiguously removed taxation from gross income of repairing and servicing aircraft only; it did not impact sales taxation on parts sold to the repair business. The statutory language for the exemption for aircraft parts remained the same, and is limited to parts sold for the repair of certain out-of-state aircraft, which is inapplicable in this case. Dep't of Revenue v. Heath, Mississippi Court of Appeals, No. 2013-SA-01547-COA. 6/30/15
  

Billboard Advertising Not Subject to Tax
The Arizona Court of Appeals, Division One, reversed a lower court and held that a billboard advertising company was not liable for the state's transaction privilege tax (TPT) because the taxpayer retained control of its property. The court held that the taxpayer’s selling billboard advertising was not leasing or renting tangible personal property.

The taxpayer is an outdoor advertising company that owns billboards throughout the state and contracts with customers that pay to display their messages on the billboards. The Department of Revenue (DOR) determined that the taxpayer’s business fell within the scope of the statute which imposes TPT on the leasing or renting of tangible personal property, and assessed TPT and interest against the taxpayer. The state’s TPT is an excise tax on the privilege or right to engage in an occupation or business in the state and is a tax on the gross receipts of an entity’s business activities. The issue in this matter is whether taxpayer’s sales of billboard advertising constitute leasing or renting of tangible personal property for consideration.

Prior case law in the state has determined that billboards are personal property. The court reviewed case law in the state interpreting the terms “leasing” and “renting” and the discussion focused on whether the customer had exclusive use and control and whether the business owner gave up possession and control of the tangible personal property. The court in this matter rejected DOR’s argument that advertisers have exclusive use and control of the billboards for the duration of their contract. The court said that the taxpayer owned the vinyl on which the advertisement was printed, the taxpayer affixes the vinyl to the billboard and only the taxpayer’s employees are permitted on the billboard to post, re-post, repair, adjust or illuminate the billboard. The court also noted that only the taxpayer may hire an electrician, repair person, or other maintenance person to service the billboard and under no circumstances does the taxpayer permit its customers entry on the billboards.
Under the terms of the contract, the taxpayer reserves the right to relocate and assign the advertisement to another billboard location of approximately equal advertising value, and the taxpayer also reserves the right at any time to refuse or withdraw any advertising copy in its sole discretion. In light of those facts, the court concluded that the taxpayer’s customers receive the mere right to have a message displayed on the billboards and do not enjoy possession or control of the billboards.

The court also noted that in 1986 the legislature expressly repealed the TPT on local advertising and the court said there is no indication the legislature repealed the tax because it believed the advertising activity would be taxable under the personal property rental tax classification. The court said that by repealing the tax on advertising, the legislature manifested its intent that TPT not apply to billboard advertising. Jones Outdoor Adver. Inc. v. Dep't of Revenue, Arizona Court of Appeals, Division One, No. 1 CA-TX 14-0006. 7/16/15

Personal Income Tax Decisions

Common Law Domicile Principles Apply in Income Tax Dispute
The Ohio Supreme Court held that common law domicile principles applied and found that a taxpayer's claim of being domiciled outside of the state for individual income tax purposes was not binding on the tax commissioner when other statements supported an Ohio domicile.

In March, 2009 the taxpayer filed an "Affidavit of Non-Ohio Domicile" for tax year 2008, using the form prescribed by the tax commissioner (Commissioner), declaring under penalties of perjury that he "was not domiciled in Ohio at any time during taxable year 2008" and that he was domiciled in Tennessee. Taxpayer’s spouse did not file an affidavit for tax year 2008.

Neither the taxpayer or his spouse filed an Ohio income tax return for 2008, but they jointly filed a federal tax return for that year which listed their Cincinnati address as their home address. The Commissioner filed an assessment for income tax against the taxpayer and his spouse for tax year 2008 and they filed an appeal. The commissioner issued a final determination with findings of fact, including that they filed an Ohio homestead-exemption application in January 2008, declaring under penalties of perjury that the Cincinnati homes was their principal place of residency and that the Tennessee home was a second or vacation home. The Commissioner also noted that the Tennessee utility bills submitted by them were sent to their Cincinnati address. The commissioner concluded that because of the contradictory statements made by the petitioners, the Affidavit of Non-Ohio Domicile contains a false statement and that the petitioners were not irrebuttably presumed to be domiciled outside of the state. The Board of Tax Appeals, in holding for the taxpayer, found that because domicile is a legal concept for individual income tax purposes, a taxpayer can lose the irrebuttable presumption of non-Ohio domicile only if making a false statement regarding contact periods or having an abode outside of the state, and found that the taxpayer had complied with the requirements of the statute and was irrebuttably presumed to be not domiciled in Ohio.

During the years at issue here, the taxpayer and his spouse were retired and their income was derived from sources such as pensions, interest, dividends, and IRA distributions, and the allocation of that income for state tax purposes depends solely on where they are domiciled.

The court discussed the principal of common law domicile and noted that case law has generally defined it as a legal relationship between a person and a particular place which contemplates residence, at least for some period of time and the intent to reside in that place permanently or at least indefinitely. The court noted that at common law, the issue of domicile is one of intent determined by the facts of the individual case, including the acts and declarations of the person and the totality of accompanying circumstances. Prior case law has held that for a change in domicile to be established, the person must have a physical presence in the new residence and intend to stay there. Husband and wife in this case concede in their brief that they were both "common law domiciliaries of Ohio during the 2008 tax year."

In 1993, the General Assembly enacted what is referred to as the "bright-line" statute, which sets forth certain presumptions regarding an individual’s domicile for tax purposes. Those presumptions depend on two circumstances: having an "abode" or place of residence outside Ohio during the entire taxable year and having no more than a certain number of "contact periods in this state" during the taxable year. In 2006, the legislature amended the bright-line statute, creating a presumption of non-Ohio domicile for a taxpayer with 182 or fewer contact periods in Ohio. The facts on the record are clear that the taxpayers meet these two requirements. The presumption is irrebuttable unless the taxpayer fails to timely file a statement verifying that he was not domiciled in Ohio and he had at least one abode outside Ohio, both during the entire taxable year. The statement must identify the abode(s). The statement is rebuttable if it contains a "false statement."

Again, the court cited case law stating that it is well settled that " the general assembly will not be presumed to have intended to abrogate a settled rule of the common law unless the language used in a statute clearly supports such intention," and the court noted that although the bright-line statute creates an irrebuttable presumption, it does not affect the substantive law of domicile. The court rejected taxpayer’s argument that the bright line legislation abrogated the common-law principles of domicile and that the General Assembly did not intend to permit a finding that a taxpayer filed a "false statement" merely because other evidence shows that the taxpayer meets the common-law criteria for domicile, finding that the statute is not as narrow as the taxpayer and his spouse claim. The court said that a statement verifying non-Ohio domicile can be false if it is not supported by the common law of domicile. If the common law does not matter, as the taxpayer asserts, then the statutory requirement that the individual "verify" non-Ohio domicile would be rendered meaningless.

The court also found that the Commissioner had a substantial factual basis for the false-statement finding in the application for the homestead exemption, made under penalties of perjury for the purpose of obtaining the property tax benefit for his Cincinnati home. The claim of homestead exemption contradicted the income tax affidavit in two respects: it asserted that the Cincinnati house was the principal place of residence and that the Tennessee house was a second or vacation home. The court concluded that when the Commissioner has information that furnishes a substantial basis for rejecting the claim of non-Ohio domicile and he sets forth that basis in his determination, the statute does not fail of its essential purpose of streamlining domicile determinations. In this case, the Commissioner correctly proceeded, after making his false-statement finding, to consider whether the evidence rebutted the presumption of Ohio domicile and concluded that it did not.

The dissent in this case found that the taxpayer demonstrated that he performed the actions necessary under the bright line test to raise an irrebuttable presumption that, for purposes of the state’s income tax, he was not domiciled in the state during 2008. Cunningham v. Testa, Ohio Supreme Court, Slip Opinion No. 2015-Ohio-2744. 7/8/15
  

Income From Nonresidents' Deemed Asset Sale Can Be Taxed
The New York Court of Appeals upheld tax imposed on nonresidents' pro rata share of gains from the deemed asset sale of their S corporation's stock. The court found no constitutional bar to taxation of a nonresident's New York-source income earned from a stock sale.

The taxpayers are several nonresident former owners and shareholders of JBS Sports, Inc. (JBS), a Tennessee business organized as an S corporation for federal and New York State tax purposes. In 2007, the taxpayer sold their JBS stock to Yahoo, Inc., and JBS and Yahoo decided to treat this transaction as a "deemed asset sale" for tax purposes under the Internal Revenue Code. Deemed asset treatment is not automatic or mandated by statute, but instead requires a voluntary election by both the seller and purchaser to treat the transaction as an asset sale. The court said, therefore, that the taxpayers freely chose to proceed with the JBS stock transfer as a deemed asset single-transaction sale, presumptively aware of the tax consequences of their choice. JBS realized over $88 million in gains as a result of this stock transaction and the earnings then passed through to the taxpayers as shareholders.

JBS reported these corporate gains and the amount passed to the taxpayers as part of its federal tax return, but excluded the amount distributed to the taxpayers from its 2007 New York S corporation franchise tax return. The taxpayers reported and paid federal taxes for the 2007 tax year on their respective shares of the asset sale income, but did not report or pay any New York State taxes associated with the sale. Taxpayers paid the assessment under protest and filed a claim for refund which was denied by the state Department of Revenue (DOR). The state’s Supreme Court denied the taxpayer’s motion for summary judgment and granted the motion for DOR, ruling that the statute was constitutional. The present matter considers the taxpayer’s direct appeal of the assessment.

Taxpayers allege that Article 16, Section 3 of the New York Constitution absolutely precludes taxation of gains from the sale of a nonresident’s intangible personal property. They argued that their corporate-derived income was obtained from the sale of JBS stock, which is considered intangible personal property and, therefore, nontaxable. They further contend that Tax Law § 632(a)(2), as amended in 2010, is unconstitutional to the extent it directly permits taxation of nonresidents' income derived from the Internal Revenue Code (IRC) § 338(h)(10) deemed asset sale. DOR argued that the article cited by taxpayers does not apply to plaintiffs' flow-through income realized from the sale of JBS corporate assets because the constitutional prohibition relied upon by taxpayers applies to location-based taxes on intangible personal property domiciled outside of New York State. DOR also argued that the taxpayers waived any challenge to the tax by electing to treat the transaction as a deemed asset sale under IRC § 338(h)(10).

The parties to this matter do not dispute that the state statute, as amended in 2010, contemplates the taxes that DOR assessed on the New York-source portion of plaintiffs' deemed asset sale gains. The court noted a foundational tenet of state tax law that New York seeks to achieve a certain amount of parallel treatment of state and federal taxation. New York S Corporation shareholders must report for state income tax purposes the same "income, loss, deduction and reductions . . . which are taken into account for federal income tax purposes" (Tax Law § 660[a]). The state statute further provides that nonresidents are subject to tax on income "derived from or connected with New York sources," such as income derived from an S corporation. Tax Law § 632(a)(2), as amended in 2010, includes as New York source income any gains from a deemed asset sale under IRC § 338(h)(10).

The court noted that from the language of Article 16, § 3 of the state Constitution, there is no express prohibition on income taxation of a nonresident's intangible personal property. The taxpayer, however, argued that a prohibition is the logical consequence of the situs-rule adopted in the first sentence of section three, and any income generated by the stock must be treated as nontaxable because New York's constitution requires a nonresident's intangible personal property, not employed in carrying on business in New York, be treated as domiciled outside of the state. The court rejected this argument saying it misconstrued the constitutional prohibition and assuming that according an out-of-state domicile to a nonresident's intangible property, such as stocks, insulates the nonresident shareholder from all types of taxes for all purposes is too expansive an interpretation of the provision. The court noted that the text of section three makes no mention and provides no language supporting extending the prohibition on ad valorem and ownership/property-based excise taxes to income taxes and that there is simply no language in Article 16, § 3 that expressly or implicitly constrains the state from imposing any other non-location based taxes. The tax being imposed here is based on income generated by those intangibles which are derived from New York sources. Therefore, the subject tax does not fall within the prohibition contained in Constitution. Burton v. Dep't of Taxation and Fin., New York Court of Appeals, No. 115. 7/1/15
   

Retroactive Assessment on Nonresidents' Deemed Asset Sale Affirmed
The New York Court of Appeals held that the retroactive application of 2010 changes to New York tax laws to nonresidents' 2007 sale of their New Jersey S corporation's stock did not violate the taxpayers' due process rights. The 2010 amendments in question involve deemed assets sales and the use of the installment method of accounting.

The taxpayers are Florida residents who owned the capital stock of Tri-Maintenance & Contractors, Inc. d/b/a TMC Services, Inc., a New Jersey corporation that provided janitorial services and elected to be taxed as a subchapter S corporation for state and federal tax purposes. Under the state statute, resident New York shareholders pay state income tax on all pass-through S corporation income, but nonresidents are assessed proportional state income taxes based on the percentage of the S corporation's total gains that are derived from or connected with New York sources of corporate income. The record reflects that TMC earned nearly 50% of its total income in New York. In 2007, taxpayers sold all of their shares in TMC to a third party for approximately $20 million and both parties, jointly, made an election under Internal Revenue Code (26 USC) § 338(h)(10) to treat the transaction as a "deemed asset sale," pursuant to which the corporation that is being sold is treated, for tax purposes, as if it sold all of its assets to the buyer and then distributed the sale proceeds to its shareholders in a complete liquidation. The sale was structured so that the purchase price was to be paid in installments pursuant to promissory notes, rather than with cash up-front. When the installment method is used, taxpayers recognize gains or income in the taxable years in which the payments are actually received, rather than the year the notes representing the installment obligation are received. The taxpayers limited their challenge in this case to the retroactive application of the amendments pertaining to the tax treatment of installment obligations.

When the taxpayers filed their 2007 New York state tax returns they reported no income or gain derived from the sale of TMC, in contrast to their federal return in which they reported the gain from the first installment payment received that year. They argued that the payments they received that year were treated as the proceeds of a sale of stock for federal tax purposes, and New York treated the sale of stock as an intangible asset, which was not taxable to them under state law.

As a result of state court decisions in this area in 2009, the legislature amended the tax law to overturn those decisions, providing that the amendment was intended to clarify the concept of federal conformity in the personal income tax and was necessary to prevent confusion. The 2010 amendments, which were made retroactive to all taxable years beginning on or after January 1, 2007, clarified, among other things, that if the S corporation distributed an installment obligation under federal law or made a deemed asset sale election under 26 USC § 338(h)(10), "any gain recognized on the receipt of payments from the installment obligation . . . [or] on the deemed asset sale for federal income tax purposes will be treated as New York source income." The taxpayers alleged that the 2010 amendments imposed a tax for the first time on the gain recognized on payments received from installment obligations such as theirs and the 2010 law provides an excessive period of retroactivity, creating a hard and oppressive effect on their settled expectations.

Citing prior case law, the court noted that the retroactivity provisions of a tax statute are not necessarily unconstitutional and are considered valid if for a short period. But the court recognized that a taxpayer may choose to make a claim that a retroactive tax violated the Due Process Clause because it was so harsh and oppressive as to transgress the constitutional limitation, but the plaintiff must show that the retroactive application of a tax is arbitrary and irrational. The state’s burden is met by showing that the retroactive application is itself justified by a rational legislative purpose. The court said it uses a balancing-of-equities test, articulated in an earlier case, in determining whether the statute is arbitrary and irrational. The factors it relies on are the taxpayer’s forewarning of a change in the legislation and the reasonableness of reliance on the old law, the length of the retroactive period and the public purpose of the retroactive application.

The court found that the taxpayer had not shown that their reliance on their own reading of the law, at the time of the transaction in 2007, was reasonable, stating that they relied upon an untested interpretation of the prior law, unsupported by any actual experience, practice or professional advice, that was in conflict with the foundational purposes of S corporations, which permit shareholders to avoid paying corporate taxes by paying the taxes themselves. The court noted that before its amendment, the state tax law did not clearly prohibit the taxation of gain on installment payments received in connection with corporate asset sales or deemed asset sales. The court found that the 3 1/2-year retroactive period was curative and designed to cover open tax years, intended by the legislature to prevent an unexpected loss of revenue as a result of the 2009 court decisions. Finally, the court held that the public purpose for the retroactive application, attempting to correct an error and preventing significant and unanticipated revenue loss, were rational public purposes underlying retroactivity. Accordingly, the court held that the retroactive application of the 2010 tax law amendment is valid under the Due Process Clauses of the United States and New York Constitutions. Caprio v. Dep't of Taxation and Finance, New York Court of Appeals, No. 116. 7/1/15
   

Double Assessment, Denial of Amnesty for Couple Upheld
The Massachusetts Appeals Court upheld the imposition of a double assessment and denial of amnesty for a couple found guilty of federal tax fraud. The court also rejected claims that the taxpayers were not properly subject to a double assessment or were entitled to relief under a 2009 amnesty program.

The taxpayers since the 1970s have owned property and business interests in Massachusetts, and have had other close ties to the Commonwealth. The couple filed no Massachusetts tax returns between 1989 and 2007. In 2007, the husband was convicted of Federal conspiracy and tax evasion charges in the United States District Court for the District of Massachusetts.

The Commissioner of Revenue (Commissioner) subsequently issued the taxpayers a notice of failure to file their state income tax returns for the years 1993, 1994, and 1995. The taxpayers filed returns for those years, but the Commissioner determined that the returns were false or fraudulent or were filed with a willful attempt to evade the tax. As a result the Commissioner imposed a "double assessment" against the taxpayers and, on appeal by the taxpayers, refused to abate it. The Commissioner's decision was upheld by the Appellate Tax Board (board), and the Appeals Court affirmed. See Schussel v. Commissioner of Revenue, 86 Mass. App. Ct. 419, 431 (2014). (See prior issue of State Tax Highlights for a discussion of the Appeals Court decision.)

The taxpayers contend that they were not properly subject to a double assessment, noting that their tax returns were prepared for them by an attorney, and that they attached a "rider" to those returns, stating that the sums reported were the subject of Federal criminal proceedings against the husband. They also claim that they were entitled to relief from the double assessment under an amnesty program established by the Commissioner in 2009, pursuant to legislation. Although the 2009 amnesty program does not apply to "any taxpayer who . . . was the subject of a tax-related criminal investigation or prosecution," St. 2008, c. 461, § 1, the taxpayers argued that this exception refers only to investigations or prosecutions arising from State, not Federal, tax offenses.

The court concluded that the board's findings of fact are supported by substantial evidence and that the taxpayers’ claim that the 2009 amnesty program applies to them was not properly before the court. The court said that there is no dispute that the taxpayers’ Massachusetts tax returns for the years from 1993 to 1995, filed in response to the Commissioner's May, 2007, notice of failure to file, were incorrect because they classified the taxpayers as nonresidents and because the amounts of income reported in the returns were lower than the amounts of income the taxpayers actually earned. The court noted that not every inaccurate tax return represents a false or fraudulent return within the meaning of the tax statute and the double penalty assessment may be imposed only on taxpayers whose conduct was knowing and intentional, rather than negligent or careless. The court agreed with the board’s finding that the taxpayers’ filing of false returns was “knowing” and that they made their filings with an “intent to evade taxes.” The court rejected the taxpayers’ contention that the rider attached to the return undermined the board’s conclusion, noting that the language of the rider was, itself misleading. The court also found that the record contained no indication that the taxpayers provided their attorney with a full and accurate disclosure of relevant information concerning either their ties to the state or there actual income. Under those circumstances, the fact that the tax returns were prepared by an attorney has little, if any, significance for the question whether the taxpayers filed their false returns knowingly and intentionally.

The court also found that the taxpayers’ contention that a criminal investigation or prosecution excludes a taxpayer from the 2009 amnesty program only if it concerns "Massachusetts taxes imposed pursuant to Massachusetts statutes" was not properly before the court because it was not raised in the proceedings before the board. Schussel v. Comm'r of Revenue, Supreme Judicial Court, SJC-11807. 7/1/15

  
Corporate Income and Business Tax Decisions

No cases to report.

Property Tax Decisions

Court Clarifies Residential Transfer Tax Exemption Requirements
The Michigan Supreme Court held that a taxpayer only needs to demonstrate that real property is the principal residence of the seller, that its state equalized value is not greater than the acquisition value, and that the sale was at arm's-length in order to be entitled to a real property transfer tax exemption for residential property.

The taxpayers in this case were all homeowners who sold their principal residences at a time when the state equalized value (SEV) of their respective properties was less than the SEV at the time of their purchase. Upon the sale of their homes, the taxpayers paid a transfer tax under the State Real Estate Transfer Tax Act (SRETTA) and then requested a refund from the Department of Treasury (Treasury). That statute exempts from this tax a sale or transfer of a principal residence when, at the time of the conveyance, the property has an SEV that is "equal to or lesser than the [SEV] on the date of purchase or on the date of acquisition by the seller or transferor for that same interest in property." The statute does provide that if the treasurer finds that the sale or transfer was for "a value other than" the property's "true cash value," a penalty of 20% may be assessed against the transferor.

The court said that what is in dispute is the meaning of "true cash value" as used in the penalty clause and the extent to which that meaning controls the concept of SEV as contemplated in the exemption. Taxpayers contend that the proper understanding of "true cash value" here is the property's fair market value at the time it is sold. Under this theory, the exemption would apply if the SEV at the time the property is conveyed is equal to or lesser than the SEV on the date the property was acquired, unless it is determined by the Treasurer that the sale or the transfer of the property was at a value other than the property's fair market value. Treasury argued that "true cash value" is a term of art that means the value assigned by the assessor in that tax year, which will always equal the property's SEV multiplied by two because property is assessed at 50% of its true cash value, subject to county equalization.

The court noted that while SRETTA does not define "true cash value," it defines the word "value" as "the current or fair market worth in terms of legal monetary exchange at the time of the transfer." The court pointed out that case law treats the concept of true cash value as being synonymous with "fair market value." The court found that the Court of Appeals erred when it held that, to be entitled to the exemption, petitioners must have sold their properties for exactly double the SEV at the time of the sale.

The court said that it is very unlikely, particularly in the absence of any textual indicia, that the legislature impliedly intended the property's "true cash value" to mean precisely twice its SEV. Rather, the court said that the interpretation that best effectuates the legislative intent is that the exemption requires an arm's-length transaction, which, by definition, gives the property its true cash value, finding that the only instance in which the penalty clause would apply to preclude an exemption is when a seller or transferor sold the property for an amount other than an amount at which a willing buyer and a willing seller would have arrived through arm's-length negotiation. Gardner v. Dep't of Treasury; Michigan Supreme Court, Docket Nos. 150293; 150294; 150295. 7/9/15
  

Summary Judgment Upheld Against Telephone Companies
The California Court of Appeal, First Appellate District, granted summary judgment in favor of the State Board of Equalization (BOE) in a property tax refund claim. Although a taxpayer properly filed a petition for reassessment of its property, it did not state in the petition that it was also claiming a refund, as required by statute. The court said that while this requirement serves limited practical purposes, the language of the statute is plain and compulsory.

State property owners who dispute the government's assessment of their property for tax purposes may generally request to have the property reassessed at a lower valuation and request a refund of paid taxes that were based on an excess valuation. They must make both requests before bringing a judicial tax-refund action, but may elect to make them separately. This case involves a unique assessment-and-refund procedure applicable to certain entities, such as telephone companies, that typically hold property in multiple counties. The state constitution requires BOE to assess telephone companies' property at fair-market value annually. The assessment is then allocated among the jurisdictions in which the property is located and each county is responsible for collecting the taxes owed by the telephone company in that county.

In 1987 the legislature enacted a streamlined appeals process for state assessees and while telephone companies are no longer required to file refund claims in each county before seeking judicial relief, they must still comply with certain procedural requirements, including first filing a petition with BOE for a reassessment and paying any disputed tax. The reassessment petition must state that a refund is claimed. The statute of limitations on a judicial tax-refund action is four years, and the limitations period begins to run when the BOE mails its decision on a reassessment petition that stated a refund was claimed. After this new procedure was signed into law, BOE created a standard, one-page form for reassessment petitions to make it easy and a form of this notice was used by the taxpayer here, with a check box to indicate whether the taxpayer was making a request for refund pursuant to the statutory requirement. The taxpayer failed to check either the yes or no box and filed nothing else with its petition to signify that it wanted the petition to be considered a claim for refund.

The taxpayer argued that the company was not required to comply with the notice requirement because it serves no real purpose and the counties were not prejudiced. While the court was concerned with the fairness of a strict application of the notice requirement, it concluded that the notice requirement, while serving few practical purposes, is not irrational and must be enforced in accordance with the statute's plain language.
The court noted that the taxpayer did not identify an ambiguity in the statute and acknowledged that its literal terms require a telephone company to request a refund with the BOE as a prerequisite to filing a judicial tax-refund action. The court concluded that the legislative intent is reflected in the statute's plain language and meaning and while the court said that the notice requirement advances few practical purposes, the court could not say that the requirement is entirely pointless. Sprint Telephony PCS L.P. v. State Bd. of Equalization, California Court of Appeals, First Appellate District, A140540. 7/16/15
  

Partial Charitable Exemption for Park Property Granted
The Georgia Court of Appeals determined that an Atlanta park was entitled to a partial charitable tax exemption for a building owned by the park but leased by two restaurants. The court held that the exemption could be applied against the building for the portions not occupied by the restaurants.

Taxpayer is the Piedmont Park Conservancy (Conservancy), a section 501(c)(3) charitable organization that owns a park in Atlanta with a building that is occupied in part by lessees operating two restaurants. When the Conservancy purchased the park in 1999 it applied for, and received, an exemption from property tax. In response to comments from visitors to the park regarding a lack of food services, the Conservancy entered into lease agreements with two food vendors, one in 2001 and the other in 2002, leasing out a total of 28.30% of the building. Facts in the court record show that all of the income received by the Conservancy from the restaurants during the years at issue was devoted to the Conservancy's charitable purposes, which include the preservation and enhancement of the park and the provision of recreational and educational services to the public; no part of the Conservancy's earnings is distributed to private persons or shareholders. The portion of the building not leased to the restaurants, amounting to 71.7% of its square footage and known as the Piedmont Park Community Center, consists of office space for the Conservancy, an environmental education center, and a room used for Conservancy events and community meetings. The Conservancy also uses the Center for events including summer camp programs and an open-air community market.

The county Board of Tax Assessors (Board) subsequently denied the Conservancy a charitable tax exemption for the building, which the Conservancy appealed. The Board asserts here that the lower court erred when it granted the Conservancy the proportional tax exemption because state law does not authorize a tax exemption for any portion of a property owned by a charitable organization engaged in commercial activities on that property. The Board also argued that the Conservancy did not present evidence as to the charitable use of the remainder of the property.

The state statute provides an exemption for all ad valorem property taxes to all institutions of purely public charity. Under the Georgia Constitution of 1945 and a 1946 amendment to it, charitable institutions were authorized to use a portion of their property to generate income as long as the property's "primary purpose" remained charitable. The court pointed out that the Supreme Court of Georgia has long granted tax exemptions to charities even when the commercial activity at those charities' properties have generated income, as long as that income is used exclusively for religious, educational, or charitable purposes.

The court cited a 1991 case, York Rite Bodies of Freemasonry of Savannah v. Bd. of Equalization of Chatham County, 261 Ga. 558(2)(408 SE2d 699) (1991) that reaffirmed that the statute authorized ad valorem tax exemptions for property owned by a purely public charity and established a three-prong test. Following York Rite, the Court continued to hold that proportional exemptions as to those portions of a property not engaged in income-producing activities were consistent with the statute’s provision of exemptions to "purely public charities."

In 2007 the legislature amended the statutory exemption but the court noted in another decision that the only substantial change made by the 2007 amendment was to limit the extent of property that may be used primarily to generate income. The court rejected the Board’s argument that the statute forbids the Conservancy from using any portion of the property for income-producing activity finding that this argument runs contrary to at least forth years of state law. The court, instead, reviewed the three factors cited in York Rite and found that the Conservancy qualified as an institution devoted entirely to charitable pursuits, whose charitable pursuits were for the benefit of the public and whose use of the property in question was exclusively devoted to those charitable pursuits. It concluded that the Conservancy was entitled to a proportional exemption.

The court rejected the Board’s argument that the Conservancy is not entitled to a proportional exemption because it failed to provide evidence of the charitable use of that portion of the building not occupied by the restaurants and because the restaurants are turning a profit, finding that the record reflects that the Community Center occupies more than 70% of the building and the Center is used for purposes consistent with the Conservancy’s charitable mission. The court further stated that the profitability of the tenant restaurants has no bearing on the question whether the Conservancy is entitled to a proportional exemption as to the space not occupied by these tenants. Fulton Cnty. Bd. of Tax Assessors v. Piedmont Park Conservancy, Georgia Court of Appeals, A15A0356. 7/16/15

Other Taxes and Procedural Issues

No cases to report.

The State Tax Highlights is a publication of the Federation of Tax Administrators for its members. If you have any comments on this publication, please send them to Linda Tanton at [email protected].