State Tax Highlights

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].

The full archive of State Tax Highlights is available below.  To read the most recent issue, click here.

 


 

STATE TAX HIGHLIGHTS
A summary of developments in litigation.
 
Published biweekly by the Federation of Tax Administrators

 
August 28, 2020 Edition
 
 
NEWS
 
 
Texas Court Approves Service for Lawsuits Over Social Media
 
The Texas Supreme Court announced changes to the Texas Rules of Civil Procedures that will allow lawsuits in the state to be served over Facebook, Twitter, email and other social media sites or technology in circumstances where traditional means of service have failed.
 
 
U.S. SUPREME COURT UPDATE
 
No cases to report.
 
FEDERAL CASES OF INTEREST
 
 
State Cannot Tax Intangible Property of Railroad
 
The U.S. Court of Appeals for the Ninth Circuit held that the Oregon Department of Revenue's (DOR) inclusion of a railroad's intangible personal property, including accounting goodwill, when valuing the company's property discriminated against the railroad in violation of the federal Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act).
 
Oregon law generally taxes real and tangible personal property situated within its borders, but certain commercial and industrial entities, including railroads and other interstate concerns, must also pay taxes on their intangible personal property. For the first time in 2017, the state’s Department of Revenue (DOR) began including the taxpayer’s intangible personal property in the railway's property value assessments, which resulted in a tax liability thirty percent higher than the previous year. The taxpayer filed suit under the 4-R Act alleging the tax on its intangible personal property was another tax that discriminates against a rail carrier. The district court ruled that the taxpayer could challenge the property tax under 49 U.S.C. § 11501(b)(4), that the proper comparison class for the taxpayer was the state’s commercial and industrial taxpayers, and that the intangible personal property tax assessment discriminated against the taxpayer in violation of the 4-R Act. The district court concluded that the taxpayer’s challenge to the state’s tax scheme under 49 U.S.C. § 11501(b)(4) was not barred by prior case ACF, which held railroads could not challenge as discriminatory a generally applicable property tax to which some non-railroad property, but not railroad property, was exempted.  In making that decision, the district court rejected an argument of DOR for nearly three decades that railroads may not challenge property taxes under § 11501(b)(4). The district court also rejected an argument DOR raised for the first time at oral argument: that the taxpayer failed to establish the state’s centrally assessed taxpayers are isolated and targeted enough to show discrimination.  DOR filed this appeal.
 
Congress adopted the 4-R Act to restore railroads' financial stability. Under the Act, states may not “unreasonably burden and discriminate against interstate commerce” by doing any of the Act’s enumerated acts, including, in pertinent part, impose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Board under the Act.  All real and tangible personal property, but not intangible personal property, situated within Oregon is subject to assessment and taxation by county assessors. The property of railroads and thirteen other industries is, however, centrally taxed by the state’s DOR and those industries pay taxes on their intangible personal property in addition to their tangible property. Intangible personal property includes accounting goodwill, and in 2010, the taxpayer acquired about $14.8 billion accounting goodwill when Berkshire Hathaway overpaid for all of the taxpayer’s remaining shares.  From 2011 to 2016, DOR did not include the accounting goodwill in its calculation of the taxpayer maximum assessed value (MAV), but in 2017, DOR included the $14.8 billion goodwill, as well as $637 million of other intangible personal property, in its calculation of the taxpayer’s real market value (RMV) and MAV, which increased the taxpayer’s assessed value and tax liability by approximately 30 percent. 
 
The court began its analysis by examining ACF.  In ACF, a group of railway car leasing companies sued under 49 U.S.C. § 11501(b)(4) to challenge Oregon's assessment of taxes upon their railroad cars, considered tangible personal property in Oregon. The ACF plaintiffs complained the tax was discriminatory because it exempted certain classes of commercial and industrial property while taxing railroad cars in full. Because subsections (b)(1)–(3) of the 4-R Act prohibit certain types of discriminatory property tax practices, DOR reasoned that Congress must have intended subsection (b)(4)'s “another tax” to refer to non-property taxes.
The court rejected DOR’s preferred statutory construction and upheld the tax on other grounds. First, the court in ACF  reasoned that “commercial and industrial property” was the proper comparison class for purposes of determining whether tax treatment was discriminatory. The statute defines “commercial and industrial property” to be property devoted to a commercial or industrial use and subject to a property tax levy and the court reasoned that “subject to” meant property that was taxed as opposed to taxable. The court said a railroad cannot generally claim discrimination if it is forced to pay a generally applicable tax from which some of its comparators are exempted. 
 
DOR arguedthat railroads may not challenge any property taxes under 49 U.S.C. § 11501(b)(4) and believes that CSX Transportation, Inc. v. Alabama Department of Revenue (CSX I), 562 U.S. 277 (2011) supports that position, but the court concluded that nothing in CSX I closed the door ACF left open and that under § 11501(b)(4), railroads may challenge discriminatory property taxes, even those masquerading as tax exemptions.
The court reviewed a number of other cases that it said uniformly support the taxpayer’s position that it may challenge a discriminatory property tax under 49 U.S.C. § 11501(b)(4).
 
The court then rejected DOR’s argument that its intangible personal property tax was “generally applicable” and that the taxpayer’s challenge was no more than a demand for exemptions offered to other taxpayers, like the unsuccessful challengers in ACF, agreeing with the lower court’s description of the state’s “property tax law as two systems: one that taxes intangible personal property and one that does not tax intangible personal property.”
The court said the state’s statutory scheme cannot create an intangible personal property tax exemption because it never creates a generally applicable intangible personal property tax, from which to grant exemptions.  Instead, the statute creates a tax on real and tangible personal property that is generally applicable to all Oregon taxpayers.   A separate rule applies to centrally assessed taxpayers, who in addition to real and tangible personal property, must also pay taxes on their intangible personal property. 
 
Finally, the court concluded that the taxpayer had proven that its tax treatment violated the 4-R Act.  The court agreed that the appropriate comparison class is the state’s commercial and industrial taxpayers and noted that only the centrally assessed taxpayers in that class were subject to tax on the intangible property.  The court found that there was not sufficient justification for this disparate treatment. BNSF R.R. Co. v. Oregon Dep't of Revenue, U.S. Court of Appeals for the Ninth Circuit, No. 19-35184; D.C. No. 3:17-cv-01716-JE.  7/8/20
 
 
 
DECISION HIGHLIGHTS
 
Sales and Use Tax Decisions
 
Telecom Company Not Double-Taxed
 
The Nebraska Supreme Court found that a company that builds, maintains, repairs, and removes mobile telecommunication towers and equipment must pay sales or use tax on building materials and also remit sales tax when billing customers when the same materials are furnished, installed, or connected.  The court found that the two taxes are on different activities and do not constitute double taxation.
 
The taxpayer builds, maintains, repairs, and removes mobile telecommunication towers and equipment. Specifically, it erects towers, builds lines and antennas, and installs roads and fences for wireless tower sites. At some sites, its work includes installing backup generators attached to concrete foundations, the purpose of which is to allow the telecommunications tower to operate during a power outage. The taxpayer has paid sales tax or use tax as a consumer when it purchases building materials, under what the statute refers to as an Option 2 taxpayer.
 
The state’s Department of Revenue (DOR) performed an audit of the taxpayer and determined there was a deficiency.  The taxpayer sought a redetermination of that deficiency and a hearing was held and the Commissioner subsequently denied the taxpayer’s petition finding that the taxpayer owed taxes on gross income from providing, installing, constructing, servicing, or removing property used in conjunction with mobile telecommunications services. The taxpayer appealed to the district court which upheld the assessment, reasoning that the plain language of § 77-2701.16 applied to Option 2 contractors under § 77-2701.10 and that such a taxing structure did not constitute double taxation. The taxpayer filed this appeal, arguing that the lower court erred in concluding that the taxpayer must pay sales or use tax on building materials purchased by it and must also remit sales tax on gross receipts earned from the “furnishing, installing, or connecting” of mobile telecommunications services.
 
Under § 77-2701.10 of the state statute,  a contractor may opt to be taxed as the retailer or as the consumer of building materials. Option 1 contractors are taxed as retailers and Option 2 and “Option 3” contractors are taxed as consumers.  DOR is not permitted to “prescribe any requirements . . . restricting any person's election”  and a contractor can change its status with permission of the Commissioner. In addition to sales tax on building goods, gross income from installing or connecting mobile telecommunications services is also taxable under § 77-2703 which imposes a sales or use tax on gross receipts of “any person involved in the connecting and installing of the services” defined in § 77-2701.16(2).
 
The court said relevant to this appeal, § 77-2701.16(2)(e) defines gross receipts as the gross income received from the provision, installation, construction, servicing, or removal of property used in conjunction with the furnishing, installing, or connecting of any public utility services specified in subdivision (2)(a) or (b) of this section. There is an exception when the taxpayer is acting as a subcontractor for a public utility if the contractor has elected to be treated as a consumer of building materials under subdivision (2) or (3) of section 77-2701.10 for any such services performed on the customer's side of the utility demarcation point. The Nebraska Administrative Code specifically deals with Option 2 contractors in the area of telephone, cable satellite services, and other utilities, including mobile telecommunications services, and provides that the contractor must charge sales tax in certain situations.
 
The court rejected the taxpayer’s argument that there is a conflict between §77-2701.10(2), allowing it to pay sales tax as a consumer, and § 77-2701.16(2)(e), requiring it to pay tax on the gross receipts it earned in the “furnishing, installing, or connecting” of mobile telecommunications services using those previously taxed goods. The court reviewed the rules of statutory construction, noting that an appellate court will not resort to interpretation to ascertain the meaning of statutory words that are plain, direct, and unambiguous. A collection of statutes pertaining to a single subject matter are in pari materia and should be conjunctively considered and construed to determine the intent of the Legislature, so that different provisions are consistent, harmonious, and sensible.  The court said that together, § 77-2703(1) and § 77-2701.16(2) apply to “any person involved in [the] connecting and installing” of mobile telecommunications services. There is an exemption for the gross income of certain Option 2 and Option 3 contractors in § 77-2701.16(2)€ that is applicable to “services performed on the customer's side of the utility demarcation point.”  The court noted that the taxpayer did not assert on appeal that any of its services were performed on the customer's side of the demarcation point, and thus this exception is not applicable to it. The court further noted that the very existence of this exception showed that Option 2 contractors were intended to be taxed under both §§ 77-2701.10 and 77-2701.16.  The court also said its conclusion was reinforced by DOR’s regulations, which provide that an Option 2 contractor pay a sales tax on its purchase of “wire, cable, outlets, and other property used to install or construct . . . mobile telecommunications services,” and agency regulations properly adopted have the effect of statutory law.
 
The taxpayer also  contended that the taxation under 77-2701.10 and 77-2701.16 constituted impermissible double taxation.  The court pointed out that it had previously held that there is no double taxation unless both taxes are of the same kind and have been imposed by the same taxing entity, for the same taxing period, for the same taxing purpose, and upon the same property or the same activity, incident, or subject matter.  In addition, double taxation is not unconstitutional or prohibited, although it is the court’s policy to guard against it, unless it is
unreasonable, confiscatory, or discriminatory. A tax is confiscatory if it is established that it is so high as to effectively prohibit a taxpayer from engaging in a particular business.  DOR contended that two different activities are subject to tax here, the sales or use tax on the taxpayer’s purchase of building materials, and the sales tax on the gross receipts from the “furnishing, installing, or connecting” of mobile telecommunications services. The court concluded that the taxpayer was not subject to double taxation in this case, citing its decision in Anthony, Inc. v. City of Omaha.   In that case, the court discussed the legal incidence of a sales tax and of an occupation tax. The court pointed out that the taxpayer purchased building goods and voluntarily, and for business reasons, elected to pay a sales tax as a consumer of those building goods. That sales tax is part of the taxpayer’s purchase price and it is the obligation of the retailer of those goods to remit the tax to the State.  With regard to the sales tax on the taxpayer’s gross receipts, the taxpayer’s customers are the consumers and the sales tax is part of the purchase price.  It is the taxpayer’s obligation to remit the tax to the State.
The court concluded that this situation presented no double-taxation.
 
The taxpayer also argued that the district court erred in finding that certain portions of the deficiency determination were not used in conjunction with the “furnishing, installing, or connecting” of mobile telecommunications services, relying primarily that it relied on 2008 correspondence from DOR when it did not collect sales tax on the now-challenged items, with the exception of the backup generators. The court agreed with DOR that the generators were installed “in conjunction with” the “furnishing, installing, or connecting” of mobile telecommunications services, finding that while a generator and its fuel may not be critical to the usual operation of mobile telecommunications services, those items are necessary to the uninterrupted operation of such a service.
 
Finally, the taxpayer claimed the evidence showed that all of its records for the audit period were available to DOR and that DOR therefore erred in estimating its deficiency based on the 2014 tax year. The court said, however, that the issue was not that the taxpayer did not provide access to the DOR at the time of the audit, but that it now challenges that deficiency without offering documentation to prove its assertion that DOR’s determination was wrong.
Diversified Telecom Servs. Inc. v. State of Nebraska, Nebraska Supreme Court, No. S-19-883.  8/14/20
 
Court Affirms Prior Order
 
The Illinois Appellate Court, First Judicial District, issued an opinion affirming its previous decision in which it rejected a taxpayer’s claims contesting its liability for retailers' occupation tax on select sales of appliances.  See the FTA’s legal database for a discussion of that earlier decision.
 
The taxpayer is a retailer of, among other things, consumer electronics and appliances. It also sometimes installs appliances in the purchasers' homes and if in the taxpayer’s opinion the installed appliance is “incorporated into, and permanently affixed to, real estate,” then it does not collect sales tax.  The Department of Revenue (DOR) sent the taxpayer a Notice of Proposed Liability for sales taxes on applies the taxpayer had exempted from the tax.  The taxpayer paid the assessment and filed an appeal.  The circuit court found for DOR and the taxpayer filed an appeal to this court.
 
The court once again found that the circuit court did not err in finding that the taxpayer’s sale of certain appliances was not exempted from the retail occupancy tax despite its subsequent installation of those appliances and DOR’s imposition of the retail occupancy tax on these sales did not violate the uniformity clause of the state constitution. Best Buy Stores LP v. Dep't of Revenue,  Illinois Appellate Court, First Judicial District, No. 1-19-1680; No. 2017 L 050591.  8/14/20
 
Appliance Sales Subject to Tax
 
The Illinois Appellate Court, First Judicial District, held that sales of appliances were subject to the state's retailers' occupation tax, despite the fact that the appliances were subsequently installed by the seller.  The parties had agreed that the decision in Best Buy Stores LP v. Dep't of Revenue would determine the outcome in this case.
The taxpayer is a wholly owned subsidiary of Best Buy and like its parent company, it is a retailer of kitchen and home appliances. Although the taxpayer operates stand-alone stores in some states, its operations in Illinois are all located within Best Buy stores.  In May 2017, the Department of Revenue (DOR) sent a notice of tax liability to the taxpayer and the taxpayer paid the assessment and filed this complaint arguing that for certain built-in appliances that it installs, it operates as a construction contractor and not a retailer, and is thus exempt from collecting and remitting sales tax on those transactions. In January 2019, the circuit court entered an agreed order holding the taxpayer’s circuit court action in abeyance pending a final ruling in the Best Buy case and providing that the circuit court's ruling in the Best Buy case would “control and determine the final outcome” of the taxpayer’s action. In July 2019, the circuit court entered an order noting that the Best Buy case had been resolved and that the court had rejected Best Buy's substantive claims. As a result, the court denied the relief that the taxpayer sought in its complaint. The taxpayer filed this appeal.  The taxpayer contended that it was appealing the circuit court's order “for the same reasons Best buy appealed” the court's order in the Best Buy case and asked that the court resolve this appeal in a manner that is “consistent with” its substantive resolution of the issues in Best Buy. The parties adopted the arguments set forth in their respective briefs in Best Buy, and they offered no new arguments in favor of their respective positions. Consequently, the court said, it had no reason to depart from its substantive holding in Best Buy. The court, therefore, affirmed the judgment of the circuit court. Pac. Sales Kitchen & Bath Ctrs. LLC v. Dep't of Revenue, Illinois Appellate Court, First Judicial District, 2020 IL App (1st) 191679-U; No. 2017 L 50590.  8/14/20
 
Public Utility's Sales Tax Refund Suit Dismissed
 
The Texas Court of Appeals, Third District, vacated a judgment of the 353rd District Court of Travis County awarding a taxpayer a sales tax refund.  The court dismissed the public utility's tax refund suit, finding that the district court lacked subject-matter jurisdiction over the suit.
The taxpayer is a fully integrated public utility in the business of manufacturing, generating, transmitting, and distributing electricity in west Texas and southern New Mexico.  It believed that it overpaid sales taxes on customer meters, substation meters, and disconnect collars that it bought and used in its business for the period April 2006 to December 2009. The taxpayer contended that each of these types of equipment were “telemetry units that are related to . . . step-down transformers,” as the statute uses that phrase. It also sought a refund of tax on other types of equipment it believed was exempted from the tax and filed a refund application with the Comptroller.
 
The taxpayer and the Comptroller proceeded through the administrative process set forth in the regulations, including a hearing before the Office of Administrative Hearings (OAH).The State argued that the taxpayer first raised any claim for the exemption for telemetry units related to step-down transformers in what the taxpayer called an “Alternative Argument” in a filing before OAH, which the State responded to by objecting to the purportedly new claim. The taxpayer argued that it first raised the claim in its two Statements of Grounds and their supporting schedules. The Administrative Law Judge (ALJ) proposed to deny any refund and the Comptroller adopted that proposal. The ALJ found that the taxpayer’s statement of grounds had not timely raised its claims for refunds under Tax Code section 151.318(a)(4)'s provision about telemetry units that are related to step-down transformers.  The taxpayer filed an appeal to the district court seeking a refund under the exemption for telemetry units related to step-down transformers.  The State argued that the taxpayer had raised this argument too late in the administrative process, but the court denied the State’s argument and the case proceeded to trial on the merits. The trial court found for the taxpayer and awarded it a refund for customer meters and substation meters but denied the refund for the disconnect collars. The State filed this appeal, contending that the trial court lacked subject-matter jurisdiction over the taxpayer’s suit for a tax refund because it allegedly did not timely raise its claim for the exemption for telemetry units related to step-down transformers.
 
A suit for a tax refund must meet the jurisdictional requirements of the tax code. This statutory scheme makes it clear that the trial courts only have jurisdiction over tax refund claims that are first raised in accordance with Tax Code section 111.104 and then appealed in a motion for rehearing under Tax Code section 111.105.  The court said the parties' dispute centers on the first step, Section 111.104, which requires that a refund claim be written and “state fully and in detail each reason or ground on which the claim is founded,” and filed before the expiration of specified periods.  At issue is whether the claim stated “fully and in detail each reason or ground.” The legal basis of the taxpayer’s refund claim is “telemetry units that are related to . . . step-down transformers” in Section 151.318(a)(4), but the State claimed that the taxpayer first raised its claim for the exemption for telemetry units related to step-down transformers in what the taxpayer called an “Alternative Argument” in a November 4, 2016 filing before OAH. The State argued that the taxpayer’s first raising the exemption only then constituted an untimely amendment to its Statements of Grounds. The ALJ agreed with the State, finding that the taxpayer first presented the argument on November 4, 2016, well after its 2012 Statements of Grounds. The taxpayer argued that its two Statements of Grounds and their supporting schedules included a claim for the exemption and these filings put the Comptroller on notice of the legal basis of the claim because they cited Section 151.318 and its subsection (a)(4).  The court said that the taxpayer did not argue that it was advancing refund claims under all of Subsection (a)(4)'s listed categories of equipment, only that citing Subsection (a)(4) sufficed to put the Comptroller on notice of a refund claim for telemetry units related to step-down transformers.  The court distinguished at case cited by the taxpayer from the current matter, finding that, on its own, quoting every word of all those subsections did not suffice to put the Comptroller on notice of the legal basis of a refund claim for telemetry units related to step-down transformers. The taxpayer also argued that it cited the statutory section online items in supporting schedules it submitted with the Statements of Grounds, but the court said nothing in the line items reasonably made it any clearer to the Comptroller that the taxpayer was claiming a refund for telemetry units related to step-down transformers. The court said that referencing “meters” was not specific enough because the taxpayer’s trial witness confirmed that not all meters are telemetry units.
The court found that this left the taxpayer without a refund claim that “state[d] fully and in detail” a claim for exempt telemetry units related to step-down transformers.  Hegar v. El Paso Elec. Co., Texas Court of Appeals, Third District, NO. 03-18-00790-CV.  8/13/20
 
 
Personal Income Tax Decisions
 
No cases to report.
 
 
Corporate Income and Business Tax Decisions
 
Company Allowed to Use Alternative Apportionment
 
The Mississippi Supreme Court affirmed a lower court decision which held that a taxpayer was allowed to use an alternative apportionment method for calculating the company's income for franchise tax purposes.
 
The taxpayer provides cable-network and other related services in various states, including Mississippi. In addition to holding its own operating assets, the taxpayer holds investments in more than fifty subsidiaries that, like it, are engaged in the provision of cable and cable-related services. Because these subsidiaries are engaged in the same type of business as the taxpayer, they are referred to as “unitary subsidiaries.” These unitary subsidiaries provide services primarily outside Mississippi, with only two of the subsidiaries with any connections in Mississippi. In addition to the unitary subsidiaries, the taxpayer also holds minority passive-investment interests in approximately ten “non-unitary subsidiaries” that are not engaged in or related to the provision of cable. These non-unitary subsidiaries hold nonstrategic assets acquired by the taxpayer as a byproduct of previous corporate acquisitions, have no connection to its business of providing cable or cable-related services in Mississippi, and otherwise have no connection with Mississippi.
 
The taxpayer filed Mississippi Corporate Income and Franchise Tax Returns for the 2008, 2009, and 2010 tax years and in calculating its capital base for each year, excluded certain amounts of capital utilizing the holding-company exclusion located on Line 8 of the Mississippi Corporate Franchise Tax Schedules. It attached its calculations used to arrive at these amounts through documentation labeled “Mississippi Holding Company Exclusion — 2009 Tax Year” and “Mississippi Holding Company Exclusion — 2010 Holding Company Exclusion — 2010 Tax Year.” In calculating its apportionment ratios for each tax year, the taxpayer combined the net book value of its Mississippi real and tangible personal property owned at year end with its Mississippi gross receipts and then divided this total by the combination of its everywhere counterparts. It did not include in its apportionment ratios all of Mississippi destination sales as gross receipts in the numerator of the apportionment factor.
In July 2012, the Department of Revenue (DOR) commenced an audit and determined that the taxpayer owed additional corporate franchise tax, finding that its preapportioned capital base and its Mississippi apportionment ratios should be increased for each applicable year.  The increase in the taxpayer’s capital base was attributable to DOR’s disallowance of the holding-company exclusion and the increase in the taxpayer’s Mississippi apportionment ratios was attributable to DOR's inclusion of all of its Mississippi destination sales as gross receipts.
The taxpayer filed an appeal to DOR’s Board of Review (BOR) which upheld the assessment.
The taxpayer filed an appeal to the Board of Tax Appeals (BTA), arguing that DOR’s
franchise-tax assessment did not accurately reflect the true value of its capital employed in Mississippi. The taxpayer presented four alternative franchise-tax computations which the BTA considered and specifically determined that one alternative, referred to as the factor-representation method, showed that the DOR seeks to tax over 340% more out-of-state value than allowed and resulted in a distortion in favor of the state by over-attributing income to the state. The BTA found that the taxpayer had met its burden of proof to overcome the presumption of the correctness of DOR’s assessment, concluding that there was substantial credible evidence that the tax assessment was distortive and did not fairly represent the true value of the taxpayer’s capital in Mississippi.  DOR filed an appeal to the chancery court which found for the taxpayer.  DOR filed this appeal, arguing that the standard of review applied by the chancellor gave deference to the BTA in contradiction to Miss. Code Ann. § 27-77-7 and the court’s precedent.
 
The court began by findingDOR's assertion that the chancellor erroneously gave deference to the BTA is “of no moment” because the DOR's interpretation of the applicable franchise tax statutes is reviewed de novo.  Next, the taxpayer argued that under the Mississippi franchise-tax statutes, it was permitted to exclude the capital value and apportionment factors attributable to its non-unitary subsidiaries, and to include the apportionment factors of its unitary subsidiaries for purposes of computing the true value of its capital in Mississippi.  DOR, on the other hand, argued that the Mississippi franchise-tax statutes do not provide the taxpayer with an exclusion and do not provide the use of an alternative apportionment method. The taxpayerargued that DOR's franchise-tax assessment did not reflect the true value of its capital employed in Mississippi because it erroneously included the value of its non-unitary subsidiaries in its capital base.  The court noted, however, that the express language of the statute provides no exemptions for the retained earnings of a subsidiary. The intent of the legislature to include the assets of a subsidiary corporation in the parent corporation's franchise tax base was made clear by an amendment in 1988 of the statute which provided that “[t]here shall not be any exclusion of capital by a corporation relating to the stock of another corporation.”  The court noted an exception to that provision in the case of a holding company, but the taxpayer admitted that it did not qualify for the holding company exclusion.
 
The taxpayer argued that it is entitled to exclude its investment in its non-unitary subsidiaries under Mississippi Code Section 27-13-11 (Rev. 2010).  That section provides that if any organization has cause to believe that the calculations required on the return prescribed are not sufficiently informative or do not properly reveal the true franchise or excise tax to be due as measured by the value of the capital of that organization, or shall feel aggrieved at the requirements upon it for information or tax, the organization shall have the right to file with the commissioner a petition and affidavit signed as returns are by this chapter required to be signed, setting forth the facts showing the true value of its capital. The taxpayer asserted that it had the right to present evidence setting forth the facts showing the true value of its capital and the court agreed.  Under Section 27-13-11, DOR's determination of capital is prima facie correct, but such a presumption of correctness can be overcome. The court noted that the BTA found that the taxpayer had overcome the presumption of correctness of DOR's franchise-tax assessment. The court said that the record showed that by including the value of the taxpayer’s non-unitary subsidiaries in its capital, DOR’s computation included billions of dollars in non-unitary assets in the taxpayer’s tax base, assets that represented passive, non-unitary investments with no connection to the taxpayer’s business in Mississippi. The court concluded that the value of the taxpayer’s non-unitary subsidiaries was not “capital employed in the state” nor was it “business that is actually being done or carried on in Mississippi.”  The court found that because these non-unitary subsidiaries had no connection to the taxpayer’s business in Mississippi, it was error to include its investments in them in its franchise-tax base.
 
The court noted the Mississippi franchise-tax statutes were designed to impose a franchise tax on the value of the capital employed in the state and to provide a standard method for computing that capital, but said the franchise-tax statutes also provide a statutory-relief mechanism that can be utilized by a taxpayer when the standard method produces a distortive or an unreasonable result. The court agreed with the BTA and the chancellor that the taxpayer had shown that DOR’s tax assessment produced a distortive or an unreasonable result and did not fairly represent the true value of the taxpayer’s capital employed in Mississippi and the taxpayer demonstrated under Section 27-13-11 that its capital base and apportionment factor should be modified.  Dep't of Revenue v. Comcast of Georgia/Virginia Inc., Mississippi Supreme Court, No. 2019-CA-01134-SCT.  8/13/20
 
 
Property Tax Decisions
 
Animal Rescue Group Loses Appeal Over Exemption
 
The Massachusetts Appeals Court affirmed the Appellate Tax Board's holding that a taxpayer failed to establish that it was entitled to a charitable tax exemption under a state statute for three properties for fiscal years 2012-2015.
The taxpayer, Animal Rescue League of Boston, was formed in 1899 for the purposes of establishing "one or more refuges for and the rescue and relief of suffering or homeless animals and any other charitable or benevolent act for the welfare of animals." These purposes were later expanded to include holding land for "such purposes and trusts as may be expressed in any deed or instrument of conveyance or gift made to . . . [it]." The taxpayer applied to the board of assessors of Bourne for charitable tax exemptions on three parcels of land for fiscal years 2012-2015. The assessors denied those applications, and the taxpayer appealed to the Appellate Tax Board (Board), which denied the applications on the basis that, for fiscal years 2012-2015, the taxpayer did not occupy the parcels for the charitable purposes for which it was organized.  The taxpayer filed this appeal.
 
The case concerns the taxpayer’s use of land which it acquired outright in 1997, with the restriction that they be used "consistent with the charitable purposes manifested in the will and codicils of . . . Ester M. Baxendale." Pursuant to Baxendale's fifth codicil, some land located at 0 Lawrence Island is undevelopable and must exist as a bird sanctuary.For many years, the taxpayer operated a summer camp at 55 and 96 Megansett Road and 0 Lawrence Island at which it taught the humane treatment of animals. It ceased operation of the summer camp in 2008, due to financial reasons and after it ceased operating the summer camp, its use of the parcels was limited to physical inspections and maintenance and to placing no trespassing signs on the parcels. The only evidence of any animal-related activity was of neighbors walking their dogs.
 
The court said the charitable tax exemption under G. L. c. 59, § 5, Third, is available, in relevant part, to a charitable organization that owns the property in question and occupies it for the organization's charitable purposes.  Case law has provided thatin the context of the exemption, occupancy means something more than that which results from simple ownership and possession. Occupancy signifies an active appropriation to the immediate uses of the charitable cause for which the owner was organized and the charitable organization seeking the exemption has the burden of proof to demonstrate that the express terms of the statute, which are strictly construed, apply. The court said that there is no dispute that the taxpayer is a charitable organization within the meaning of the statute or that it owns the parcels. The dispute instead concerns whether it occupied the land located at 55 and 96 Megansett Road and 0 Lawrence Island for its charitable purposes. The taxpayer focused on the natural state of the parcels as benefiting animals and on its intent to reopen the summer camp, but the Board said that the taxpayer was not actively appropriating the parcels for its charitable purposes in fiscal years 2012-2015.  The court agreed.
 
The court distinguished the current case from caselaw cited by the taxpayer, finding that the taxpayer only periodically addressed routine maintenance issues on the parcels and excluded the public through the use of no trespassing signs, finding that this use did not furtherthe charitable purposes for which the taxpayer was organized and was instead consistent with that of a private landowner. In addition, the court found there was simply no evidence that the taxpayer was pursuing funding or taking any other steps, no matter how equivocal, to reopen the summer camp. Animal Rescue League of Boston v. Bd. of Assessors of Bourne, Massachusetts Appeals Court,  No. 19-P-149.  8/12/20
 
University Restaurant Not Exempt
 
The New Jersey Supreme Court found that a high-end restaurant on a nonprofit university campus did not qualify for the nonprofit property tax exemption.  The court concluded that the property lost its exemption because it was effectively leased to the for-profit restaurant and not used for a public purpose.
 
The taxpayer owned and operated a fine dining restaurant named in a Kean University building. In October 2011, the Kean University Foundation, Inc., and the taxpayer entered into a Management Subcontract Agreement (MSA), which conferred on the taxpayer the exclusive right to operate, manage, and control the restaurant. The taxpayer agreed to pay the Foundation an annual “management fee” and a percentage of the restaurant’s gross revenue.
The restaurant began operation in late October 2011 and in August 2012, the Township issued a letter notifying the taxpayer that it would receive a tax bill for the last two months of the 2011 tax year and the entirety of the 2012 tax year. The taxpayer did not challenge those initial assessments but did challenge the 2013 and 2014 tax assessments. The taxpayer filed an appeal to the tax court, which granted summary judgment in favor of the Township.  The Appellate Division reversed, relying on a holistic view of the facts.  The court said the restaurant is located on-campus, University students and their parents regularly dine there, the restaurant provides students and members of the University community “an alternative dining experience,” the taxpayer’s annual management fees were used for scholarships, the University's Board determined that having a critically acclaimed, upscale restaurant on campus enhanced the public's perception of the University as a forward-looking institution, and served as an important recruiting tool,” many of the restaurant's employees are students, and the restaurant uses produce grown on the University grounds and provides the University with compostable waste.  The Township filed this appeal.
 
The court said the issue in this appeal was whether a high-end restaurant operated by a for-profit entity but housed in a building on the Kean University campus qualified for exemption from local property taxation. The statute exempts from taxation property belonging to the State, counties, or municipalities, or their agencies and authorities, that is used for a public purpose. Another provision exempts certain property of various non-profit organizations, including: “all buildings actually used for colleges, schools, academies or seminaries, provided that if any portion of such buildings are leased to profit-making organizations or otherwise used for purposes which are not themselves exempt from taxation, said portion shall be subject to taxation.”
 
The court determined that the arrangement by which the taxpayer operated the restaurant was taxable as a lease or lease-like interest and said the public-benefit-oriented exemption provisions at issue were not intended to exempt the for-profit operator of a high-end, regionally renowned restaurant situated on a college campus, when the overriding purpose of this commercial endeavor was focused on profitmaking. The court found that the taxpayer, as the exclusive operator and manager of the restaurant establishment, must bear its fair share of the local real property tax burden. The court noted that both the Tax Court and the Appellate Division recognized that the subject property was on State property and, as such, fell within the purview of N.J.S.A. 54:4-3.3, but rejected the argument that the demonstration of a “public purpose” was unnecessary here.
 
The court found that the Appellate Division's holistic approach to the public purpose inquiry was mistaken, concluding that the accomplishment of the public purpose must be the paramount factor in an arrangement with a private entity's use of public property. For a tax exemption to apply, any private advantage must be incidental or subordinate and the court found that that was no so in this case. The court rejected the taxpayer’s argument that it was merely a manager and operator of the restaurant facility, not a tenant or lessee. The court concluded that the taxpayer was a for-profit entity, and the restaurant, as contemplated by the MSA, was intended to make a profit, which after all expenses are paid goes to the Taxpayer.  Thus, the court said, the taxpayer’s use of the subject property did not constitute a use for the “college” but rather for itself. Gourmet Dining LLC v. Union Twp., New Jersey Supreme Court, No. 083146; 459 N.J. Super. 323 (App. Div. 2019).  6/30/20
 
 
Other Taxes and Procedural Issues
 
Estate Tax Refund Affirmed
 
The New Jersey Superior Court, Appellate Division, affirmed the tax court’s ruling that the value of a property should not have been included in a decedent’s estate for inheritance tax purposes.  The court found that the heirs only possessed the deed to the property and did not possess any right, title, control, or power over the property.  The court also found that the Division of Taxation’s (Division) notice of assessment sent to the decedent’s heirs was invalid.
 
The decedent deeded his two-family Lodi home to his nieces, Valerie Shedlock and Judith Solan for less than $100 on July 24, 2013. The deed included no provisions giving decedent any right, title, interest, control, or power over the property. On the same date, decedent executed a will devising his entire estate to his nieces, the heirs. After the transfer of the property by deed, decedent continued to live on the property and collect rent from a tenant, which he deposited into a joint savings account he shared with Shedlock. The account was used to pay maintenance expenses on the property. Decedent paid the taxes on the property, and he reported maintenance expenses and the rental income from the tenant on his 2015 federal income tax return. Decedent died on August 29, 2016, more than three years after the July 2013 transfer of his property to the heirs by deed. The heirs filed a New Jersey inheritance tax return for decedent's estate but did not include the property. The Division audited the inheritance tax return and issued a notice of assessment on May 7, 2018, that included the property, which was valued at $425,000 on the date of decedent's death and the heirs paid the taxes and interest due and then filed a complaint in the Tax Court seeking a refund and costs of suit. The Tax Court entered an order invalidating the notice of assessment and refunding the taxes and interest paid, finding that the transfer of the property was not made in contemplation of death, nor was it intended to take effect at or after death. The Division filed this appeal.
 
The Division argued decedent did not completely and irrevocably divest his interest in the property at the time the deed was signed and filed, and that rather, the transfer was intended to take effect at the transferor's death and was subject to the transfer inheritance tax and argued the Tax Court's decision misconstrued the statutory requirement that transfers intended to take effect at or after death are subject to the inheritance tax. The Division asserted the transfer of the property by deed on July 24, 2013, had the effect of a transfer at death because decedent remained in possession of the property and continued to receive rental income from the property.
 
The court said that it recognized that Tax Court judges have special expertise and for that reason their findings will not be disturbed unless they are plainly arbitrary or there is a lack of substantial evidence to support them and the court’s scope of review is limited to determining whether the findings of fact are supported by substantial credible evidence with due regard to the Tax Court's expertise and ability to judge credibility.  The court began its analysis with a review of the rules of statutory construction.
 
After reviewing the plain language of the relevant statute as well as the legislative history, the Tax Court found that it was undisputed by the very terms of the deed of transfer that the decedent retained no interest, right to possession or income in, of, and from the property. The court said that at all times, the heirs had full control over, and the right to the rental income. Decedent only had a right to use the funds in the joint bank account and handled the funds in the joint account to maintain the property.
 
The Division cited Estate of Riper v. Dir., Div. of Taxation, 31 N.J. Tax 1 (Tax 2017) to argue that the decedent retained a de facto life estate in the property, but the court found that case factually distinguishable because there was clear and convincing evidence in that case that the transferors retained an interest in the property.  The court said here that the decedent only received the rental income and remained in the property at the discretion of the heirs.  The court found the transfer of the property was complete and decedent's title was conveyed without any reference to a right to receive rental income or retain a life estate. Accordingly, the court found  that the grantor had completely divested himself of his entire interest in the transferred property and the property should therefore not be included in the decedent’s estate for inheritance tax purposes. Shedlock v. Dir., Div. of Taxation, New Jersey Superior Court, Appellate Division, Docket No. A-5634-18T1; Docket No. 8644-2018.  8/26/20
 
 
 
 
 
 
 
 
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].
 
STATE TAX HIGHLIGHTS
A summary of developments in litigation.
 
Published biweekly by the Federation of Tax Administrators
Also available at the FTA Member website at:
 
June 19, 2020 Edition

 

 

NEWS

 

FTA Offering Training Opportunities

 

With the cancellation of conferences typically put on by the FTA during the summer and fall, our staff has been working to provide what would otherwise have been conference presentation in a virtual format.  Please check our website for information on the variety of upcoming topics, including FTA Talks on Technology and webinars for Motor Fuel Uniformity and Tobacco Uniformity.  Check back periodically as we add new topics.

 

U.S. SUPREME COURT UPDATE

 

No cases to report.

 

FEDERAL CASES OF INTEREST

 

No Relief for Couple With $7 Million of Cryptocurrency

 

The U.S. Tax Court found no abuse of discretion by an IRS settlement officer who sustained a proposed collection action against a couple.  The court found no error in issuing a notice of intent to levy while the couple’s installment agreement request was pending or in rejecting their installment agreement request since they failed to liquidate assets, including $7 million in cryptocurrency.

 

The facts show that the taxpayers filed a timely Federal income tax return for 2017 but did not pay the tax shown as due.  On June 4, 2018, the IRS assessed the amount shown as due along with an addition to tax for failure to pay. On July 24, 2018, the taxpayers sent the IRS via certified mail a Form 9465, Installment Agreement Request, proposing to pay their 2017 tax liability in installments over a six-year period and attached a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The Form 9465 was delivered to the IRS on Friday, July 27, 2018, and the IRS recorded taxpayers’ request as pending the following Monday, July 30, 2018.  As of December 2018, the taxpayers’ outstanding liability for 2017 exceeded $1.1 million. On December 17, 2018, the IRS sent the taxpayers a Notice CP90, Intent to Seize Your Assets and Notice of Your Right to a Hearing. The taxpayers timely requested a CDP hearing, expressing interest in an installment agreement (IA) and attaching a copy of their previously submitted Forms 433-A and 9465. They did not check the box indicating that they could not pay the balance, and they did not dispute their underlying liability for 2017. The case was assigned to a Settlement Officer (SO) in the IRS Appeals Office in Baltimore, Maryland. After reviewing the taxpayers’ administrative file, the SO confirmed that their 2017 liability had been properly assessed and that all other requirements of applicable law and administrative procedure had been met and on April 17, 2019, she sent them a letter scheduling a conference for May 29, 2019.  The SO reviewed their Form 433-A, which showed that they owned substantial investment assets, consisting chiefly of cryptocurrency.

 

Before the scheduled conference the SO received from the taxpayers’ representative a copy of their 2018 tax return, which reported wages exceeding $200,000, and investment statements showing cryptocurrency assets valued over $7 million. During the conference the SO noted that taxpayers were currently withdrawing $19,000 per month from their cryptocurrency account, and she asked why they could not liquidate or borrow against those assets in order to discharge their tax liability in full.  The SO emphasized that the taxpayers could not qualify for an IA if they had the current ability to pay their tax liability in full and simply chose not to do so.  The taxpayers’ representative contended that the IRS should not have issued the notice of intent to levy while their Form 9465 request was pending and the SO replied that no levy action would be taken until she had addressed their request for an IA, but once that request was formally rejected that levy action would be appropriate 30 days after the rejection. The SO had a second call with the taxpayers’ representative on June 3, 2019 but the representative supplied no evidence that the taxpayers were unable to draw on their cryptocurrency account to pay their liability. He insisted that they could still qualify for an IA by agreeing to pay their liability in full over a six-year period and the SO replied that this six-year rule applied only where a taxpayer lacks the ability to pay the entire liability currently. The representative subsequently spoke with the SO's manager, who confirmed her analysis. On June 25, 2019, the IRS issued a notice of determination sustaining the proposed levy, rejecting the taxpayers’ request for an IA, and stating that levy action was permitted 30 days after the rejection. The taxpayers filed this appeal and both parties filed motions for summary judgment.

 

The court found the case appropriate for summary determination and said that where there is no dispute as to the taxpayers’ underlying tax liability, the court reviewed the decision of the IRS for abuse of discretion.  In reviewing the SO's determinations the court considered whether she properly verified that the requirements of applicable law or administrative procedure had been met,  considered any relevant issues the taxpayers raised, and considered whether any proposed collection action balanced the need for the efficient collection of taxes with the legitimate concern of the taxpayers that any collection action be no more intrusive than necessary, pursuant to sec. 6330(c)(3).  The court concluded that the record established that the SO properly discharged all of her responsibilities under that section. Section 6159 authorizes the Commissioner to enter into an IA if he determines that it will facilitate full or partial collection of a taxpayer's unpaid liability and the decision to accept or reject an IA lies within the Commissioner's discretion. The court said it would not substitute its judgment for the SO's, recalculate the taxpayer's ability to pay, or independently determine what would be an acceptable offer. The court said that in considering a taxpayer's qualification for an IA, a SO does not abuse  discretion by following guidelines set forth in the Internal Revenue Manual (IRM). The SO concluded that the taxpayers were ineligible for an IA after determining that they could fully satisfy their tax liability by liquidating a portion of, or borrowing against, their cryptocurrency assets and the taxpayers made no showing of economic hardship or other special circumstances.

 

The taxpayers also argued that the IRS erred in issuing the notice of intent to levy while their Form 9465 request for an IA was pending, relying on section 6331(k)(2) which provides

that no levy shall be made while a taxpayer's request for an IA is pending with the Secretary or if the IA request is rejected during the 30 days thereafter.  The court noted, however, that while that section bars the issuance of a levy under those circumstances, it does not bar the IRS from issuing notices of intent to levy. Alexander Strashny et ux. v. Commissioner, U.S. Tax Court, No. 13836-19L; T.C. Memo. 2020-82.  6/11/20

 

Tribal Member's Refund Suit To Go Forward

 

The U.S. District Court for the Western District of New York  held that some income a couple earned from gravel extracted and sold from Seneca Nation land is exempt from tax.  The court held that questions remained about how much tax-exempt income they generated and what expenses they incurred and said the matter needed to be set for trial.

 
The facts show that on June 16, 2016, the taxpayers commenced an action to recover income taxes they believed were illegally and erroneously collected from them.  The case was referred to a U.S. Magistrate Judge and both parties filed motions for summary judgment.

The Magistrate Judge issued a Report and Recommendation (R&R), finding that all motions should be denied and both parties filed objections to the R&R. On June 6, 2019, the United States notified the Court that the U. S. Tax Court had entered its decision in favor of the Internal Revenue Service (IRS), denying the taxpayers’ challenges to the IRS’s deficiency assessments for tax years 2008 and 2009. The United States contended, therefore, that the Tax Court’s opinion collaterally estopped the taxpayers’ identical claims in this lawsuit. The taxpayers argued that a decision of the Tax Court does not become final until after the later of the expiration of the period in which to file a notice of appeal or the finality of the appeal and because the taxpayers planned to file an appeal within the period for filing an appeal, collateral estoppel did not yet apply.

 

The court said after carefully and thoroughly reviewing the R&R and the record in the case, that it accepted the Magistrate Judge’s recommendation to deny both motions for summary judgment as well as the United States’ motion to strike.  The court agreed that the decision of the Tax Court had not yet become final and that collateral estoppel therefore did not apply. 

In addition, it noted that the court’s prior decision that the taxpayers have a cognizable claim under both the Canandaigua Treaty and the 1842 Treaty was issued months before the decision from the Tax Court. Thus, the court’s decision constituted the law of the case, and the Tax Court’s subsequent decision could not collaterally estop the court from adhering to its prior decision. The court noted that it had carefully reviewed the Tax Court’s opinion and respectfully disagreed with its conclusion that income earned from selling gravel mined from Seneca Nation land is taxable income that is not excluded by either treaty.  The court also agreed with the remainder of the Magistrate Judge’s analysis, including his conclusion that disputed factual issues preclude summary judgment and that the taxpayers’ evidence was acceptable for consideration on summary judgment.

 

Finally, the court rejected the new arguments raised by the United States that it was entitled to summary judgment based on the variance doctrine, which bars a taxpayer from raising issues in a suit against the United States that were not first raised in a claim for refund with the IRS. 

The court noted that the variance doctrine "does not require exact precision.” The court noted that as enrolled members of the Seneca Nation of Indians the taxpayers have been given permission by the Nation to sell gravel from the property on the Nation’s territory, in exchange for royalty payments made to the Nation. Under the Supremacy Clause, the IRS may not tax income derived directly from the land protected by federal treaties. The taxpayers correctly reported these sales as exempt from federal taxation, but the IRS determined the income to be taxable. Taxpayers paid the taxes and now seek a refund. The court said there was no question that the taxpayers appropriately teed that precise issue up before the IRS.

 

The court also noted that the parties realized during discovery that the taxpayers had underreported the gross receipts earned by the wife doing business as A & F Trucking. The United States claimed that this effectively mooted the issue because the amount of tax that the taxpayers should have paid on their underreported gross receipts was higher than the exemption of gravel income they claim. The court concluded that the crux of the taxpayers’ claim was that their gravel income was improperly taxed, and that issue was fully presented in their refund claim to the IRS. The IRS had a full opportunity to investigate all aspects of their claim for a refund but chose not to examine the 2010 income or business expenses, and did not request or review any receipts, statements, workpapers, or other records.  Fredrick Perkins et ux. v. United States, U.S District Court for the Western District of New York,  No. 1:16-cv-00495.  6/1/20

 

“Rowdy Beaver” Sentence Affirmed

 

The U.S. Court of Appeals for the Eighth Circuit upheld the sentence of a restaurant owner who pleaded guilty to willfully failing to collect or pay employment taxes.  The court rejected his arguments that the lower court’s upward departure from the sentencing guidelines was substantively unreasonable.


The taxpayer pleaded guilty to willfully failing to collect or pay employment taxes for his “Rowdy Beaver” restaurants and stipulated to a tax loss of $1,095,267.02.  The district court varied upward from his Guidelines range of 27 to 33 months and sentenced him to 36 months' imprisonment.  The taxpayer filed this appeal, arguing his sentence was substantively unreasonable because the court ignored or failed to sufficiently weigh mitigating factors and based its decision to vary upward on a factor that was already accounted for in his Guidelines range.

 

The court said it applied a deferential abuse of discretion standard when reviewing the substantive reasonableness of a sentence.  Case law has said that a district court abuses its discretion when it fails to consider a relevant factor that should have received significant weight, gives significant weight to an improper or irrelevant factor or  considers only the appropriate factors but in weighing those factors commits a clear error of judgment. When a sentence is outside the Guidelines range, the court said it must consider the extent of the deviation while giving due deference to the district court's decision that factors justified the variance. 

 

The court rejected the taxpayer’s argument that the district court abused its discretion by ignoring or failing to adequately weigh his efforts to pay restitution, acceptance of responsibility, age, family support, and the consequences his incarceration would have for 45 employees, concluding that the record did not support the argument. The court said the district court explicitly noted that the taxpayer had not made progress toward paying restitution despite having ample time to liquidate assets and also indicated that the taxpayer did not appreciate the seriousness of his offense. The court noted that although a prison sentence might affect his employees the taxpayer had plenty of time to get his affairs in order. In sentencing the taxpayer, the district court highlighted the fraud's nine-year duration, the extent of his fraud, and how he was “living high on the hog” with an expensive house, real estate, boats, and significant amounts of cash. The district court underscored that the taxpayer’s failure to pay taxes jeopardized his employees' well-being, and that it had “never seen a case of knowing and intentional fraud and deceiving the government” like the taxpayer’s. The court concluded that the district court did not ignore relevant factors and did not abuse its discretion by weighing the factors differently than the taxpayer would have liked.  United States v. Rodney Minner, U.S. Court of Appeals for the Eighth Circuit, No. 19-2073.  6/19/20

 

 

DECISION HIGHLIGHTS

 

Sales and Use Tax Decisions

 

No Jurisdiction

 

The Missouri Court of Appeals held that a case challenging a sales tax audit and penalty would require the court to interpret sales tax penalty provisions, and under the state constitution the Missouri Supreme Court has exclusive appellate jurisdiction in all cases involving the construction of state revenue laws.  The court concluded that this required the case to be transferred to the state supreme court.


The taxpayer operates a donut shop in St. Louis, Missouri and the Department of Revenue (DOR) conducted an audit of its sales during October 1, 2011, through September 30, 2014.

During the audit period, Brad Arteaga was the owner and sole member of the taxpayer and Eddie Strickland was the business's sole, paid employee. Arteaga was solely responsible for handling the taxpayer’s financial affairs, and Arteaga went to the store once or twice a week to collect money, credit card receipts, checks, and related paperwork. The taxpayer contracted with a tax accountant, bookkeeper, and financial advisor to file its sales tax returns and he prepared all returns during the audit period relying on documents provided by Arteaga including the taxpayer’s bank statements, credit card statements, and check stubs written by Arteaga. The taxpayer did not use Z-tapes.  DOR’s auditor requested a variety of documents from the taxpayer who provided only a small number of the requested documents.  Because

the records provided were incomplete, Hoffman requested that the taxpayer retain individual cash register receipts for its sales in December 2014 and track its inventory of donuts made in the shop during the month, but the taxpayer provided only partial receipts for the month of December 2014.  The auditor made additional requests, but the taxpayer failed to supply the requested documents and the records presented showed certain discrepancies

Because of these irregularities, Hoffman estimated the taxpayer’s July 2015 sales and then used this estimate to estimate its sales during the audit period to determine a percentage of underestimation and DOR issued an estimated assessment of tax, interest and penalty.

The taxpayer filed an appeal to the Commission which found that the taxpayer was liable for additions to tax because it was negligent in its report of its taxable sales. The Commission found it failed to keep adequate records and what records it did retain were inconsistent and also found the taxpayer liable for statutory interest. The taxpayer filed this appeal, alleging errors in the amount assessed and the negligence penalty.

 

Before the court addressed the merits, it determined if jurisdiction lied with the court.  It noted that neither party had raised the jurisdiction issue but found that it had an obligation, acting sua sponte, to determine its authority to hear the appeals that came before it. The Missouri Constitution confers exclusive appellate jurisdiction to the Missouri Supreme Court in all cases involving the construction of the revenue laws of this state. "Revenue law" is a defined term and includes a law that "directly creates or alters an income stream to the government” or “establishes or abolishes a tax or fee, changes the rate of an existing tax, broadens or narrows the base or activity against which a tax or fee is assessed, or excludes from or creates exceptions to an existing tax or fee."  However, a case does not involve the construction of a revenue law if the law at issue has already been interpreted by the Supreme Court, and the appellate court can dispose of the issue by merely applying that construction of the law to the facts of the case.  In the instant case, the Commission assessed a five percent addition to tax penalty against the taxpayer finding that it was negligent in its report of its taxable sales because it failed to keep adequate records and what records it did retain were inconsistent. The court said that because the meaning of "negligence" as relevant here has not been provided by the General Assembly nor has it been defined by the state’s Supreme Court, it lacked jurisdiction to construe its meaning. 

 

DOR argued that the court had jurisdiction to hear the appeal pursuant to Armstrong-Trotwood, LLC v. State Tax Commission, 516 S.W.3d 830 (Mo. banc 2017). It argued that the 5% addition to the tax assessed pursuant to section 144.250.3 constituted a penalty provision and the interpretation of this provision did not constitute the "construction of the revenue laws of this state” pursuant to that case. The court disagreed, distinguishing that case from the current dispute, and found that the interpretation of the penalty provisions of section 144.250.3 fell within the exclusive jurisdiction of the Supreme Court under article V, section 3. The court said that even if some but not all of the issues presented in this case fall within the exclusive jurisdiction of the Supreme Court, appeals are not bifurcated, and the appeal is properly lodged in the court having jurisdiction over all issues in the case. The court transferred the case to the Supreme Court of Missouri pursuant to article V, section 11 of the Missouri Constitution.  SEBA LLC v. Dir. of Revenue, Missouri Court of Appeals, WD83083.  6/9/20

 

 

Personal Income Tax Decisions

 

Taxpayer Did Not Sever Residency

 

The Montana Supreme Court affirmed the Tax Appeals Board's (Board) assessment of income taxes, interest, and penalties against an individual who moved to Montana from Texas, and then went back to Texas five years later.   The court found that the taxpayer did not sever his Montana residency because although he spent significant time in Texas during the tax years under audit and his actions included owning real property, voting in local elections, and registering vehicles to avoid paying sales tax to Texas.


In 1999 the taxpayer, his wife and children moved from Texas to Kalispell, Montana, where they purchased a home and lived there for the next five years.  The children were enrolled in school, the taxpayer acquired a Montana driver's license, he registered to vote in Montana, obtained Montana hunting and fishing licenses, opened a bank account in Montana, and registered vehicles in Montana. He continued to manage his businesses located in Texas and in 2004 the taxpayer and his family relocated to Texas.

 

In March 2013, the state Department of Revenue (DOR) began auditing the taxpayer’s nonresident individual income tax returns from the years 2008 to 2012 and requested he complete and submit a series of questionnaires to help determine his residency status during those years. On the questionnaires, the taxpayer asserted he and his family had moved back to Texas in 2004 and claimed Texas as his new state of residency. He noted he had been employed in Texas since 1977, owned real property, purchased vehicles, maintained bank accounts, acquired health insurance, obtained routine healthcare, and used an accountant in Texas during the 2008 to 2012 audit years. He indicated he was not registered to vote in Texas and believed he voted in Montana in 2008 and acknowledged that while his wife  obtained a Texas driver's license upon moving to the state in 2004, he had retained his Montana driver's license and renewed it in 2010. He explained this by stating that he never found changing his license to be “a pertinent issue.”  He asserted he and his family visited his Kalispell home “2-3 times a year” for vacation purposes during the audit years and received mail at the home while there. He also indicated he registered vehicles in Montana, claimed Montana as his legal residence for automobile insurance purposes, and obtained resident hunting and fishing licenses in both Montana and Texas during the audit years.  DOR acknowledged that the taxpayer spent significant time in Texas for work and leisure during the 2008 to 2012 audit years, but that he continued to declare Montana residency during that time and only took steps to declare Texas residency after he was contacted by the DOR.  DOR determined the taxpayer was a Montana resident from 2008 to 2012 and assessed him $515,321.02 of Montana resident income tax, interest, and penalties.  The taxpayer filed an appeal to DOR’s Office of Dispute Resolution (ODR).

 

Stipulated facts and exhibits established that the taxpayer obtained approximately twenty-one Montana resident hunting, fishing, and trapping licenses from 2004 until 2013, applied for and obtained a Montana concealed weapons permit in 2010, registered to vote in Montana and voted both in-person and by absentee ballot in general and special elections during 2006 to 2010. He renewed his Montana driver's license in 2010 and did not surrender it until September 2013 and registered three vehicles in Montana from 2002 to 2012. The ODR conducted a hearing at which the taxpayer testified. He admitted that he acquired his Texas fishing license by reciting his Texas driver's license number that he had memorized, even though he had surrendered that license when he moved to Montana in 1999. He also testified that by registering his vehicles in Montana, he avoided paying sales tax to Texas. The ODR issued its final agency decision affirming the DOR's residency determination and the taxpayer appealed to the Board. The parties stipulated to the same facts and exhibits as submitted to the ODR and agreed that the Board could consider the ODR hearing transcript and decision.  After a hearing the Board determined that the taxpayer established Montana residency in 1999 upon moving to the state from Texas and continued to be a Montana resident during the 2008 to 2012 audit years. The Board found that upon moving back to Texas in 2004, the taxpayer’s wife took affirmative steps to sever her Montana ties and establish a new residency, but the taxpayer did not, availing himself of the benefits of Montana residency trough 2012.  The taxpayer filed this appeal

 

Pursuant to the state statute, if a resident of the state obtains employment outside the state, income from the employment is taxable in Montana. A person may be considered a “resident” for Montana individual income tax purposes if the person is domiciled in the state or if the person maintains a permanent place of abode within the state even though temporarily absent from the state and has not established a residence elsewhere.  “Domiciled” is defined by administrative regulation as having a residence in the state of Montana. A residence is “the place where a person remains when not called elsewhere for labor or other special or temporary purpose and to which the person returns in seasons of repose.”   “Permanent place of abode” is defined by administrative regulation as “a dwelling place habitually used by an individual as the individual's home, whether or not owned by the individual or a dwelling the individual may someday leave.” An administrative ruling provides that whether an individual is a Montana resident for Montana income tax purposes is determined in light of all facts and circumstances.

 

The taxpayer argued that he abandoned his Montana residency when he returned to Texas in 2004 and was a Texas resident who improperly claimed the benefits of residence in Montana during the 2008 to 2012 audit years. The court noted that the taxpayer had no union of act and intent to sever his residence from Montana as required by the statute and repeatedly took specific actions to maintain the benefits and privileges of a Montana residency, despite his assertions that he intended to establish a Texas residence.  He represented himself to be a Montana resident when he renewed his Montana driver's license in 2010 and represented himself to be a Montana resident when he applied for and acquired resident hunting, fishing, and trapping licenses year after year during the 2008 to 2012 audit years, privileges the court said the Montana Legislature has taken great pains to protect by enacting strict residency requirements. The court noted that the taxpayer represented himself to be a Montana resident during the 2008 to 2012 audit years when he voted in Montana elections and when he applied for and obtained a Montana concealed weapons permit. The court determined that the taxpayer held himself out as a Montana resident and enjoyed many of the benefits and privileges granted by the State of Montana during the 2008 to 2012 audit years. The court found the Board considered all of the taxpayer’s arguments and evidence and found his actions established a pattern of claiming a certain residency status only when it was favorable to him and the court deferred to the Board’s findings regarding the weight and credibility of the evidence.  Greenwood v. Dep't of Revenue, Montana Supreme Court,  DA 19-0615; 2020 MT 149; Cause No. DDV-2016-170.  6/9/20

 

Employee Expense Deductions Denied

 

The Oregon Tax Court upheld the Department of Revenue's (DOR) tax assessment on a union pipefitter who sought to deduct travel expenses incurred while going from his home to union-assigned work locations in Portland.  The court found that he was not eligible for deductions for travel mileage, meals, or tools and safety equipment.


The taxpayer worked as a union pipefitter for multiple companies during the tax year in issue and sought to deduct travel expenses for his daily travel between his home in Lebanon, Oregon to his union assigned work locations in Portland, Oregon. He also sought deductions for meal expenses based on his long workday, and expenses for tools and equipment.

He is a member of the United Association of Journeyman and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada, Local 290 (the Union) which dispatches its members to work with various businesses.

 

The Union's membership verification letter stated that the taxpayer was not entitled to travel pay or per diem reimbursement for his job assignments during the period October 13, 2014 through June 2018 and that while the Union has travel pay/per diem in specific zones in the local's jurisdiction, the taxpayer did not work in any of these travel pay/per diem zones in the timeframe.  Most of the taxpayer’s job assignments for the relevant period were in Swan Island, Portland and the taxpayer calculated his travel miles going from his home in Lebanon to Swan Island at 167 miles per day times the number of working days using his 2015 and 2016 timecards.  Based on his calculations he commuted 40,915 miles to work in 2015, and 27,555 miles in 2016.  He also deducted for meals using the IRS standard meal rate because he often had to work ten-hour days and had a two-hour commute to and from Swan Island. The taxpayer also took a deduction of $2,400 in 2015 and a deduction of $1,770 in 2016 for tools and safety equipment.

 

IRC section 162(a) allows deductions for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, but section 262(a) disallows deductions for personal, living, or family expenses. The IRC is relevant here, because the state statute makes personal income tax law identical in effect to the IRC for purposes of determining taxable income of individuals, where possible. The general rule in sec. 162(a)(2) is that a taxpayer cannot deduct the cost of commuting between the taxpayer's residence and their place of business, except where the taxpayer travels “away from home in the pursuit of a trade or business.” Courts have interpreted the term “home” to mean their tax home, which is their “principal place of business or employment.” There are exceptions to the commuting rule, including pertinent to this case the temporary distant worksite exception.  This exception provides that travel expenses between a taxpayer's residence and temporary work locations outside of the metropolitan area where the taxpayer lives and normally works are deductible.  This exception has two parts, the first of which is that the work location must be temporary, which Rev Rul 99-7 has said means “realistically expected to last (and does in fact last) for 1 year or less[.]”  The second part is that the work location must be “outside the metropolitan area where the taxpayer lives and normally works,”  which means that the taxpayer must live and normally work in the same metropolitan area. 

 

It was undisputed that the taxpayer’s work assignments were temporary, but the parties disagree on the term “normally” as it relates to the period of time the court should take under consideration. The taxpayers argued that the court should consider work the husband performed for MPP Piping, located in Scio, beginning in September 2017, as evidence that he normally works in the Lebanon-Albany metropolitan area where he lives.  The court said that even if it were to look at his assignments after the tax year in issue, his work history shows that all of his job assignments between October 2014 and July 2017 were in Portland.  The court concluded that the taxpayers had not presented a credible argument that Portland is within the Albany-Lebanon metropolitan area and under these facts it could not find that he normally worked in the metropolitan area in which he lived. Therefore, all his mileage going to and from his work represented non-deductible commuting expenses.

 

With regard to the deduction for deducted meals and entertainment expenses for each tax year in issue, the court noted that the taxpayers offered no journal, log, or receipts, instead arguing that since the husband worked long hours, he should be entitled to a deduction using the federal per diem allowance amounts, or “standard meal allowance” method as an alternative to the actual cost method. The court said that when considering whether an employee is entitled to a meal expense the travel must meet the requirements of the “sleep or rest rule,” which provides that a taxpayer traveling away from their tax home on business trips as required by their employer and that necessitate a need to sleep or rest, are deductible traveling expenses. The court concluded that the taxpayer’s ten-hour work shift and two-hour commute to work might have made his workday difficult but there was no evidence that it necessarily caused an increase in expenses more than any another worker with a long job commute. The court denied the taxpayers’ deduction for meals for failure to meet the sleep or rest rule.

Finally, the court denied the deduction for tools and safety equipment, finding that the taxpayers did not offer any evidence in support of these deductions.  Kromhout v. Dep't of Revenue, Oregon Tax Court, TC-MD 190250R.  6/12/20

 

 

Corporate Income and Business Tax Decisions

 

Capital of LLC Subsidiaries Included in Franchise Tax

 

The Mississippi Supreme Court ruled that a corporation must include in its franchise tax base the capital of single-member limited liability company subsidiaries doing business in the state.


The taxpayer is a Delaware corporation with several subsidiary companies doing business in Mississippi. The state Department of Revenue (DOR) conducted an audit of the taxpayer’s state corporate tax returns for the years 2008 through 2010. During the course of the audit, the taxpayer filed amended returns removing the capital of its single-member limited-liability companies (SMLLCs) from its calculation of capital employed in the state, seeking a refund of franchise tax in the amount of $981,419. After DOR’s review of the taxpayer’s records and returns, it issued an assessment, including in the calculation the capital of the SMLLCs in the taxpayer’s state franchise-tax base, resulting in a reduced refund. The taxpayer filed an appeal to DOR’s board of review (BOR) which upheld the auditor's determination and denied the remaining refund amount of $749,778. The taxpayer then appealed the decision of the BOR to the Mississippi Board of Tax Appeals (BTA), which affirmed the decision to deny the remaining refund amount, finding that the taxpayer was required to include the SMLLCs' capital in the calculation of its Mississippi franchise-tax base.  Taxpayer filed an appeal to the chancery court which also found for DOR and the taxpayer filed this appeal.

 

The state statute imposes a franchise-tax on corporations organized, created, or established under the laws of the state. The taxpayer, being a corporation with several subsidiary companies doing business in the state, is statutorily obligated to pay franchise tax. The taxpayer argued that DOR erroneously disregarded its subsidiary SMLLCs and included the capital of the SMLLCs in its franchise tax capital base. The taxpayer argued that Code Section 27-13-7(1) imposes a franchise tax only on “every corporation, association or joint-stock company, or partnership treated as a corporation. . . .”  and because the SMLLCs in this matter are not corporations and do not have capital stock as defined in Section 27-13-7(1)(a), DOR has no statutory authority to treat the SMLLCs as corporations subject to franchise tax.

 

The court noted that DOR did not argue that the SMLLCs at issue are corporations, which is why they were not themselves assessed a franchise tax.  DOR argued that the taxpayer was required to report the activity conducted by its subsidiaries in Mississippi on its Mississippi combination return and the capital base of the SMLLCs must be included in the tax base of its sole member corporation. The parties agreed that the SMLLCs were disregarded for federal income-tax purposes. Therefore, as the single member of the SMLLCs doing business in Mississippi, state law requires that the taxpayer file a Mississippi combination return of corporate income and franchise tax and the tax is imposed of the value of the taxpayer’s capital used, invested, or employed within this state. The court said the purpose of the franchise-tax law is to require the payment of a tax measured by the amount of capital, or its equivalent, for which an organization like the taxpayer receives the benefit and protection of the laws of the state of Mississippi. The court found that the taxpayer cannot argue both that its subsidiary SMLLCs are not corporations subject to franchise tax and that the state does not have the statutory authority to disregard the SMLLCs and thereby include the SMLLCs' capital within the parent corporation's franchise-tax capital base. The fact that the taxpayer’s SMLLCs are disregarded and therefore are not required to file a tax return separate from the taxpayers’ tax return does mean that the SMLLCs are exempt from franchise tax. The assets of a subsidiary corporation are not exempt from taxation but are included in the parent corporation's franchise-tax base. 

 

The court further determined that the chancery court did not lack subject-matter jurisdiction or otherwise err by granting DOR’s motion for summary judgment. The court rejected the taxpayer’s interpretation of the statute to mean that if DOR fails to issue any undisputed refund to a taxpayer within thirty days after the taxpayer files a complaint in chancery court, the chancery court is barred from affirming the denial of the taxpayer's refund claim and is divested of subject-matter jurisdiction over the case. The Williams Cos. Inc. v. Dep't of Revenue, Mississippi Supreme Court, No. 2018-CA-01487-SCT.  6/4/20

 

 

Property Tax Decisions

 

Dismissal of Counties' Valuation Suit Affirmed

 

The Utah Supreme Court held that a constitutional challenge by Utah counties to statutory provisions such as those limiting a county's right to appeal assessments of centrally assessed properties and requiring aircraft to be centrally assessed by the State Tax Commission (Commission) using an aircraft pricing guide was properly dismissed. The court ruled that the claims challenging the limitation of appeals of assessments were not ripe and the remaining claims were requests for an advisory opinion, which the court does not provide.

Salt Lake, Duchesne, Uintah, Washington, and Weber Counties (Counties) filed a lawsuit against the State of Utah, challenging several provisions of the Utah Tax Code as unconstitutional.   The district court dismissed two of the Counties' claims as unripe because the allegations in their complaint did not show they had been adversely affected by the tax code provision at issue. The court then dismissed the Counties' remaining claims for a failure to exhaust administrative remedies because the Counties had not first filed an appeal of a tax assessment with the Commission.

 

Generally, the state statute provides that an individual's property tax obligation is determined by the county assessor for the county in which the person's property is located.  Where a business operates in more than one county, however the statute provides that its property tax obligation is determined by a central assessor, the Commission.  In 2015, the Utah legislature amended portions of Utah's tax code that establish the methodology for determining the property tax obligations of airlines operating within the state. The Valuation law provides that the value of an aircraft is based on the Airliner Price Guide, an airline industry pricing publication, but provided that the Commission may use an alternative valuation method where it has “clear and convincing evidence that the aircraft values reflected in the aircraft pricing guide do not reasonably reflect fair market value of the aircraft.” In addition, the Valuation law provides for an incremental downward fleet adjustment in the value of every aircraft, after the first three, owned by an airline.

 

The Counties brought a number of facial and as-applied challenges to the constitutionality of the Valuation law. They argued that the Valuation law's “clear and convincing evidence” standard violates article XIII, section 2(1) of the Utah Constitution, the uniformity clause, which states that “all tangible property in the State that is not exempt” shall be “assessed at a uniform and equal rate in proportion to its fair market value.” They also argued that the Valuation law's “fleet adjustment provision” violates the uniformity clause because it provides for a property tax discount applicable only to airlines, and because it prevents the Commission from assessing the value of aircraft at fair market value. They also challenged the Valuation law for violating the constitution's delegation of authority over tax assessments to the Commission, claiming that by requiring the Commission to use the valuations provided in outside pricing guides, the legislature had unconstitutionally delegated Commission authority to the publishers of those pricing guides. The district court dismissed all of the Counties' claims related to the Valuation law and the allocation law, which provides a formula for determining an airline’s property tax obligation, because administrative appeals that remain pending could obviate the need to reach some of the as-applied constitutional questions raised by the Counties.  The legislature also enacted the Threshold law, which bars counties from challenging the Commission's property tax assessment unless a county “reasonably believes” the Commission's assessment has undervalued property by at least 50 percent. The district court dismissed the Counties’ claims as unripe under the Threshold law because their complaint did not identify a specific instance in which they were denied the opportunity to pursue an appeal of an airline assessment under the Threshold Law.”  The Counties filed this appeal.

 

The court determined that the district court properly dismissed the Counties' claims on ripeness grounds. Under the ripeness doctrine, courts should resolve legal issues only where the resulting legal rule can be applied to a specific set of facts, thereby resolving a specific controversy. The court found that although the Counties cited evidence outside their pleadings to suggest that the tax code provision at issue had already adversely affected them, they did not incorporate this evidence into their complaint.  The court concluded that their complaint was facially insufficient to show that the dismissed claims were ripe.

 

The court also affirm the district court's dismissal of the Counties' remaining claims because the court found those claims were best viewed as requests for an advisory opinion, something the court does not provide. According to the Counties, their claims “do not arise from a specific tax assessment challenged, unchallenged, or forgone,” and they do not “depend upon averments of particular assessments to maintain this action.” Instead, the court concluded that the Counties' purpose in turning to the judiciary in this case was to obtain a judicial declaration that the Challenged laws are unconstitutional in the abstract. The court said that because it has no power to decide abstract questions or to render declaratory judgments in the absence of an actual controversy directly involving rights, it must affirm the district court’s dismissal. Salt Lake Cnty. v. Utah, Utah Supreme Court. No. 20180586; No. 170904525.  5/18/20

 

 

Other Taxes and Procedural Issues

 

FOIA Request Denied

 

The Michigan Court of Appeals denied a taxpayer's Freedom of Information Act (FOIA) request for tax credits granted to General Motors.  The court held that the requested financial information qualified for the confidentiality exemption of the statute.

 

In 1995, the state legislature enacted the Michigan Economic Growth Authority (MEGA) Act to promote economic growth and job creation within the state.  The Michigan strategic fund (MSF) provided staff for the authority.  MEGA allowed a qualifying institution to receive a tax credit for up to 20 years based on program guidelines and MEGA board approval.  MEGA was abolished in 2012, and all of its power and responsibilities were transferred to the MSF board.

 

In November 2018, plaintiff submitted a FOIA request to the Michigan Economic Development Corporation (Corporation) seeking document regarding MEGA tax credits extended to General Motors (GM) for all years the tax credits were issued, including amendments to the credits, value of certificates issued, remaining liability on the certificates including how many years the MEGA tax credits can be claimed, and additional information tied to the issuance of the credits. When the Corporation did not respond, plaintiff's attorney reiterated the request. The Corporation’s FOIA coordinator then responded by providing a significant volume of nonexempt documents but denied disclosure of the total amount of the tax credits, contending that the total amount was exempt from disclosure under FOIA because it was confidential information under the Michigan Strategic Fund (MSF) Act. The plaintiff filed a complaint in the Court of Claims challenging the Corporation’s FOIA appeal decision and clarified that it was not seeking financial information provided by GM, but rather the amounts and terms of the credits issued by defendant MEDC. According to plaintiff, GM was in violation of the terms of the MEGA credits and “the public cannot enforce and monitor compliance with the terms of the agreement.” Plaintiff sought an order requiring disclosure of the amount of MEGA tax credits awarded to GM for each year they were issued, along with values, amendments to the credits, the number of years GM was able to claim credits, the amount of retention tied to the credits, and information about whether the retention goals were met for each credit issued. The defendant contended that it had provided documents evidencing amounts and terms of the grants issued and denied that it had violated the law.

Plaintiff filed a motion for summary judgment arguing that the confidentiality provision in the MSF Act did not apply to MEGA tax credits and was an improper basis for denial of the requested information.  The Court of Claims issued a written opinion and order denying plaintiff's motion for summary disposition, agreeing with the defendant that the MSF Act applied, because when the MEGA was abolished, all of its powers were transferred to the MSF board, including the specific power to grant requests for confidentiality of “financial and proprietary information.”  The plaintiff filed this appeal.

 

FOIA provides a listing of reasons that a public body may claim partial or total exemption of records from disclosure. The Corporation contends that the records at issue in this matter are exempt from disclosure because, under a provision of the MSF Act, a record or data received by the fund in connection with an application for an award, grant, loan or investment that relates to financial or proprietary information submitted by the applicant that is considered by the applicant and acknowledged by the board or a designee of the board as confidential shall not be subject to the disclosure requirements of FOIA. The court noted that MSF Act further explains that routine financial information may not be considered confidential unless it is proprietary. The court noted that it did not necessarily disagree with the plaintiff’s arguments regarding the purposes intended to be served by the FOIA, the public importance of the information he seeks disclosed, and the low likelihood of any real harm to GM from that disclosure, but said it was constrained to follow the law as set forth in the plain language of the relevant statutes.

 

The court noted that there are some FOIA provisions that call for balancing or for harm assessments, but that the provision at issue here, MCL 15.243(1)(d), does not and the court was not at liberty to read into the provision any permission for it to consider the relative value of disclosure or nondisclosure. The court agree with the plaintiff that the FOIA must be read expansively, and exemptions from disclosure must be read narrowly.  The court pointed to case law concluding that courts have interpreted the policy of the FOIA as one of full disclosure of public records unless a legislatively created exemption expressly allows a state agency to avoid its duty to disclose the information, and the court noted that it could not

engage in statutory construction contrary to plain and unambiguous language. The court also pointed out that there was no dispute that MCL 15.243(1)(d) means what it says and in other words, the meaning of the FOIA exemption itself is not in doubt.

 

The court rejected the plaintiff’s argument that the information requested was not exempted under the FOIA, and more specifically, not exempt under MCL 15.243(1)(d), because only items specificallydescribed and exempted by the statute are exempt from disclosure, and MCL 125.2005(9) can exempt only financial and proprietary information submitted by the applicant. The court said it was undisputed that GM applied to the Corporation for a MEGA tax credit, and using financial or proprietary information submitted by GM, the Corporation “prepared” the amount of total tax credit. In other words, the total tax credit was “prepared by” defendant, and “relates to financial or proprietary information submitted by” GM. The Corporation then granted GM's request to acknowledge the total tax credit as confidential, thereby rendering it not subject to disclosure under the FOIA.  The Corporation submitted a December 7, 2015 memorandum regarding GM's confidentiality request, which the court said was evidence that GM and the Corporation followed the necessary procedure under MCL 125.2005(9) to render the information confidential. Plaintiff argued that the amount of the MEGA tax credit did not meet the definition of “financial or proprietary information” because no harm would come to GM as a result of its disclosure, but the court noted that the statute defines “financial or proprietary information” as, in part, information that “might cause the applicant significant competitive harm” if released. However, the  court pointed out that confidentiality provision in MCL 125.2005(9) extends to any portion of a document “that relates to financial or proprietary information.”  Sole v. Michigan Econ. Dev. Corp., Michigan Court of Appeals, No. 350764; LC No. 19-000007-MZ.  6/4/20 

 

Tobacco Products Subject to Confiscation

 

The Alabama Supreme Court reversed the circuit court's decision in a tobacco tax matter.  The court found that tobacco products on which the state tobacco tax had not been paid were subject to confiscation by the Department of Revenue (DOR).


The state imposes a license or privilege tax on tobacco products stored or received for distribution within the state and the statute provides that DOR may confiscate certain tobacco products on which the tobacco tax has not been paid. The taxpayer was a wholesale tobacco-products distributor located in Florida, and owned by Ehad Ahmed. One of its customers, Yafa Wholesale, LLC (Yafa), was an Alabama tobacco distributor owned by Sayeneddin Thiab.  In March 2018, agents of DOR began conducting surveillance of Thiab's residence, Yafa's business location, and storage units at Extra Space Storage in Vestavia Hills.  One of the units had been leased in 2010 by Sami Berriri, a driver for Yafa. The agents observed Thiab's son, Saed, making multiple trips to the taxpayer’s warehouse in Florida, where he loaded tobacco products into delivery vehicles owned by Yafa. After Saed returned to Alabama, he and other individuals unloaded the products into the storage units. The agents also observed Thiab and Saed retrieving tobacco products from the units and delivering them to more than 80 convenience stores across Alabama. On October 10, 2018, Hurricane Michael destroyed the roof on the taxpayer’s warehouse. Over the next few days, Thiab's daughter, Ghadir, and Saed leased three additional units from Extra Space and on October 19, the agents observed two of Thiab's vehicles and a rented moving truck traveling to Pensacola, Florida. The vehicles were loaded with tobacco products and were observed at Yafa's business location that night. The next day, agents observed one of Thiab's vehicles being unloaded at two of the recently rented storage units. The day after that, agents observed one of Thiab's delivery vehicles being loaded with tobacco products from the other recently rented unit. On October 23, 2018, DOR confiscated 1,431,819 cigars from four storage units leased by persons connected to Yafa and Thiab.

 

It is undisputed that the tobacco tax had not been paid on the cigars. Ahmed filed an action in the circuit court against the Commissioner of DOR, seeking a judgment declaring that the cigars were Ahmed's and that they were not subject to confiscation.  The circuit court ruled for the taxpayer, ruling that the Commissioner failed to present substantial evidence that the cigars were in the possession of a retailer or semijobber, as the court believed was required by the confiscation statute. The Commissioner filed this appeal.

 

The confiscation statute permits DOR to confiscate certain untaxed tobacco products that are found within the state in the possession of any retailer or semijobber for a period of two hours or longer without having the tobacco stamps affixed. The circuit court ruled that the Commissioner failed to present substantial evidence that the tobacco products that DOR seized from the taxpayer were in the possession of a retailer or semi-jobber as defined by the confiscation statute. The court here began its analysis by reviewing the rules of statutory construction.

 

The confiscation statute, by its own terms, applies only to "products taxable under this article.” Taxable products are tobacco products that are in the state for the purpose of distribution in the state.  The court pointed to the general language of the confiscation statute that provides that any untaxed cigars or other taxable products found within the state are declared to be contraband goods which may be seized by DOR.  There is a “primary location” exception to this rule which provides that DOR may not confiscate tobacco products that are found at the primary location of the permitted wholesaler or jobber, registered semijobber, registered retailer or tobacco products manufacturer who stores tobacco products at a bonded warehouse in the state for resale. The two-hour "exception to the exception" allows DOR to confiscate any untaxed tobacco products that have been in Alabama, in the possession of a retailer or semijobber, for two hours or longer. Under this provision, retailers and semijobbers who store tobacco products at their primary locations must still pay the tobacco tax within two hours of their possession of the products in Alabama. The statute also provides that any of the tobacco products, when offered for sale, either at wholesale or retail without the [tobacco tax having been paid on them shall be subject to confiscation. The court said this sale "exception to the exception" allows DOR to confiscate any untaxed tobacco products that are offered for sale, at either wholesale or retail. Under this provision, dealers who store tobacco products at their primary locations must still pay the tobacco tax before the products are offered for sale.

 

The court said that the circuit court's interpretation of the confiscation statute, applying only to products in the possession of a retailer or semijobber, failed to give effect to each provision of the statute. By limiting DOR’s confiscation power to tobacco products in the possession of retailers and semijobbers, that interpretation would render superfluous the third sentence's primary-location exception as to permitted wholesalers, jobbers, and manufacturers, because products in the possession of those types of dealers would not be subject to confiscation in the first place. Rather, the court said the first sentence's reference to a retailer or semijobber functions as an exception to the primary-location exception, not as a limit on the third sentence's general rule of confiscation and concluded the circuit court's interpretation would incorrectly read an exception to an exception as a restriction on the general rule.

 

The court found the Commissioner presented substantial evidence that the cigars were subject to confiscation. It was undisputed that the tobacco tax had not been paid on the confiscated cigars and the Commissioner presented substantial evidence that the cigars were in the state for the purpose of distribution. On multiple occasions, DOR agents observed Thiab, Saed, and other individuals loading boxes of tobacco products from the storage units, including units leased after Hurricane Michael, into Yafa's delivery vehicles. Thiab or Saed then transported the products first to Yafa's business location, then to more than 80 convenience stores across the state. The court concluded that from this evidence, a reasonable finder of fact could conclude that the cigars confiscated from the storage units were in Alabama for the purpose of distribution and thus subject to the tobacco tax. The taxpayer argued that the cigars were not in Alabama for the purpose of distribution, pointing to evidence that Saed brought the cigars to Alabama to store them as a personal favor to Ahmed after the taxpayer’s warehouse was damaged by Hurricane Michael.  However, the court found this evidence merely conflicted with the contrary evidence summarized above, creating a genuine issue of material fact.

Further, the court said the statute's primary-location exception did not apply and it did not, therefore, need to address whether the two-hour and sale "exceptions to the exception" applied. One justice filed a dissent arguing that DOR had not presented sufficient evidence indicating that the tobacco products at issue in the case were contraband that can be confiscated. Barnett v. Panama City Wholesale Inc., Alabama Supreme Court, 1190321; CV-19-134.  6/5/20

 

Highway Use Tax Assessment Affirmed

 

The Oregon Court of Appeals affirmed the Department of Transportation (DOT), Motor Carrier Transportation Division's (Division) assessment of highway use tax against interstate motor carriers subject to the state's weight mile tax program.  The court found that the taxpayers’ challenge of the characterization that they are separate entities for accounting purposes was not relevant to "any material issue" at the hearing.


The taxpayers are interstate motor carriers subject to Oregon's weight mile tax program when operating motor vehicles on Oregon highways. The Division assessed highway use taxes against them, and they sought judicial review of that order.  The taxpayers did not challenge the assessed taxes, but instead challenged the first finding of fact in the background section of the final order.  They argued that the order erred in the characterization of Joseph Chand as the “sole proprietor” rather than the “principal” of one of the taxpayers and the language that the taxpayers are “two separate entities” for DOT accounting purposes. DOT argued that the only issues before the ALJ and the Division administrator were whether, and how much, the taxpayers owed in highway use taxes, neither of which they contest on judicial review. DOT argued that the finding of fact concerning the business structure of Jai Mata and its relationship to Chand and to Jai Mata Joe's Trucking, Inc., was not in dispute at the hearing, not relevant to any material issue at the hearing, and, thus, the taxpayers’ assignments of error do not provide a basis for the court to reverse or remand the final order. The court agreed.

 

The statute establishes a highway use tax is imposed upon and collected from “carriers” for the maintenance, operation, construction and reconstruction of public highways.  A “carrier” is defined as a “for-hire carrier,” which is defined as any person who transports persons or property for hire by motor vehicle.  The court noted that the highway use tax statutes do not distinguish motor carriers by business structure but is imposed on any for-hire carrier that transports persons or property on Oregon roads by motor vehicle. In this contested case, the statute authorized DOT through its administrator to “modify a finding of historical fact” made by the ALJ if the administrator determined there was clear and convincing evidence in the record that the finding was wrong. If a finding was modified in a substantial manner, the agency had a duty to identify and explain the modification. The court said that the administrator made extensive findings of fact in her final order based, for the most part, on the ALJ's proposed final order and all but the first of those findings are unchallenged and, therefore, are binding on judicial review. 

 

The undisputed facts are that Jai Mata applied for and was granted a motor carrier account in August 2011. It was assigned a Division account number of 148988. Jai Mata Joe's Trucking, Inc., applied for and was granted a motor carrier account in December 2012. It was assigned a Division account number of 163222.  The taxpayers sought to supplement the record before the court by submitting the applications for these account and the court allowed their motion to supplement. The court said the record reflected that the applications were submitted to the ALJ on March 27, 2017, by counsel for DOT in an email referencing the taxpayers’ objection to the proposed order. The ALJ issued her response to the objections later that same day and the court said it was clear that the applications were considered in the hearing process leading up to the final order. The court found the administrator's characterization of the business structure of Jai Mata and Jai Mata Joe's Trucking, Inc., provided clarity that the audits at issue were from two Division accounts that were consolidated for the contested case hearing and that the final order covered both accounts and that finding had no significance in the final order beyond providing that clarity.  The court noted that no party has argued that the business structure of tax account holders is relevant to the imposition, or calculation, of highway use taxes in this case. The court found the administrator's “finding” concerning the taxpayers’ business structure and ownership was not necessary for the administrator's conclusion that the taxpayers owed highway use taxes and the disputed fact was not litigated by the parties. The administrator's conclusion that the taxpayers owed taxes does not depend on whether they are sole proprietorships, corporations, or any other form of business, or on who owned the businesses. Therefore, the court determined that the taxpayers’ evidentiary challenge to the administrator's first finding of fact did not provide a basis on which it could reverse or remand the final order, even if it was well taken.  Mata v. Dep't of Transp., Oregon Court of Appeals, MCA0473; MCA0477; A165061.  6/10/20

 

 

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].

 
STATE TAX HIGHLIGHTS
A summary of developments in litigation.
 
Published biweekly by the Federation of Tax Administrators
Also available at the FTA Member website at:

 

May 8, 2020 Edition

 

 

NEWS

 

Welcome to MTC’s New Deputy

 

The Multistate Tax Commission has selected Scott Pattison as its new executive deputy director, replacing Marshall Stanbury who recently retired.  He was most recently the chief executive of the National Governors Association, but you may recognize him from his years speaking at FTA’s conferences in his role running the National Association of State Budget Officers.  He has also served as Virginia’s budget director and has his law degree from the University of Virginia.  Welcome, Scott!

 

Indiana Court Denied Tax Analysts' Request for Amazon Proposal

 

The Indiana Marion County Superior Court has issued an order denying a request by Tax Analysts for documents that the City of Indianapolis submitted to persuade Amazon to build its second corporate headquarters there. The court found that the city's proposal was not subject to disclosure under the Access to Public Records Act because the proposal cannot be considered a "final offer of public financial resources."

 

 

U.S. SUPREME COURT UPDATE

 

Petition Denied

 

Wisconsin Department of Revenue v. Union Pacific Railroad Company, U.S. Supreme Court Docket No. 19-949.  Petition denied May 4, 2020.  The U.S. Supreme Court denied Wisconsin’s petition and let stand a decision by the U.S. Court of Appeals for the Seventh Circuit that Wisconsin’s taxation of a railroad’s software while exempting the software of commercial and manufacturing companies violated the federal Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act).

 

 

 

 

FEDERAL CASES OF INTEREST

 

Objection to Bankruptcy Plan Overruled

 

The U.S. Bankruptcy Court for the Northern District of Iowa overruled objections by the IRS and the Iowa Department of Revenue (DOR) to a couple’s bankruptcy plan requiring that their tax refunds be paid to the bankruptcy estate.  The court found that a priority-stripping provision in the bankruptcy code didn’t allow the offset of their refunds against capital gains taxes generated by the sale of farm property.

 

The Debtors are a married couple and the husband worked as a farmer for over 20 years, most of that time working with his brother. The wife maintained employment outside the farm. In 2016, the brothers began mediation with their major secured creditor and separated their business interest during that process. As part of this mediation, the Debtors were required to sell a significant amount of farmland and farming machinery. These sales took place in 2017, adding significant capital gains to the Debtors’ taxable income for the year, resulting in their owing additional income taxes. In order to gain relief from this heavy tax debt, Debtors filed bankruptcy in Chapter 12 proceedings. The Debtors’ Amended Plan stated that within sixty days of the Order of Confirmation of this Plan, the U.S. operating through the IRS and the DOR shall refund the overpayment of 2017 income taxes, which represented the withholding that the Debtor wife had from her employer, to the Debtors, with this refund being paid by the Debtors to the Chapter 12 Trustee for payment of attorney fees.  On September 13, 2019, Debtors filed a set of pro forma tax returns with the IDR and IRS for tax year 2017, showing what the owed income tax would have been without the farmland and equipment sales. The pro forma returns state that, but for those capital gains, Debtors would have been entitled to a tax refund for the full value of income taxes withheld from the wife’s employment.

 

The only issue before the court was whether the priority-stripping provision of 11 U.S.C. § 1232(a) entitles the bankruptcy estate to a refund of withheld income taxes when those withholdings have been setoff against the tax debt. The court noted that this is an issue of first impression among the bankruptcy courts and, to date, only one case has analyzed the meaning of § 1232 since the 2017 amendments to the bankruptcy code updated the old priority-stripping provision in § 1222(a)(2)(A) and moved it to § 1232.  That case analyzed the test for determining when de-prioritization is appropriate and not the effects of de-prioritization or a setoff. Because there was no case law on-point to guide the decision in this case, the court looked to the language of the Bankruptcy Code itself, noting that there were two statutes at the core of the arguments presented.  Debtors argued that these code sections, 11 U.S.C. § 1232(a) and 11 U.S.C. § 553(a), are at odds with each other such that the "general-specific" canon of statutory interpretation should control the outcome of this case. The DOR and IRS, on the other hand, argued that the plain meaning of the two code sections was clear and consistent.

 

The court agreed with Debtors that § 1232(a) specifically deals with how claims of government units based on pre-petition tax debt must be treated, i.e. as unsecured, non-priority obligations. The court also agreed with Debtors that § 553(a) generally preserved a right to setoff mutual pre-petition obligations, where the claim of such creditor arose against Debtor before the case. The court noted that the general rules of statutory construction provide that where two statutes conflict, the specific governs over the general and since § 553(a) is a statute of general applicability and § 1232(a) deals with specific scenarios, § 1232(a) will control if there is a conflict between the two statutes. The court noted that on its face, § 1232(a) says nothing about clawing back tax withholdings, finding that the usual effect of the section is to reset qualifying tax debts as ordinary unsecured, non-priority debts.  But the court said the full effects of § 1232(a) were left a bit unclear under the plain language of the statute. Congress did not elaborate on statements that qualifying tax debt "shall be treated as an unsecured claim" and "shall not be entitled to priority," which are unclear as to their effect here. The court said these statements were ambiguous when applied here to the question before the court. The court noted that in § 1232(a)(3) and (4), Congress provided some further clues useful to the analysis that these debts "shall be provided for under a plan" and "shall be discharged." The court determined that the best way to interpret sections (3) and (4) was to avoid redundancy and give meaning to all four parts. The court said that sections (3) and (4) of § 1232 thus provided some "clue" to the statute’s meaning and particularly noted that prepetition tax debts of this type "shall be discharged." But the court noted that a simple textual analysis leaves some ambiguity about whether the language effectively prevented offset under § 553(a) and the court looked to legislative history for guidance.

 

In 1999 the Senate considered adopting a similar provision and the legislative history noted

that the purpose of the bill was to alleviate the "crushing tax liability" that family farmers face "if they need to sell livestock or land in order to reorganize their business affairs"  and the bill was intended to "free up capital for investment in the farm, and help farmers stay in the business of farming." While that legislative was not adopted, the priority-stripping provision was later added to other bills.  The court said the intent of those bills reflected in the legislative history was to de-prioritize treatment of capital gains taxes to free up funds for reorganization and boost reorganization possibilities for family farmers. The priority-stripping provision was eventually added to the Bankruptcy Code in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and the priority-stripping provision was amended again in 2017 as a reaction to the courts interpreting the statute as Congress did not intend. The legislative history of that bill stressed that the bill clarified that bankrupt family farmers reorganizing their debts may treat capital gains taxes owed to the government, arising from the sale of farm assets during the bankruptcy, as general unsecured claims, giving family farmers a chance to reorganize successfully and remove the Internal Revenue Service’s veto power over plan confirmation. The court said that as all of the legislative history showed, Congress intended the priority-stripping provision to be interpreted to promote successful reorganizations of family farming operations by limiting the impact of the substantial capital gains taxes that tend to follow the sale of farm land or equipment and to put that capital into the farmers’ hands not the taxing authorities. The court concluded that allowing taxing entities to setoff withheld taxes against these capital gains taxes runs directly counter to these objectives.  In re: Philip Charles DeVries, U.S. Bankruptcy Court for the Northern District of Iowa, No. 19-00181.  4/28/20

 

Enforcement of Tax Liens Granted

 

The U.S. District Court for the Eastern District of New York granted the government summary judgment in its suit to reduce an attorney’s unpaid tax liabilities to judgment.  The court held that federal tax liens attached to his one-half interest in property that he owned jointly with his wife, and the government was entitled to enforce its liens by sale of the property.


The taxpayer, based on returns filed by him in 2004, was assessed tax liabilities for tax years 1996 through 1998 and 2000.  A notice of tax lien was recorded in Nassau County on October 12, 2005 and refiled notices were recorded on September 16, 2014 and October 31, 2014.

The taxpayer owns real property in Roslyn Heights, New York that was conveyed to him and his wife as tenants by the entirety. The couple executed a deed dated October 20, 1981 purporting to convey the property to the wife, but that transfer was subsequently deemed invalid by a New York State court and the couple remain co-owners by the entirety of the property.  Deutsche Bank holds a first mortgage on the property, and Riback holds a second mortgage on the Property. The couple have not made a full payment on the mortgage held by Deutsche Bank since April 1, 2006, and as of October 7, 2018, owed $532,074.28. They have not made a payment on the mortgage held by Riback since July 2002 and, as of July 11, 2017, owed $185,289.00. The IRS commenced the action on September 9, 2015 and amended the complaint twice, most recently on March 17, 2016.  The taxpayer requested and received three extensions of time to file an answer. After the final extension of time expired on November 25, 2016, the United States requested entry of a Certificate of Default as to the couple and an Entry of Default was issued on December 8, 2016. 

 

The court noted that filings reflected that during the early part of 2018, the parties attempted to reach a settlement, but that the taxpayer failed to follow through on any preliminary requirements for the settlement. The taxpayer requested, after briefing on the motion was completed, that the court hold the decision in abeyance while he continued negotiations to modify his mortgage with Deutsche Bank, contending that the repayment plan the bank had submitted was unrealistic. The U.S. first sought to reduce the taxpayer’s unpaid tax liability to judgment.  The court noted that a government tax assessment is generally presumed to be correct, and a taxpayer who contests such an assessment bears the burden of proving that it is not. The U.S. submitted certified copies of Form 4340 tax transcripts for each of the four relevant tax periods and the court found these documents sufficed to verify the taxpayer’s outstanding tax liability. The court noted that the other defendants did not contest the taxpayer’s liability or challenge in any way the accuracy of the assessments made against him. The court, therefore, found the assessments rendered against the taxpayer were presumed valid and the assessments would be reduced to judgment. The court also found that the federal tax lien filed by the U.S. attached to the taxpayer’s one-half interest in the property held by him and his wife.  The court then turned to the government’s request that the court authorize the enforcement of the liens by the sale of the subject property. The court concluded that the U.S. had satisfied the notification requirements of the statute, finding that proper notice had been provided to parties with an interest in the property and all defendants except the couple, Deutsche Bank, and Riback have had a default judgment entered against them declaring that they have no interest in the property and are not entitled to any sale proceeds. The court pointed out that the U.S. Supreme Court has recognized that district courts may exercise a degree of equitable discretion in sec. 7403 proceedings which may take into account both the Government's interest in prompt and certain collection of delinquent taxes and the possibility that innocent third parties will be unduly harmed by that effort.  The court noted that the limited discretion provided in this section should be exercised sparingly, but that there were no circumstances under which it would be permissible to refuse to authorize a sale simply to protect the interests of the delinquent taxpayer himself or herself.

 

The couple listed several “additional circumstances” in their papers, but the court determined that to the extent they were offered as reasons to deny the United States' request to proceed with sale of the property, they were unavailing. The court said it accorded little weight to any purported harm to the taxpayer, nor did it find that reliance on imaginary settlement negotiations justified any delay. The court found the only consideration meriting discussion concerned a third-party, the wife’s elderly mother, who resides at the property. The couple argued that moving her would cause her irreparable physical damage but provided no supporting evidence.  While the court noted it was sympathetic for their personal circumstances, it found that the couple had failed to raise any argument warranting an exercise of discretion to deny or delay the sale of the property.  On the other hand, the court determined that postponing the sale would not produce an equitable result and instead would prejudice the United States since, absent a sale, it would have no alternative means to enforce its valid tax liens. The court said the United States would be entitled only to the taxpayer’s one-half interest or 50% of the sale proceeds minus satisfaction of both mortgages and since the couple had made no payments on either mortgage since 2006 with the result that their obligations on those debts continues to grow, the United States' ability to recover is diminished monthly. The court granted motion for summary judgment in its entirety, including a direction for sale of the property. United States v. Jeffrey Bettan et al., U.S. District Court for the Eastern District of New York, No. 2:15-cv-05204.  4/27/20

 

 

 

DECISION HIGHLIGHTS

 

Sales and Use Tax Decisions

 

Membership Fees Subject to Sales Tax

 

The South Carolina Court of Appeals affirmed a lower administrative court's decision that upheld the Department of Revenue's (DOR) sales tax assessment against a taxpayer.

The court found that the company's sales and renewals of Millionaire's Club memberships are subject to sales tax.

 

The taxpayer operates a discount book retail business headquartered in Alabama. It sells books, magazines, collectible supplies, cards, and other gifts in retail stores throughout the country and online and operates thirteen retail locations in the state.  Customers pay a $25 annual fee (Membership) to belong to the Millionaire's Club (Club).  Customers can pay the Membership Fee separately or along with other store purchases and the Memberships automatically renew each year for a one-year period unless customers affirmatively opt out of the automatic renewal or the Membership is otherwise cancelled or terminated. The taxpayer does not charge sales tax on the cost of the membership fee. DOR conducted an audit of taxpayer and discovered that it was not charging sales tax on the cost of Membership.  As a result, DOR issued a Proposed Notice of Assessment for sales tax on the Membership charge.

The taxpayer filed an appeal and DOR issued a final determination.  The taxpayer filed an appeal and requested a hearing before an ALJ, arguing that the proceeds from its sales of Memberships were not subject to the sales tax. A hearing was held before the ALC on May 9, 2017 and the ALJ subsequently granted DOR’s motion for summary judgment.  The taxpayer filed this appeal.

 

 DOR argued a plain reading of the statute demonstrated that all persons engaged in the sale of tangible personal property at retail are liable for sales tax on their gross proceeds of sales. The taxpayer argued that the statute only imposed a sales tax on the gross proceeds of the sale of tangible personal property.  The ALJ concluded that because the Membership could not exist without the taxpayer offering tangible personal property for sale, the Membership and sales of tangible personal property were inseparable and the Membership was, therefore, subject to tax. The court found, after reviewing the record, that the decision of the ALC was supported by substantial evidence. State case law provides that gross proceeds of sales includes all value that comes from or is a direct result of the sale of tangible personal property and the Membership fee is a direct result of the sale of tangible personal property because the taxpayer would not be able to sell Memberships but for the taxpayer’s sale of tangible personal property.

 

The taxpayer also argued the ALJ erred in finding renewals of the Memberships were subject to sales tax, but the court concluded that because it found the ALC correctly determined sales of Memberships were subject to sales tax, the ALC correctly determined renewals of Memberships were also subject to sales tax.  The taxpayer also argued that the ALJ erred

in finding the statutes were not ambiguous, but the court disagreed finding the language of the statutes was not ambiguous, and the ALJ's reading of the statutes was correct and consistent with the intent of the legislature. Books-A-Million Inc. v. Dep't of Revenue, South Carolina Court of Appeals, Appellate Case No. 2017-001519.  4/29/20

 

 

 

 

Temporary Storage Exemption for Solvent Denied

 

The Illinois Appellate Court, First District, held that purchases of unused cleaning solvent were subject to the use tax once the solvent was returned to the state for further storage after it was blended with recycled solvent.  The court found that the temporary storage exemption only applied to the initial storage of the unused solvent and using and recycling the solvent did not make it a different product that could claim its own temporary storage exemption.

 

The taxpayer filed a petition before the tax tribunal (Tribunal) alleging that the Department of Revenue (DOR) erred in assessing use tax against its virgin solvent purchases. The company stated that it provides “solvent parts washers” and “recycled solvent” to commercial customers throughout North America. As part of its services, it regularly drains used solvent from its customers' parts washers and replenishes the washers with recycled solvent. At issue here is the virgin solvent, which the taxpayer purchases from out-of-state retailers and blends with the recycled solvent “to ensure an adequate supply of solvent.” The taxpayer also alleged that during the audit period it remitted Illinois use tax on purchases of virgin solvent. The DOR completed a reconciliation of use tax and gave the taxpayer credit for use tax accrued on virgin solvent purchases. Later, however, DOR audited the taxpayer and concluded that it

owed state use tax on multiple items, including virgin solvent.  DOR’s informal conference board denied the taxpayer’s adjustment request and concluded that the recycling of solvents is considered a taxable use in Illinois.  The taxpayer asserted the virgin solvent was received and stored in Illinois and subsequently distributed and used outside of the state and claimed it did not subject the virgin solvent to its “intended use” until the solvent reached its customers' locations both within and outside of Illinois.  The taxpayer further argued that once the solvent was used and returned to Illinois, the solvent was allegedly a “substantially different product” because it was contaminated with debris and foreign chemicals that must be removed through the recycling process before further use. The taxpayer argued that 88.46% of the out-of-state virgin solvent purchases qualified for the temporary storage exemption to the use tax because the virgin solvent was acquired outside of the state,  stored in the state temporarily, and used solely outside of the state. DOR argued that the taxpayer’s virgin solvent lost the temporary storage exemption once it was returned to Illinois for further storage after its initial post-purchase storage, citing Shared Imaging, LLC, 2017 IL App (1st) 152817.  DOR further refuted the taxpayer’s claim that virgin and used solvent were different properties entirely, arguing that at least some of the original virgin solvent returns multiple times to the state, albeit in contaminated or used form.

 

The facts showed that the taxpayer provided its customers with a regular, scheduled service to drain “used solvent” from its customers' parts washers and then replenish those washers with “recycled solvent.”  “Used solvent” contains all of the oils, chemicals, liquids, and debris that were previously attached to the metal parts or tools before the solvent was used to clean them and does not have the same cleaning capability as “virgin” or “recycled” solvent.  “Recycled solvent” is usable, clean solvent that has been refined through distillation from used solvent.

“Virgin solvent” is a solvent that has not diluted any solute yet.  “Recycled solvent” has the same chemical and physical properties, as well as the same commercial value, as “virgin solvent.” The stipulation of facts shows that after the taxpayer drains used solvent from customers, it transports the used solvent to a recycling center in the state where the used solvent is stored in tanks before it is recycled through “fractional distillation.”  Once used solvent is recycled, the taxpayer blends virgin solvent with recycled solvent in order to ensure that it maintains an adequate supply of solvent necessary for replenishing customers' solvent parts' washers.  Solvent can be recycled many times before it is permanently exhausted.

The taxpayer could not identify the exact amount of virgin and recycled solvent that is returned to the state for recycling.

 

The Tribunal granted DOR’s motion for summary judgment, citing Shared Imaging in holding that the temporary storage exemption can apply only once and so if the property is returned to Illinois for further storage the exemption is lost.  The Tribunal also observed that the taxpayer cited no legal authority supporting its position that the return of its property in a different form allows it to reset the clock on the temporary storage exemption. The Tribunal noted that it did seem reasonable that at some point property may be so transformed out of state that when returned to Illinois it could claim its own temporary storage exemption, but the Tribunal was not convinced that such a transformation had occurred here. The taxpayer filed this appeal arguing that the Tribunal erred in concluding that the temporary storage exemption did not apply to its virgin solvent, as the solvent was used outside of Illinois and returned in-state as an entirely different product. According to the taxpayer, the virgin solvent was only temporarily stored once in Illinois, and the court’s holding in Shared Imaging does not apply.

 

The court noted that tax exemptions are strictly construed, and any doubts regarding an exemption's applicability must be resolved in favor of taxation. The statute provides for the imposition of a tax on the privilege of using tangible personal property in the state purchased at retail from a retailer and exempts, in pertinent part here, temporary storage in the state of tangible personal property that is acquired out of state and stored in the state temporarily before being used solely out of state. The court noted that the parties agreed the virgin solvent was acquired outside of Illinois and therefore qualified for the first of the temporary storage exemption's three elements. They also agreed that, under the court’s holding in Shared Imaging, property does not qualify for the temporary storage exemption where it has been temporarily stored in Illinois, shipped out-of-state, and then returned to Illinois for further storage. The parties additionally did not dispute whether the virgin solvent's first storage in Illinois, before it is used out-of-state in customers' parts washers, constituted a use. The issue before the court was limited to whether the virgin solvent is used in Illinois for purposes of the statute when it is altered by its out-of-state use and, in a different form, returned to Illinois and stored again. The taxpayer’s theory was that the virgin solvent's use in parts washers so fundamentally changed the solvent on a “molecular level” that it could not even be deemed the same property afterwards, and the record contains a cursory outline of the science underlying the virgin solvent's apparent transformations. The court, however, after a review of the facts before it concluded that it did not appear that the actual matter that makes up the virgin solvent was completely lost when it was used in parts washers, finding that the solvent simply picked up the oils, chemicals, liquids, and debris from the materials which it is used to clean.

 

In Shared Imaging, the petitioner leased medical equipment units to customers within and outside of Illinois, temporarily stored them in the state before shipping them to out of state customers.  Some units were subsequently returned to the state for storage until rented again and the court concluded that the units were not used solely out-of-state, as they were continuously stored and maintained within Illinois, an act which the court found constituted an “exercise of rights and power over the property that belongs only to the owner of the property” and therefore fell within the statute’s definition of “use.” The court in that case rejected the taxpayer’s argument that there was no limit on the number of times a taxpayer may temporarily store property in Illinois, finding the temporary storage exemption clearly placed that limit on the taxpayer by providing that after the initial post-purchase temporary storage of property, that property must be used solely outside of Illinois. The court found Shared Imaging applicable to the current case, rejecting the taxpayer’s argument that the decision is distinguishable because in Shared Imaging, the exact same medical equipment units that left Illinois were returned to Illinois for storage after their out-of-state use. The taxpayer claimed that its virgin solvent becomes “new tangible personal property” after its initial out-of-state use because it obtains a new color and odor, it contains oils, chemicals, liquids, and debris that were previously attached to the metal parts or tools before the solvent was used to clean them, it is legally different, as trucks carrying used solvent must bear a placard stating the truck is transporting hazardous waste and the used solvent lacks the cleaning capabilities of virgin solvent.  The court rejected this argument concluding that even if the court were to assume that virgin solvent and used solvent are substantially different products, the used solvent is ultimately recycled and used alongside virgin solvent for the same activity again. The court found no basis to hold that used solvent was an entirely different property than virgin solvent when, through recycling, the used solvent regains the characteristics of virgin solvent. Safety-Kleen Sys. Inc. v. Dep't of Revenue, Illinois Appellate Court, First District, 2020 IL App (1st) 191078; No. 16-TT-167.  4/28/20

 

 

Personal Income Tax Decisions

 

Refund Petition Untimely

 

The Pennsylvania Commonwealth Court affirmed a decision by the Board of Finance and Review (Board) which found that the Board of Appeals (BOA) had properly dismissed as untimely an individual's petition for a refund of personal income tax paid for the 2005 tax year.   The state statute provides that when a payment is made as the result of an assessment, a petition for refund must be filed within six months of payment, and the taxpayer did not file his refund petition for more than a year after the payment was made.

 

In 2005, the taxpayer failed to timely file a Pennsylvania personal income tax return and the Commonwealth’s Department of Revenue (DOR) used information from the Internal Revenue Service (IRS) to establish the taxpayer’s personal income tax liability for the 2005 tax year.  DOR issued a Notice of Assessment on January 9, 2008 and the taxpayer paid the assessment on September 3, 2014 without appealing the assessment. On October 29, 2015, the taxpayer filed a petition with DOR’s BOA, requesting a refund, which was denied on the basis that the refund request was not timely filed.  BOA specifically cited Section 3003.1(d) of the Tax Reform Code of 1971, as amended, which provides that for payments made as a result of an assessment, a petition for refund must be filed within six (6) months of the actual payment.

The taxpayer then appealed to the Board, which denied the appeal for failure to file a timely petition for refund, rejecting the taxpayer’s argument that DOR issued its assessment pursuant to an audit, and that, therefore, Section 3003.1(b) of the Tax Reform Code applied, and the taxpayer, therefore, had three years from the actual payment of the tax to file a refund claim.

The taxpayer filed this appeal.

 

DOR argued that the taxpayer’s petition for refund was untimely, as it had to be filed within six months of actual payment because the petition for refund concerns an amount paid as a result of an assessment, not an audit. The court noted the general rule and time limitation for filing a petition for refund was found in Section 3003.1(a) of the Tax Reform Code, which provides in pertinent part that, except as otherwise provided by statute, a petition for refund must be made to DOR within three years of actual payment of the tax, interest or penalty. In the case of amounts paid as a result of an assessment, Section 3003.1(d) of the Tax Reform Code applies, and that section requires that if the payment was a result of an assessment, the petition for refund must be filed with DOR within six months of the actual payment of the tax.

The court noted that the statute’s time limitations are to be strictly enforced and the burden is on the taxpayer to present evidence sufficient to prove that a petition is timely filed.

 

The term “audit” is not defined in the statute and the court looked to the definition in Webster's Third New International Dictionary as “a formal or official examination and verification of books of account” or “a methodical examination and review of a situation or condition . . . concluding with a detailed report or findings.” An affidavit filed by DOR’s acting director of the Bureau of Individual Taxes indicates that the assessment against the taxpayer for the tax year 2005 was generated by the DOR’s Pass Through Business Office using information obtained from the Internal Revenue Service. The affidavit also attests that the DOR’s Bureau of Audits was not involved in generating the assessment against the taxpayer for the tax year 2005 and indicated that no DOR audit was conducted to prepare the assessment for 2005. The court found that based on this affidavit, it was apparent that the DOR determined the taxpayer’s tax liability by merely using information it obtained from the IRS. The court said that the taxpayer offered no evidence to demonstrate that an audit was conducted, other than the statements by its counsel that DOR obtains records from the IRS and used them to conduct an audit.  The court found those statement to be merely conclusory with no supporting analysis. The court concluded that because DOR did not conduct an audit, the taxpayer could not rely on Section 3003.1(b).   The court found that Section 3003.1(d) applied here and, as such, the taxpayer needed to file his petition for refund within six months of actual payment.  Torres v. Pennsylvania, Pennsylvania Commonwealth Court, No. 567 F.R. 2016.  2/28/20

Corporate Income and Business Tax Decisions

 

Deduction Disallowed for Interest Income

 

The Illinois Appellate Court, First District, affirmed the Department of Revenue's (DOR) determination that a taxpayer’s books and records failed to establish the exact amount of interest income that it earned as a partner in a bank account and claimed on its amended tax returns.  The court, therefore, ruled that the interest could not qualify for the nonbusiness income deduction.

 

In 2004, the taxpayer amended its tax returns for taxable years 1992 and 1994-2000 to reflect what it claimed were nonbusiness income deductions based on interest income it earned as a partner in three investment accounts. DOR audited the amended tax returns and issued a notice of denial and two notices of deficiency proposing to assess additional tax liabilities. The taxpayer filed a protest and the matter proceeded to an administrative hearing. The administrative law judge (ALJ) recommended that the director of DOR finalize the notice of denial and notices of deficiency as issued, concluding that the taxpayer failed to present competent evidence supported by its books and records that it was entitled to the nonbusiness interest deductions claimed in its amended tax returns. The taxpayer appealed to the circuit court which confirmed DOR’s decision. The taxpayer filed this appeal.

 

The taxpayer is a nonresident corporation and it operates its business in the state and earns income which required it to pay state income tax.  The state statute imposes tax measured by net income on every corporation for the privilege of earning or receiving income in the state. It also imposes a personal property replacement tax, measured by net income, upon every corporation based upon the same privilege.  Net income is defined as that portion of the taxpayer's base income that is allocable to the state, subtracted by the standard exemption and allowable deductions. The statute contains an apportionment formula that the state uses to identify that portion of a nonresident corporation's business income that is attributable to its business operations in Illinois and, thus, taxable.  Business income is defined as all income that is properly apportionable under the United States Constitution and nonbusiness income is all income other than business income and does not factor into the state’s apportionment formula.

 

The taxpayer amended the returns at issue here to reflect purported nonbusiness income deductions it failed to deduct from its original tax returns for those years. The source of the claimed deductions was three investment accounts opened at State Street Bank that allegedly earned nonbusiness interest income during the taxable years in question. The taxpayer was one of three partners in the accounts and used them to manage cash flow, improve its balance sheet, and support day-to-day automotive operations. Testimony at the administrative hearing was that during the 1990s the taxpayer had more cash than it believed necessary to run the daily operations of its automotive business and a plan was devised to invest a portion of the excess cash in securities to earn interest income. The taxpayer used the State Street Accounts to purchase and sell securities. Each of the three State Street Accounts held securities with different terms of maturity and operated “like an in-house mutual fund.”  There were three partners in the State Street Accounts and it was estimated that the taxpayer’s share “of the invested cash” was between “80 and 95 percent.”  The taxpayer attempted to admit a spreadsheet into evidence but admitted that it did not contain the actual amount of “interest earned on the cash investment” in the State Street Accounts because the person putting together the spreadsheet “had not located those records.”  She also did not have the partnership agreements for the State Street Accounts and, as a result, was unable to determine each partner's representative share of cash in those accounts during the taxable years in question. The ALJ declined to admit the spreadsheet in evidence and ruled for DOR concluding that the taxpayer had failed to satisfy its burden of proving with competent evidence supported by its books and records it was entitled to the nonbusiness income deductions reported on its original return.

 

The court began its analysis by noting that an administrative agency's findings and conclusions on fact questions are prima facie true and correct and the court was not to reweigh the evidence or substitute its judgment for that of the Director. The court said this case did not present a legal question, with the Director finding that the taxpayer failed to rebut the DOR’s prima facie case because its books and records failed to establish, as a threshold matter, the amount of interest income it earned as a partner in the State Street Accounts necessary to demonstrate that the nonbusiness income deductions reflected in its amended tax returns was correct. An entity that claims a nonbusiness income deduction bears the burden of showing that the identified income is, in fact, nonbusiness income. The taxpayer was required to rebut DOR’s prima facie case in order to prevail on its protest and was required to present competent evidence supported by its books and records showing that DOR’s assessments were incorrect. The court said the correct amount of interest income the taxpayer earned as a partner in the State Street Accounts was an evidentiary prerequisite, under any apportionment methodology, necessary to rebut DOR’s prima facie case and that amount was absent from the taxpayer’s books and records presented at the administrative hearing. The court found that the record showed that the taxpayer estimated the total amount of interest income realized by the State Street Accounts and factored that amount into the AHP Calculation only to arrive at another estimation of the nonbusiness interest income earned by all the State Street Accounts for the taxable years in question. The court concluded that the final estimation was not based upon the amount of interest income the taxpayer earned as one of three partners in the State Street Accounts and did not match the amount of deductions claimed in its amended tax returns. The court rejected the taxpayer’s argument that it was entitled to make “as close an approximation as it could” and that its approximation rebutted DOR’s prima facie case. The court said that the amount of interest income the taxpayer earned as a partner in the State Street Accounts during the taxable years in question was not impossible to determine or incapable of accurate mathematical resolution. The court agreed with the Director's decision that the taxpayer failed to establish with competent evidence supported by its books and records the amount of interest income earned as a partner in the State Street Accounts necessary to prove its entitlement to the nonbusiness interest deductions claimed on its amended tax returns.  Ford Motor Co. v. Dep't of Revenue, Illinois Court of Appeals, First District, 2019 Il App (1st) 1772663.  4/13/20

 

Property Tax Decisions

 

Property Classification Upheld

 

The Iowa Court of Appeals held that a taxpayer's property was correctly classified as residential, not agricultural.  The court found that farming was not the property's primary use and the taxpayer had not engaged in farming with the intent of realizing profit, but rather had only performed any farming activity at all solely for the property tax advantage.

 

In 2008, the taxpayer bought 10.2 acres in the county. About two acres of the property was considered the homestead and contained improvements, including a two-story house. About five acres was a slough, with streams and forest and 3.6 acres was cropland that is in a 100-year flood plain.  In 2009 to 2011, the taxpayer grew hay and in 2012 and 2013, he grew corn.  He did not have any crops in 2014 due to weather conditions. In 2015, he had corn and pumpkins. The taxpayertestified he continued to grow corn and pumpkins on the tillable land.

In February 2017, the County Assessor sent the taxpayer a notice that his residential real estate was valued at $985,108 for property tax purposes and the taxpayer petitioned the county board of review (BOR), claiming the assessment was inequitable. He also argued the land was misclassified as residential rather than agricultural. The BOR denied his petition and he appealed that denial to the district court. The court upheld the county’s designation of the property as residential, finding that the taxpayer was a “hobby farmer,” but reduced the valuation of the property.  The taxpayer filed this appeal.

 

Citing case law, the court said thatfor assessment purposes, a property's classification is to be decided on the basis of its primary use. The taxpayer argued the district court wrongly decided that he failed to show agriculture was the primary use of his real estate and contended he overcame the statutory presumption as to continuity of use. The statute provides that if the classification of a property has been previously adjudicated by the property assessment appeal board or a court as part of an appeal, there is a presumption that the classification of the property has not changed for each of the four subsequent assessment years, unless a subsequent such adjudication of the classification of the property has occurred. The burden of demonstrating a change in use shall be upon the person asserting a change to the property's classification. The taxpayer conceded the 2013 and 2015 assessments classified his property as residential, so the court said he must prove by a preponderance of the evidence the primary use of his property is for agricultural purposes.

 

The court then turned to the definition from the administrative code that agricultural real estate shall include all tracts of land and the improvements and structures located on them which are in good faith used primarily for agricultural purposes except buildings which are primarily used or intended for human habitation. The court set aside the 4.9 acres of slough land and looked to whether the taxpayer in good faith used his remaining 5.3 acres primarily for agricultural purposes.  Included in that 5.3 acres was another 1.7 acres that accommodated his residence.  The court said the county assessor had to determine whether the principal use of the taxpayer’s land was “devoted to the raising and harvesting of crops or forest or fruit trees, the rearing, feeding, and management of livestock, or horticulture, all for intended profit.” While the county conceded some agricultural use of the property it characterized the property as a “start-up” or “hobby farm.”  The court cited questions used in prior cases to determine if real estate is primarily agricultural and noted that the property has never provided a profit from the agricultural portion of the property and if the property was for sale it would be sold as a residential property not an agricultural property. When the taxpayers bought the property, it was as a residential property and though the property is slightly over ten acres it is being surrounded by property being developed for residential property. The court said the best use of the property is for residential purposes. The biggest asset of the property is not the farmland but is the residence. The court concluded that the taxpayer was a hobby farmer, and the determination by the BOR that the property is primarily a residential property was supported by the evidence. The court found that the taxpayer failed to show genuine intent to turn a profit on the farming operation, noting that he testified the profit he realized through his farming operation came predominantly from tax savings. Regarding the challenge of the property’s valuation, the court found that the county sustained its burden to prove the valuation that was adopted by the district court. Miller v. Scott Cnty. Bd. of Review, Iowa Court of Appeals, No. 19-1038.  4/29/20

 

Commercial Trucks Not Subject to Business Property Tax

 

The Texas Court of Appeals affirmed the 44th District Court of Dallas County's judgment in favor of two Kansas-based companies.  The court found that the evidence sufficiently supported the lower court's determination that trucks owned by one company and and leased and operated by another lacked local situs in Dallas County for business personal property tax purposes.

 

The leasing company is a Kansas corporation with its headquarters and principal place of business in Liberal, Kansas, specializing in the provision of refrigerated transportation services for its parent company and other customers. The company leasing the trucks is an irregular-route carrier, meaning its drivers do not travel fixed routes on a repeated basis and the trucks operated by it are kept on the road and at any given time are scattered throughout the United States. It is possible it might service the same route more than once, but unlikely it would do so with the same truck. The lessee owns a facility in Irving, Texas used for orientation and safety, light maintenance on trucks, administration, and recruiting. Ten to twenty trucks are present at the facility at any given time for minor maintenance or to drop off trailers. No trucks are located at the facility or generally return there, and individual trucks are at the Irving facility for as little as an hour or as long as two days, but never more than a temporary period.  The leasing company is a wholly-owned subsidiary of the lessee and its headquarters and principal place of business is at the same location as the lessee in Liberal, Kansas and it has no office or other location in Texas. It owns the trucks leased to its parent and also sells and leases trucks to others. Titles to the trucks are held in Kansas, and the leasing company pays business personal property tax on the trucks in Kansas.

 

For tax year 2016, Dallas County Appraisal District (DCAD) issued a notice of appraised value to the company that operated the leased trucks for business personal property valued at over $53 million. The taxpayer filed an appeal of the appraisal, arguing that the trucks were not taxable in the county and that it did not own the trucks. The taxpayer and the chief appraiser reached a value settlement, which adjusted the appraised value to $0.  DCAD subsequently sent a supplemental notice of appraised value for the trucks to the taxpayer but intended for the leasing company. Both companies filed a protest of the notice on the same grounds as the initial protest and that the value settlement precluded the supplemental notice of appraised value. The Dallas County Appraisal Review Board (Board) denied the protest and assessed a business personal property tax value to the leasing company of over $8.7 million.  The companies filed suit seeking judicial review and the trial court found for the companies.  DCAD filed this appeal.

 

The parties agree that section 21.02 of the statute controls this case, providing the circumstances under which tangible personal property is taxable by a taxing unit. The court said that DCAD challenged the findings that the trucks were not located in Dallas County for more than a temporary period, the trucks were not normally located in Dallas County, the trucks were not normally returned to Dallas County between uses elsewhere and were not located in any one place for more than a temporary period, and that the owner of the trucks did not maintain its principal place of business in Dallas County, all requirements for taxation of the property. The court said “temporary” as used in section 21.02(a) is given its ordinary meaning, that is, lasting for a limited time and from the evidence in the record, the trial court could reasonably conclude that the trucks were not located in Dallas County for more than a temporary period. The testimony reflected that ten to twenty trucks are on the Irving Property at any given time and only there for short periods of time, as little as one hour, but never more than two days. The evidence also shows that no trucks were stationed or located at the Irving Property and were not returned to the Irving Property between assignments. The trucks continually transport freight and are not located at any specific location and the court noted that the evidence further showed that the leasing company owns the trucks and did not maintain its principal place of business in Dallas County in 2015 or on January 1, 2016. The court concluded the evidence was legally sufficient to support the trial court's judgment. DCAD argued there was a rebuttable presumption, once the taxing unit present a prima facie case, that personal property has a tax situs within the unit's jurisdiction, but the court noted that presumption disappears once evidence to the contrary is introduced and the taxpayers presented ample evidence contrary to that presumption. The court concluded the evidence was legally sufficient to support the trial court's findings of fact and judgment.  Dallas Central Appraisal Dist. et al. v. Nat'l Carriers Inc. et al., Texas Court of Appeals, No. 05-18-01520-CV.  5/5/20

 

Principal Residence Exemption Denied

 

The Michigan Court of Appeals upheld the tax tribunal's (Tribunal) denial of a taxpayer's claim for a principal residence exemption.  The court held that the married taxpayer's primary residence was in another state, where her spouse also claimed the exemption, because she and her spouse filed joint federal tax returns. The court vacated the Tribunal’s penalty assessment, ruling that it should only be assessed when an individual person tries to claim the exemption in more than one state.

 

The taxpayer and her husband own a home together as tenants in the entirety in Illinois. The taxpayer owns another home in Covert Township, Michigan, which she has owned for 42 years. She used to treat the Michigan home as a vacation home and would pay its property taxes as a nonresident, but after her children moved away and she retired, she began spending more time at the Michigan property.  She contended that for tax years 2016 and 2017, she spent most of her time at the Michigan property, and filed Michigan income tax returns as a resident with the filing status married filing separately. She claimed a principal residence exemption (PRE) for the Covert Township property for 2016 and 2017.  For those same tax years, her husband filed state income tax returns in Illinois with the status married filing separately and claimed an Illinois exemption for the couple's Illinois home. In tax years 2016 and 2017, the taxpayer and her husband filed joint federal income tax returns.

 

The Michigan Department of Treasury (Department) denied the taxpayer’s claimed PRE for 2016 and 2017 finding that she was granted a substantially similar exemption in another state and assessed a $500 penalty. The taxpayer filed an appeal, denying that she claimed or was granted a substantially similar exemption in another state in 2016 and 2017. She also noted that she and her husband filed separate state tax returns, and that her husband alone claimed and was granted an exemption in Illinois. The Tribunal upheld the denial of the PRE for 2016 and 2017, holding that while the taxpayer was eligible to claim a PRE for her Covert Township property in those years but was disqualified from doing so under MCL 211.7cc(3)(b).  The taxpayer filed this appeal.

 

The statute governing PRE provides that a married couple who are required to file or who do file a joint Michigan income tax return are entitled to not more than 1 exemption under this section and a person is not entitled to a PRE if that person has claimed a substantially similar exemption, deduction, or credit, regardless of amount, on property in another state. If a person or his or her spouse owns property in a state other than Michigan for which that person or his or her spouse claims an exemption, deduction, or credit substantially similar to the PRE, the PRE is denied unless that person and his or her spouse file separate income tax returns.

The court then turned to the question of whether the taxpayer and her husband filed “separate income tax returns” as that term is used in MCL 211.7cc(3)(b) and concluded that they did not.  The taxpayer and her husband filed separate state income tax returns, but they filed a joint federal income tax return. The court said that the plain meaning of “separate income tax returns” is that income tax returns are separate and does not limit itself to state income tax returns but encompasses all income tax returns.  The court said that if the legislature had intended to limit the meaning of “separate income tax returns ” in the section to “ separate state income tax returns,” it could have done so. The court concluded that “separate income tax returns” as used in the statute refers to both separate state and separate federal income tax returns and because the taxpayer and her husband did not file separate federal income tax returns, she was disqualified under MCL 211.7cc(3)(b) from claiming a PRE.

 

The court did disagree with the Tribunal’s assessment of the penalty against the taxpayer, finding that the Tribunal misinterpreted the statute.  The court determined that the section imposing the penalty refers to a “person” not a “taxpayer and that “person as used in the provision means a single individual. The court found that because “person” as used in MCL 211.7cc can only refer to a single individual, the penalty under MCL 211.7cc(3)(a) can only be assessed if a single individual claimed a PRE and a substantially similar exemption in another state and it is undisputed that the only exemption Maureen claimed was the PRE. Therefore, the Tribunal improperly assessed the taxpayer a penalty. Foster v. Van Buren Cnty., Michigan Court of Appeals, No. 349001; LC No. 18-003531-TT.  4/30/20

 

 

Other Taxes and Procedural Issues

 

Worker Classification Appeal Upheld

 

The New York Supreme Court, Appellate Division, Third Judicial Department, ruled that the Unemployment Insurance Appeal Board (Board) properly found that a taxpayer failed to rebut a statutory presumption of employment under New York's labor law.  The court affirmed that the taxpayer, a theater company, was liable for additional tax contributions on compensation paid to individuals determined to be employees rather than independent contractors.


The taxpayer is a nonprofit, off-Broadway theater company that produces plays written and directed by women. Following an audit of its records and books, the Department of Labor (Department) concluded that it owed additional tax contributions on remuneration paid to certain individuals whom it had treated as independent contractors. The taxpayer appealed and an informal conference was held, and a revised audit figure was computed.  A hearing was held on the issue of the characterization of certain workers. An Administrative Law Judge (ALJ) largely ruled in favor of the taxpayer, finding that with the exception of teaching artists the statutory presumption of employment embodied in Labor Law § 511(1)(b)(1-a) either did not apply or had been successfully rebutted.  The ALJ determined that the record did not otherwise demonstrate that the taxpayer exercised sufficient direction and control over the contested categories of workers to render them employees. The Commissioner of Labor (Commissioner) appealed to the Board, challenging the ALJ's decision with respect to the categories of artistic advisors, casting directors, designers, directors/choreographers and lab artists and the Board modified the ALJ's decision as to those categories of workers, finding that the taxpayer failed to rebut the statutory presumption of employment,.  The Board upheld the additional tax contributions imposed upon the taxpayer based upon remuneration paid to workers in those categories during the audit period. The taxpayer applied for reconsideration/reopening and the Board reopened the matter, made additional findings and otherwise adhered to its prior decision. The taxpayer filed this appeal.

 

The court began by finding any assertion by the taxpayer that it either was unaware that the statutory presumption set forth in Labor Law would be applied to this matter or was not afforded a full opportunity to tender proof in this regard was belied by the record. The Department invoked the cited statutory provision as early as July 2010, and the ALJ stated at the administrative hearing that the taxpayer could submit whatever documents it wanted in support of its position. The court said the fact that the taxpayer elected to proceed utilizing a sampling of representative individuals and/or agreements for workers in the contested categories did not deprive it of an opportunity to fully develop the administrative record.

 

The court then turned to the merits of the case and cited the statutory provision that defined employment, in relevant part, as "any service by . . . a person otherwise engaged in the performing arts, and performing services as such for a . . . theatre . . . unless, by written contract, such . . . person is stipulated to be an employee of another employer covered by this chapter." The court noted that the statute further provides that the phrase "'[e]ngaged in the performing arts' shall mean performing services in connection with the production of or performance in any artistic endeavor which requires artistic or technical skill or expertise."

The court said the statute, which was designed to extend the availability of unemployment insurance and workers' compensation benefits to those in the performing arts, created a rebuttal presumption of employment. The taxpayer did not dispute that the workers in each of the contested categories provided various services for it in its capacity as a theatre company and, in so doing, were engaged in the performing arts by virtue of the artistic or technical skill and/or expertise that they provided. The contested categories of workers, therefore, fell within the statutory definition of employment unless the taxpayer came forward with sufficient evidence to rebut the statutory presumption. The taxpayer argued that it met its burden, relying on written agreements entered into with individuals in certain of the contested categories, as well as checklists prepared by individuals rendering services in the categories at issue. The court noted that although the written agreements indicated that the individuals in question were providing services as independent contractors or freelance artists, none of the subject agreements stated that the individuals were employees of another covered employer.

The court found that, based upon a fair reading of the written agreements, it could not conclude that the "clear import" of the agreements reflected that the workers at issue were the employees of another covered employer. The court also determined that the checklists could not cure the deficiencies in the written agreements, as the agreements provided that they could be modified only by a writing signed by both parties and the checklists were signed only by the relevant worker. Accordingly, the court concluded the Board rationally concluded that the taxpayer failed to rebut the statutory presumption of employment. Women's Project & Prods. Inc. v. Comm'r of Labor, New York Supreme Court, Appellate Division,  2020 NY Slip Op 02509.  4/30/20

 

 

 

 

 

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].

 

STATE TAX HIGHLIGHTS
A summary of developments in litigation.

Published biweekly by the Federation of Tax Administrators
Also available at the FTA Member website at:
http://www.taxadmin.org

December 13, 2019 Edition


NEWS


Georgetown University Law Center Partners with MTC

April 1, 2020 is the deadline to qualify for the tuition discount now available through the MTC for state and local tax government lawyers and qualified tax professionals (“government employees”) applying for Fall 2020 admission to the Georgetown University Law Center’s Tax online distance education programs. Membership in MTC is not a precondition of enrollment. For details concerning eligibility, among other things, see https:// http://www.mtc.gov/The-Commission/News/Georgetown-University-Law-Center-Partners-with-MTC.

Court Rejects Appeal in Interest Dividends Case

The California Supreme Court will not review an appellate court decision upholding the taxation of dividends from a regulated investment company (RIC) that received interest income from holdings of government bonds. This decision lets stand the decision of the California Court of Appeal, Second District, that the taxation of the dividends did not violate the state constitution’s provision exempting interest on bonds issued by the state or a local government in the state. See the FTA’s legal database for a discussion of that decision.

Under the state’s statute a RIC may pay exempt interest dividends to its shareholders if at least 50 percent of the value of its total assets at the close of each quarter of its tax year consists of obligations that the interest from which is exempt. The taxpayers owned shares in a RIC that received 12.41 percent of its interest income from holdings in California municipal bonds and received dividends derived from interest from their investments in the RIC during the 2010 tax year. They protested an assessment arguing that the statute conflicted with Article XIII, section 26(b), of the state constitution by taxing interest income on government bonds. The FTB contended that the bond interest lost the exemption when it was distributed to the taxpayers as a dividend of the RIC.

 

U.S. SUPREME COURT UPDATE

No cases to report.

FEDERAL CASES OF INTEREST

Railroad Fuel Tax Suit Concludes

The United States District Court for the Northern District of Alabama, Southern Division, issued an order in CSX Transportation Inc. v. Alabama Department of Revenue holding that the state must exempt CSX from the fuel tax purchased while engaged in interstate commerce, as long as it exempts water carriers from the tax. See the FTA’s legal database for a discussion of the prior decisions in this matter.

The U.S. Court of Appeals for the Eleventh Circuit remanded this matter to the district court with instructions to enter declaratory and injunctive relief in favor of CSX Transportation, Inc. (CSX) consistent with its opinion in CSX Transportation, Inc. v. Alabama Department of Revenue, 888 F.3d 1163 and 891 F.3d 927 (11th Cir. 2018). In accordance with those opinions, the district court declared that, as long as the State of Alabama retains the sales and use tax exemption in the statute for diesel fuel used by water carriers engaged in foreign or international commerce or in interstate commerce, the Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) forbids it from imposing on CSX the sales and use tax under the state statute on diesel fuel purchased or used by CSX while “engaged in foreign or international commerce or in interstate commerce.” The court order further enjoined the state DOR from assessing, levying, or collecting from CSX sales and use taxes on diesel fuel purchased or used by CSX while engaged in foreign or international commerce or in interstate commerce. The court also noted that it had been informed that, in order to avoid further litigation, CSX and the DOR had entered into an agreement to resolve what portion of diesel fuel used by CSX should be deemed as affecting only intrastate commerce and therefore subject to taxation without violating this injunction. CSX Transp. Inc. v. Alabama Dep't of Revenue, U.S. District Court for the Northern District of Alabama, Southern Division, Case No.: 2:08-cv-00655-AKK. 12/9/19

Tobacco Company Violated PACT Act

The United States Court of Appeals for the Second Circuit has found a tobacco company that shipped untaxed cigarettes from a Native American reservation in Washington to several reservations in New York violated the Prevent All Cigarette Trafficking Act (PACT Act) by selling tobacco in interstate commerce. This decision affirmed a lower court's decision which barred the company from making any more similar shipments. The decision also permitted the state to ask for civil penalties and damages.

The taxpayer shipped unstamped and untaxed cigarettes from the Yakama Indian Reservation in Washington State to certain Indian reservations in the State of New York and New York filed this action to enjoin the taxpayer from making these shipments, arguing that they violate state and federal law. The action also requested additional relief including civil penalties and damages. The U.S. District Court for the Eastern District of New York granted partial summary judgment for the State and the taxpayer filed this appeal, contending that the state’s enforcement violates the dormant Commerce Clause and the injunction amounted to state regulation of commerce between Indian nations in violation of federal Indian protections. The State cross‐appealed from the district court's dismissal on summary judgment of its claims under two federal statutes, the PACT and the Contraband Cigarette Trafficking Act (CCTA).
The State argued that the taxpayer’s cigarette shipments were “interstate commerce” as defined by the PACT Act, and that the taxpayer did not enjoy the CCTA's exemption for “an Indian in Indian country.”

The New York State Department of Taxation and Finance (Department) uses a “stamping” system to pre-collect certain state and local cigarette taxes. State law requires that all cigarettes “possessed” for sale in the state bear a stamp evidencing payment of the applicable taxes, and that all cigarettes delivered into the state be sent initially to state‐licensed stamping agents, who purchase tax stamps, affix them to cigarette packages, and pass on the taxes to consumers by incorporating the stamps' value into cigarette resale prices. The taxpayer is a manufacturer and seller of cigarettes, organized under the laws of the Yakama Nation, with its principal place of business on the Yakama reservation, situated within the boundaries of Washington State. In 2012 and 2013, state investigators purchased unstamped cartons of the taxpayer’s cigarettes from smoke shops on the Poospatuck Indian Reservation in Mastic, New York and in 2013 from a smoke shop on the Cayuga Nation reservation in Union Springs, New York. In December 2012, state troopers seized 140 cases of unstamped cigarettes from the taxpayer from a truck in Clinton County, New York, which was enroute to the Ganienkeh Nation in Altona, New York. The State alleged that the taxpayer unlawfully delivered millions of unstamped cigarettes into New York since 2010 and asserted claims under various provisions of state law.

The taxpayer argued that the State violated the dormant Commerce Clause by enforcing its tax laws only against non‐New York Indian cigarette manufacturers, thus unconstitutionally discriminating against out‐of‐state Indian cigarette manufacturers. The court noted that the taxpayer did not contend that New York's tax statutes are discriminatory on their face and said there was no decision of the Court standing for the proposition that discriminatory enforcement of a nondiscriminatory state law violates the dormant Commerce Clause. The court said that the lack of universal enforcement did not bespeak discrimination. The taxpayer cited decisions in two other circuits, but the court concluded that they did not support the taxpayer’s arguments and determined that the taxpayer failed to establish a violation of the dormant Commerce Clause.

The court also dismissed the taxpayer’s argument that the State's claim was barred by res judicata by virtue of prior state administrative proceedings, resulting from an assessment that was issued against the taxpayer for unstamped cigarettes. The district court ruled that a state investigator's purchase of unstamped King Mountain cigarettes in November 2012 arose out of a different underlying factual transaction than the December 3rd Inspection, namely, the purchase of unstamped cigarettes at a smoke shop on the Poospatuck Reservation in Suffolk County rather than the search and seizure of a truck of unstamped cigarettes in Clinton County. The lower court ruled that because a common carrier was used to transport the cigarettes to Indian reservations and Indian‐owned businesses in New York, the taxpayer did not “possess” unstamped cigarettes in the State of New York and therefore did not violate the statute, but did find that the taxpayer violated the statute by admittedly failing to sell its cigarettes directly to a licensed stamping agent. The taxpayer argued that the statutory requirement to sell cigarettes to licensed stamping agents applies only to “wholesalers,” not manufacturers such as the taxpayer. which is a “wholesale dealer.” The court said that even if it accepted, arguendo, that a distinction between a “wholesaler” and a “wholesale dealer” was decisive under the applicable statutes, the taxpayer’s admissions establish that it violated the implementing regulations of the statute. The court noted that the taxpayer had conceded that it is a wholesale dealer under the statute, that it is not a licensed stamping agent, and that it sold unstamped cigarettes directly to Indian tribes and companies owned by tribe members, actions clearly in violation of the implementing regulations which require that all cigarettes sold by agents and wholesale dealers to Indian nations or tribes or reservation cigarette sellers located on Indian reservations must bear a tax stamp.

The taxpayer argued on appeal that the relevant New York statutes violate the Indian Commerce Clause and the Yakama Treaty of 1859, and are thus preempted by federal law.
The Indian Commerce Clause grants the United States Congress the power to regulate commerce with the Indian tribes and the taxpayer contended that this power belongs exclusively to Congress, and that the district court's ruling impermissibly allows New York to burden Indian‐nation‐to‐Indian‐nation trade. Prior decisions in this area have held that the legal incidence of New York's tax falls on non‐Indian consumers, and, therefore, whatever its economic impact, the tax is not categorically barred by the Indian Commerce Clause. Prior decisions have also concluded that New York's stamping regime does not place an undue burden on tribal retailers. The court acknowledged that the Yakama Nation Treaty of 1855 preserves the Yakama people's right to travel all public highways but found that right is not at issue in this case because the taxpayer did not transport cigarettes within New York, but instead utilized a common carrier.

The lower court determined that all the relevant King Mountain cigarette sales were made from King Mountain's location on the Yakama reservation to Indian reservations within the boundaries of New York. The State argued that the district court erred by ruling that the PACT Act's definition of “interstate commerce” excludes sales that begin and end on Indian reservations located within the borders of different states and the court agreed. The court concluded that the district court's view that the terms “Indian country” and “State” in the PACT Act are mutually exclusive was inconsistent with the statute's definition of “State” as “each of the several States of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States,” and noted that as a general rule, this definition includes Indian reservations within the States. The court agreed with the State that Congress's decision to separately define “Indian country” and “State” in the PACT Act evidences Congressional intent to expand the traditional understanding of “interstate commerce” rather than narrow it. New York v. King Mountain Tobacco Co. et al., U.S. Court of Appeals for the Second Circuit, No. 17-3198(L); No. 17-3222(XAP). 11/7/19

DOR Can’t File Involuntary Bankruptcy for Taxpayer with Disputed Debt

The United States Court of Appeals for the Ninth Circuit held that the Montana Department of Revenue (DOR) could not use the portion of an assessment that the taxpayer did not dispute to qualify as a petitioning creditor and file involuntary bankruptcy proceedings against the taxpayer. The court affirmed the lower courts’ decisions that the DOR lacked standing to commence the proceedings.

The taxpayer is the co-founder of the private ski resort Yellowstone Mountain Club. DOR commenced an audit of the taxpayer for tax years 2002 through 2006 and in 2009 issued a notice of deficiency assessing tax, interest and penalties, including tax assessed on a disallowed deduction the taxpayer claimed for the environmental penalty payment made by a pass-through entity in the 2004 tax year in the amount of approximately $200,000. The taxpayer worked with DOR in an informal review process during which he conceded the environmental penalty payment, but disputed the remaining audit issues, and provided additional information and materials to DOR. In light of the additional information provided, DOR adjusted its original audit assessment. The taxpayer filed an appeal to the State Tax Appeals Board (Board), disputing all audit issues with the exception of the environmental penalty payment. While the taxpayer’s appeal was pending before the Board DOR, along with two other entities, initiated involuntary bankruptcy proceedings against the taxpayer, each asserting claims for unpaid taxes and penalties and interest. DOR’s claim consisted of the taxes, penalties, and interest purportedly flowing from the audit issue of the environmental penalty payment. The other entities subsequently entered into settlement agreements with the taxpayer and withdrew as petitioning creditors. The taxpayer moved to dismiss the bankruptcy proceedings on the ground that the petitioning creditors' claims were the subject of bona fide disputes.

Following a hearing, the bankruptcy court entered an order granting the taxpayer’s motion to dismiss. The bankruptcy court acknowledged that no party contested that the petitioning creditors collectively held unsecured claims exceeding the statutory minimum amount to initiate an involuntary bankruptcy or that their claims were non-contingent. Thus, the only issues before the court were whether the taxpayer had more than eleven creditors on the petition date, necessitating three qualified petitioning creditors and whether the petitioning creditors' claims were subject to bona fide disputes as to liability or amount. The bankruptcy court evaluated the petitioning creditors' standing. The court looked to DOR, Idaho, California, and Yellowstone's claims and determined that Idaho and California's claims were subject to bona fide disputes as to liability or amount. Thus, at least two of the four petitioning creditors lacked standing. The court then looked at DOR's claim and noted that DOR contended that it had over $50 million in claims against the taxpayer, and at the time most of those claims were disputed. The court said that DOR had not shown that it was authorized to create a separate liability for the environmental penalty or if authorized that it took the proper steps to create that separate liability. The taxpayer’s remaining liability for the 2004 tax year was disputed, and thus, DOR's claim was the subject of a bona fide dispute. The bankruptcy court granted summary judgment in favor of the taxpayer. DOR filed an appeal to the district court, and the district court affirmed the bankruptcy court's grant of summary judgment. DOR filed this appeal.

The federal statute provides that to commence involuntary bankruptcy proceedings against a debtor, a creditor must be a holder of a claim that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount. The court said the issue here was whether DOR's claim for the 2004 tax year was subject to a bona fide dispute as to amount notwithstanding the taxpayer’s concession that the deduction for the environmental penalty was improper. The bankruptcy statute was amended in 1984 addressing the risk of creditors using bankruptcy to force debtors into paying legitimately disputed debts as an alternative to resolving the disputed claims through other means. The amendment, however, did not define the phrase “bona fide dispute.” In 2005 the statute was amended to clarify that a creditor’s
claim must not be the subject of a bona fide dispute “as to liability or amount.” Following the 2005 amendment, courts have been evenly split on whether a dispute as to any portion of a claim means there is a bona fide dispute as to the amount of the claim. The court agreed with other circuits' adherence to the statute's plain meaning and held that a creditor whose claim is the subject of a bona fide dispute as to amount lacks standing to serve as a petitioning creditor even if a portion of the claim amount is undisputed. The court said that although a portion of DOR's claim was undisputed on the petition date, the vast majority of its claim remained disputed. As a result, DOR's claim was the subject of a bona fide dispute as to amount. Montana Dep't of Revenue v. Blixseth, U.S. Court of Appeals for the Ninth Circuit, No.18-15064. 11/26/19


DECISION HIGHLIGHTS

Sales and Use Tax Decisions

Company not Entitled to Sale-for-Resale Exemption

The Texas Court of Appeals denied a taxpayer’s refund claim for sales tax paid on its purchases of coin-operated gaming equipment concluding that the company did not "transfer" its coin-operated gaming equipment to customers who pay to play or ride the machines at its restaurants. The court found that the taxpayer did not qualify for the state's sale-for-resale exemption.

The taxpayer owns and operates restaurants in the state which provide food, beverages and entertainment, including coin-operated machines. Between March 2007 and April 2013, the taxpayer purchased and paid sales taxes on coin-operated game equipment and component parts for use in its restaurants in the state and subsequently filed refund claims with the Comptroller. arguing that its purchases of coin-operated machines and component parts are exempt from the imposition of the sales tax under the Tax Code's “sale for resale” exemption.
The Comptroller denied the refund claims and the taxpayer filed an appeal in the county district court. The court found for the Comptroller and the taxpayer filed this appeal.

The court said there was no dispute that the coin-operated machines were tangible personal property typically subject to sales tax unless otherwise specifically exempt in the statute.
The statute provides that the sale for resale of a taxable items is exempt from the tax. “Sale for resale” includes, in pertinent part, the acquisition of property for the purpose of reselling it in the normal course of business or for the purpose of transferring it as an integral part of a taxable service. The taxpayer argued that reading the provisions regarding “sale for resale” and “sale or purchase” together it was entitled to the sale-for-resale exemption because it “transfers” the coin-operated machines to its customers as an integral part of its amusement service. Citing case law, the court said that in the context of the statute’s sale-for-resale exemption, it has determined “transfer” means to make over or negotiate the possession or control of property for a consideration. The court found that, based on the record before it, the taxpayer’s patrons had neither “control” nor “possession” over the coin-operated gaming equipment. The court said that while the taxpayer argued that the customers' use of the coin-operated machines to ride or play a game constituted control, it was the taxpayer that determined the predominant features of the machines and their use, including the volume, length of play time and skill level. The customers must use the games and their settings as they are presented by the taxpayer and are not allowed to change any of the equipment's settings, even when they have paid to play or ride. It is also the taxpayer that determines where the equipment is placed, and customers are not allowed to move the equipment, even when they have paid to play or ride. Customers do not have access to the equipment outside of the taxpayer’s operating hours. The taxpayer’s employees are responsible for maintaining, cleaning, and repairing the coin-operated machines and their component parts and the employees also supervise customers' use of the coin-operated machines and, if necessary, correct inappropriate behavior.

The court rejected the taxpayer’s economic reality argument, finding that the taxpayer misconstrued the doctrine, which simply provides that in the area of tax law a plain-meaning determination should not disregard the economic reality underlying the transactions in issue.
The court found that the reality underlying the transactions at issue in this matter was that the taxpayer did not “transfer” its coin-operated gaming equipment to customers who pay to play or ride those machines, but simply allows them access to the games or rides provided by that equipment on the taxpayer’s terms. CEC Entm't Inc. v. Hegar, Texas Court of Appeals, No. 03-18-00375-CV. 12/5/19


Court Affirms Taxation of Out-of-State Chemical Purchases

The Illinois Supreme Court upheld an appellate court judgment that affirmed the imposition of use tax on a company's out-of-state purchases of metallurgical coke. The court found that the taxpayer's purchases were not eligible for the use tax chemical exemption. The court, however, the penalties associated with the assessment.

The taxpayer is a Delaware corporation with its primary place of business in Pittsburgh, Pennsylvania and has a manufacturing facility located in Illinois, where it operates a zinc refining facility. The Department of Revenue (DOR) issued the taxpayer notices of tax liability related to its out-of-state purchases of metallurgical coke, a solid material consisting almost entirely of carbon, for which it had not paid any state use tax. The taxpayer filed a petition for hearing with the state’s Independent Tax Tribunal (Tribunal), arguing that it was. exempt from paying use tax on the coke under a statutory exemption for machinery and equipment used primarily in the manufacturing of tangible personal property. The taxpayer relied upon the “chemical exemption” found in the definition of “equipment” that includes certain chemicals that are exempt from paying use tax. That definition provides that equipment includes chemicals but only if the chemicals effect a direct and immediate change in the product being manufactured or assembled.

The facts show that at its state facility the taxpayer is primarily in the business of recovering zinc from electric arc furnace dust (EAF dust) generated by steel mill producers. Under a process referred to as the “Waelzing process,” based on the Waelz kiln in which it takes place, rotary kilns are used to reduce and recover the zinc as crude oxide. As part of this overall manufacturing process, the taxpayer purchases metallurgical coke outside of the state. Prior to the start of the Waelzing process, the EAF dust is converted into pellet form and the coke can either be mixed into the EAF dust pellets or can be added separately. The furnace dust and coke mixture is fed into the rotary kiln and the process requires the heating of the coke in order to release the carbon in the coke. At the hearing before the Tribunal, the taxpayer called three witnesses to explain the Waelzing process and these witnesses established that the overall Waelzing process takes approximately two-and-a-half hours with virtually all of the coke consumed in the process. All three witnesses testified that carbon monoxide, not carbon from the coke, is the agent that reduces EAF dust to zinc oxide and iron oxide. The tribunal issued a decision affirming the two notices of tax liability, concluding that the coke did not qualify for the claimed exemption because, in the Waelzing process, the coke does not effect a direct and immediate change upon the product being manufactured. The Tribunal found that the coke did not react with zinc or zinc oxide directly and immediately. The Tribunal also upheld the late payment and late filing penalties imposed by the DOR. The taxpayer filed an appeal with the appellate court which affirmed the Tribunal’s final order, finding that the Tribunal’s conclusion that the coke did not effect a direct and immediate change on the zinc and iron in the EAF dust was supported by the evidence presented at the hearing. The appellate court also held that the Tribunal's finding that the taxpayer was not entitled to abatement of penalties was not against the manifest weight of the evidence. The taxpayer filed this appeal.

The court said the issue here is whether the tax tribunal properly found the taxpayer was not entitled to the statutory use tax exemption because the coke did not effect a direct and immediate change on the manufactured product. Under state law, taxation is the rule, and exemption is the exception and the burden of establishing entitlement to a tax exemption rests upon the party seeking it. The taxpayer argued that it was entitled to the use tax chemical exemption because the coke it uses in the manufacturing process has the necessary “direct and immediate change” on the zinc and iron products it sells and contended that the Tribunal's interpretation and application of the provision was overly restrictive and improperly prohibited all “intervening factors or intermediate steps.” The court turned to the language of the statutory exemption for manufacturing and assembling machinery and equipment, noting that the definition of “equipment” included certain chemicals. The court reviewed the rules of statutory construction, including the fundamental rule of statutory interpretation is to ascertain and effectuate the legislature’s intent. The court said it found the terms “direct” and “immediate” in section at issue to be clear and unambiguous, so there was no need to resort to other aids of statutory construction. The court said that to be eligible for the use tax chemical exemption, the coke used by the taxpayer in the manufacturing process must effect a change on the zinc and iron in the EAF dust at once and without any intermediate steps.

The court rejected the taxpayer’s argument that the definition of “proximate cause” should be used to define “direct” in the statute, saying that the legal phrase is a tort concept that appears nowhere in the pertinent section and the court cannot simply graft the term “proximate cause” onto the statute. The tax tribunal concluded that the coke did not qualify for the exemption because it did not directly and immediately cause a change to the zinc or iron being sold by the taxpayer and the court noted that the taxpayer’s own witness acknowledged that simply placing coke next to the solid oxide would not create any chemical reaction. The court found that at no time in the described chemical processes and reactions does the coke have a direct and immediate effect on the zinc or iron being manufactured. The court found that based upon the plain language of the statute, the legislature chose to limit the exemption to only those chemicals that effect a “direct and immediate change” on the final manufactured product and given that tax exemptions are to be strictly construed, any doubts concerning the applicability of such an exemption must be resolved in favor of taxation. The court held that the Tribunal did not commit clear error in determining that the taxpayer’s coke purchases did not qualify for the use tax chemical exemption.

The taxpayer also argued that the Tribunal's conclusion that it was not entitled to abatement of late payment and late filing penalties was against the manifest weight of the evidence. The court noted that the existence of reasonable cause justifying abatement of a tax penalty is a factual determination that is to be decided on a case-by-case basis. DOR’s regulation on what should be considered as reasonable cause to avoid penalties provides that all pertinent facts and circumstances should be taken into account, but an important factor was the extent to
which the taxpayer made a good faith effort to determine his proper tax liability and to file and pay his proper liability in a timely fashion. The court note that the taxpayer had shown good conduct in complying with its tax obligations and it acted in good faith when it failed to pay the use tax on the coke. The court also noted that the Tribunal acknowledged that the term “direct and immediate change” in the use tax chemical exemption has no specific statutory definition and there was no case law in existence at the time of the audit that the taxpayer could have used for guidance. The court recognized the unique factual circumstances surrounding the manufacturing process at issue in this case and found the Tribunal's decision to uphold DOR’s imposition of late payment and filing penalties was against the manifest weight of the evidence. Horsehead Corp. v. Dep't of Revenue, Illinois Supreme Court Docket No. 124155. 11/21/19


Personal Income Tax Decisions

Fund Manager Can Claim Credit for Taxes Paid to New York

The Connecticut Supreme Court ruled that the revenue commissioner had not challenged one of the two grounds that the trial court concluded entitled a Connecticut resident who managed a New York hedge fund to claim a credit for income taxes paid to New York on income from the hedge fund. The court found that the failure to do so required the appeal to be dismissed.

The taxpayer resided in Connecticut but worked in New York and was a member of a limited liability company (LLC) which served as the general manager for two limited partnerships. The taxpayer sought income tax credits on his Connecticut return for nonresident income taxes paid to New York on the distributive share of profits he received for managing the two limited partnership which operated as hedge funds and primarily traded their own stock index options. They paid the LLC a share of their profits for the LLC’s services and the LLC allocated to the plaintiff his distributive share of those profits. In 1997 and 1998, the taxpayer reported the income he received from the LLC as capital gains on his New York state income tax returns, paid taxes on that income to New York, and sought a credit against his Connecticut resident income taxes for the taxes he paid to New York, pursuant to a statutory provision that allows a resident of this state to receive a credit against nonresident income tax paid to another state when the nonresident income being taxed would otherwise be subject to taxation in Connecticut. The Commissioner of Revenue Services (Commissioner) disallowed the credit reasoning that the taxpayer’s income must be treated as if it derived from trading intangible property for his own account because the limited partnerships were trading their own intangible property and the character of the partnerships’ income passed through to the income of their general partner. The Commissioner noted that Connecticut does not tax nonresidents on income from the trading of intangible property for the nonresident’s own account. The taxpayer filed an appeal and the trial court held for the taxpayer, concluding that the taxpayer was not trading intangible property for his own account but was engaging in the trade or business of trading intangible property owned by others, and even if the taxpayer was trading intangible property for his own account, he nonetheless must be deemed to have been engaged in a trade or business, on the basis of the frequency and volume of his trading activity. The trial court concluded, on the basis of either of those two grounds, that the taxpayer would be taxed in Connecticut on such income and, therefore, that he was entitled to the credits that he sought for the nonresident income taxes he paid to New York. The Commissioner appealed, claiming that the trial court incorrectly concluded that the taxpayer was not trading intangible property for his own account.

The court concluded that the Commissioner’s appeal was moot because he challenged only one of the trial court’s two independent bases for its determination that the taxpayer was entitled to the income tax credits he sought and dismissed the appeal. The Commissioner conceded that he challenged the trial court’s judgment only on the issue of whether the taxpayer was trading intangible property for his own account. The court rejected the Commissioner’s argument that the trial court determination that under prior case law the taxpayer was deemed to have been engaged in a trade or business on the basis of the frequency and volume of his trading activity did not constitute an alternative independent basis for its decision. Sobel v. Comm'r of Revenue Servs., Connecticut Supreme Court, SC 20215. 11/15/19


Corporate Income and Business Tax Decisions

DOR Failed to Properly Notify LLC of Assessments

The Indiana Tax Court held that a limited liability company was entitled to a refund of its filing fee and the entire amount levied by the Department of Revenue (DOR) for withholding tax, a collection fee, and a bank fee. The court found that DOR failed to properly notify the taxpayer of its assessments in accordance with state code.

The undisputed facts show that the taxpayer, during the period at issue, was located at 155 East Market Street, Suite 860, Indianapolis, Indiana 46204 (Suite 860 address). The company had no employees and had not paid wages to any individual since the third quarter of 2009 and, as a result, stopped result, stopped filing withholding tax returns in 2009. The taxpayer did not, however, close its withholding registration account with the DOR until several years later. On March 23, 2015, DOR issued a Proposed Assessment to the taxpayer for over $2,000 of withholding tax, interest, and penalties for the period at issue and sent the Proposed Assessment to the address of the taxpayer’s former attorney-in-fact, Summit PM, LLC (Summit), at 241 North Pennsylvania Street, Indianapolis, Indiana 46204-2405. Summit forwarded the Proposed Assessment to the taxpayer. On April 29, 2015, the taxpayer’s owner filed an Indiana Business Tax Closure Request form with DOR, requesting that it close the company's withholding registration account because it had no employees. The DOR did not process the closure form because it lacked supporting documentation and was not notarized.
On June 15, 2015, DOR converted the Proposed Assessment into a Demand Notice that provided the taxpayer had ten days to pay over $2,500 of withholding tax, interest, and penalties and sent the Demand Notice to the taxpayer at the Pennsylvania Street address.
After the taxpayer failed to pay the liability, DOR on July 13, 2015 converted the Demand Notice into a Tax Warrant for the full amount of the tax, interest, penalties, and collection fees and sent the Tax Warrant to the taxpayer at the Pennsylvania Street address and filed it with the clerk of the county circuit court. Two days later, DOR’s collection agent filed a duplicate tax warrant with the county clerk for over $3,000 of withholding tax, interest, penalties, collection fees, clerk's costs, and damages. Nearly a year later, DOR’s collection agent levied $1,711.30 from the taxpayer’s bank account. As a result, the bank charged the taxpayer a $100.00 fee. On October 13, 2017, the taxpayer sent a letter to the DOR requesting a refund of any assets and/or money that has been seized because its closure form showed that it was no longer required to be registered for withholding tax as of December 31, 2009. The taxpayer followed up that letter with filing another closure form that was notarized and DOR closed the taxpayer’s withholding account. The taxpayer subsequently filed a refund claim for the amount levied plus the bank fee and the claim provided that its mailing address was 155 East Market Street, Suite 750, Indianapolis, Indiana 46204 (Suite 750 address), not the Suite 860 address. On January 30, 2018, the DOR sent a letter to the taxpayer at the Suite 750 address, requesting that it submit additional information so that the DOR could complete the processing of its refund claim. On February 20, 2018, after the taxpayer failed to submit the requested information, the DOR denied its refund claim. On March 22, 2018, the taxpayer filed a protest, claiming that its refund claim was “wrongfully denied” because it never received the DOR’s January 30 letter and the DOR did not have the authority to collect the withholding tax in the first place. DOR held a hearing and issued a Letter of Findings that sustained the taxpayer’s protest in part and denied it in part. The final determination explained that although the taxpayer established it was entitled to a refund of the amount attributable to the withholding tax assessment, it failed to show it should recoup the collection and bank fees because nothing indicated that the DOR failed to follow proper procedures. The taxpayer filed this appeal, arguing that DOR failed to provide it with adequate notice of its purported withholding tax liability as required by statute. The taxpayer also sought damages in addition to attorney's fees pursuant to the state statute.

The parties agreed that the crux of the issue before the court was whether DOR’s Withholding Notifications were valid because they were issued in conformance with the notice requirements under the state statute. If DOR’s Withholding Notifications are valid, then its final determination is correct, and the DOR is entitled to judgment as a matter of law. If, however, the DOR’s Withholding Notifications are invalid, then the taxpayer is entitled to a full refund because all of the fees arising from the DOR taking the Demand Notice to the Tax Warrant stage are likewise invalid.

During the period at issue, the state statute provided that DOR shall send a person notice of the proposed assessment through the U.S. mail and the person has ten days from the date DOR mails the notice to either pay or show reasonable cause for not paying. The statute further provided that when DOR issues a tax warrant, it may not file the warrant with the circuit court clerk of any county in which the person owned property until at least twenty days after the demand notice was mailed to the taxpayer. The court found the language here to be clear. While DOR was required to provide the taxpayer with notice of the Withholding Notifications through the U.S. mail, it did not need to provide it with actual notice to satisfy the statutory notice requirements. The court noted that the statute id not, however, prescribe where DOR was to mail the notices or whether a taxpayer has a duty to inform DOR of its current mailing address. The court said the question here was whether DOR’s mailing of the taxpayer’s Withholding Notifications to the Pennsylvania Street address, under these specific facts, comported with basic principles of fairness and justice, i.e., was the mailing reasonably calculated to apprise the taxpayer of the Withholding Notifications.

DOR maintained that it complied with all applicable statutory notice requirements because the facts show that it provided the taxpayer with notice and multiple opportunities to avoid the bank levy by sending the Withholding Notifications to the best address in its files, i.e., the Pennsylvania Street address. DOR argued that because taxpayers may authorize any number of individuals to receive their tax information, it should be able to rely on the contact information in its possession as well as any updated address information provided to DOR by taxpayers themselves. DOR claimed that the de facto attorney’s Pennsylvania Street address was the taxpayer’s most recent filing in its possession and it never provided DOR with an updated address after it terminated its relationship with the attorney.

The court noted, however, that the designated evidence did not show that DOR relied on “the most recent filing its possession” for purposes of complying with the statutory notice requirements in the code and also pointed out that the power of attorney was for the period of 2006 through 2009 only. The court found that even though the de facto attorney continued to serve as the taxpayer’s property manager until 2013, the designated evidence does not establish that the property manager was authorized to represent the taxpayer in tax matters beyond the 2006 through 2009 tax years. The court also said that DOR had not identified any legal authority that allowed it to satisfy the statutory notice requirements by sending the Withholding Notifications to an entity that was not authorized to receive them.

The court rejected DOR’s argument that these facts should be overlooked because the taxpayer failed to notify DOR it had no employees when it stopped filing the required returns in 2009 and it filed a defective closure form after it had notice of the withholding liability.
The court pointed out that the evidence indisputably showed that the power of attorney form contained the taxpayer’s correct mailing address and limited the de facto attorney’s representation to the 2006 through 2009 tax years. As a result, the court found for purposes of the notice provisions the taxpayer did not need to update its mailing address with DOR or advise DOR that it had no employees in 2009 or that Summit's tenure as its property manager concluded in 2013. The court also determined that even if actual notice were required, the evidence did not reasonably indicate that the taxpayer received actual notice of the Demand Notice or the Tax Warrant. When the taxpayer’s owner received the Proposed Assessment from the de facto attorney, he promptly filed the first closure notice with DOR, which contained its appropriate mailing address, in an attempt to halt the entire assessment process.
The court concluded that the only reasonable inference to be drawn from the facts is that the taxpayer did not receive actual notice of the rejected Form BC-100, the Demand Notice, or the Tax Warrant because if it had, it would have attempted to follow-up with DOR in some manner, just as it did when it received the Proposed Assessment. The court also found that DOR had not designated any evidence or provided persuasive argument to explain why it was overly burdensome to send the Withholding Notifications to the taxpayer’s address on the power of attorney form, a form that DOR both maintains in its records and requires taxpayers to file before disclosing their confidential tax information to other entities. The court rejected the taxpayer’s demand for attorney’s fees finding that it failed to raise the issue in a timely manner. Crown Prop. Grp. LLC v. Dep't of Revenue, Indiana Tax Court, Cause No. 18T-TA-00027. 11/13/19


Property Tax Decisions

Reduction in Value of Ethanol Plant Upheld

The Nebraska Supreme Court affirmed the reduction in value of an ethanol plant by the Tax Equalization and Review Commission (Commission). The court found that the Commission's decision was supported by competent evidence and was not arbitrary, capricious, or unreasonable.

The taxpayer owned an ethanol plant on commercial real estate in the state. The county assessor assessed the value of the property for the 2017 tax year and the taxpayer filed a protest to the county Board of Equalization (BOE). At the hearing on the matter, the taxpayer did not present evidence, and the BOE affirmed the assessment. The taxpayer appealed to the Tax Equalization and Review Commission (TERC). The county used the mass appraisal method for its appraisal of the subject property. The appraiser had appraised five other ethanol plants in different counties using the mass appraisal approach. The appraiser prepared a spreadsheet of the values of all ethanol plants in Nebraska, obtaining the values directly from the other counties' assessors. She was unaware how those counties assessed their ethanol plants but maintained that the $16 million value was the proper value for the property. The evidence showed that the value shown on the spreadsheet for the Furnas County ethanol plant had incorrect nameplate capacity, a critical element in determining the value of the plant. Its nameplate capacity was actually 44 million gallons, not 22 million gallons as shown on the spreadsheet.

The taxpayer’s appraiser, a real property appraiser for 35 years, utilized the cost approach method to appraise the property. He stated that the income approach would not be useful, and the sales comparison approach would not be effective as a stand-alone method of appraisal for the property, because most sales of ethanol plants were older and not from the area. He described his application of the cost approach method and discussed the depreciation of the buildings and improvements. TERC found that because the taxpayer’s appraiser performed the appraisal according to professionally approved standards, his appraisal report was competent evidence sufficient to rebut the presumption in favor of the BOE’s determination. TERC then found that it was unreasonable and arbitrary for the BOE to rely upon the county’s valuation. TERC agreed that physical depreciation should be applied to the property and pointed to the incorrect information the county appraiser’s spreadsheet contained and the absence of a revised opinion based upon the correct information. The BOE filed this appeal.

The court began by noting that the presumption of validity did not apply at this stage. A presumption exists that a board of equalization has faithfully performed its official duties in making an assessment and has acted upon sufficient competent evidence to justify its action and that presumption remains until there is competent evidence to the contrary presented.
Neither party disputed that the taxpayer presented competent evidence through its appraisal and thereby overcame the presumption of validity of the BOE’s valuation. The court said that once the challenging party overcomes the presumption of validity by competent evidence, the reasonableness of the valuation fixed by the BOE becomes one of fact based upon all of the evidence presented. The court found that the evidence showed that the BOE’s valuation was unreliable, because it failed to take into account any depreciation, which in turn resulted in an excessively high valuation. Because the evidence showed that a plant in another county was comparable and that the BOE’s valuation was unreliable, there was competent evidence to show that the BOE’s valuation was grossly excessive. Accordingly, the court concluded, TERC's determination that it was arbitrary and unreasonable to rely on the BOE’s determination of value was supported by competent evidence and was not arbitrary, capricious, or unreasonable. Because the taxpayer established that the BOE’s valuation was unreasonable and arbitrary, the court said that TERC did not err in relying upon the taxpayer’s appraisal. The appraiser observed the state of the ethanol industry, the decrease in the price per gallon of ethanol, and the reduction of the rate of ethanol plant construction. He emphasized that the state had 39 ethanol plants in 2010 and 26 ethanol plants in 2017 and opined that economic depreciation of 40 percent was appropriate. The court said it could not say that TERC's reliance on the appraiser opinion was arbitrary, capricious, or unreasonable.
Wheatland Indus. LLC v. Perkins Cnty. Bd. of Equalization, Nebraska Supreme Court, 304 Neb. 638; No. S-19-305. 12/6/19

Poultry Houses Ineligible for Exemption

The Delaware Superior Court determined that poultry houses were not eligible for a property tax exemption for nutrient management facilities. The court found that the county Board of Assessment (Board) did not make an error in its decision because the statute in question does not apply to poultry houses.

The taxpayers own a farm in the state with a poultry operation which was assessed by the county assessment office. The taxpayers filed a challenge to the assessment claiming that the poultry houses on the farm should be exempt under state law. The Board denied the challenge and the taxpayers filed this appeal, arguing that the poultry houses fall within the tax exemption in the statute because they represent nutrient management facilities. The Board argued that the poultry houses were not covered by the statute because the statute does not explicitly exempt them, and the statute should be read narrowly. The court said the standard of review here was whether the Board’s conclusions were supported by substantial evidence and free from legal error. In addition, the court said it could not consider new evidence that had not been presented to the Board. The taxpayers submitted a letter from the Administrator of the Delaware Nutrient Management Program, which the court said could not be considered here because it appeared that the letter was obtained after the Board had its hearing.

The court said the question here is whether poultry houses fall within the category of the structures described in the statute. If a statute is unambiguous, the words in it are interpreted using their plain meaning. If it is ambiguous, then it is considered as a whole, rather than in parts, and each section should be read in light of all others. The court said that in this case, some ambiguity exists as to what exactly is included in “other nutrient storage, disposal or management structures or facilities pursuant to the nutrient management plan” and the statute should, therefore, be considered as a whole to determine the legislative intent. The state statute begins with the assertion that all real property in the state shall be liable to taxation except as otherwise provided. The court said this language suggested that there must be a specific exception mentioned in the statute for a particular type of real property to be exempt from taxation. The pertinent provision provides examples of specific types of real property exempt under the statute, compost bins and manure sheds. These types of structures are used for the primary purpose of collecting and distributing waste. The court said this section also refers to facilities pursuant to a nutrient management plan, which is defined as “a plan by a certified nutrient consultant to manage the amount, placement, timing and application of nutrients in order to reduce nutrient loss or runoff and to maintain the productivity of soil when growing agricultural commodities and turfgrass.” The court said that it did not appear that poultry houses represent facilities situated on the land for the purpose of facilitating the activities described in the statute. The court concluded that even though it is true that poultry houses produce nutrients, the purpose of these structures is to raise and house poultry not to generate nutrients, and the structures are not involved in the application of nutrients. The court found that reading the statute in its entirety and analyzing the provision together lead to the conclusion that the Board did not make a legal error in interpreting the law involved in this case. Spence v. Kent Cnty. Bd. of Assessment, Delaware Superior Court, No. K19A-03-001 WLW. 11/27/19


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]

 
STATE TAX HIGHLIGHTS
A summary of developments in litigation.
Published biweekly by the Federation of Tax Administrators
Also available at the FTA Member website at:
http://www.taxadmin.org
November 29, 2019 Edition


NEWS


Appeal of SALT Deduction Cap Ruling

Four states have filed an appeal to the U.S. Court of Appeals for the Second Circuit after a district court upheld the constitutionality of the Tax Cuts and Jobs Act’s state and local tax deduction cap. New York, Connecticut, Maryland, and New Jersey filed their appeal on November 26, 2019 in New York v. Mnuchin to the U.S. District Court for the Southern District of New York’s ruling that the $10,000 SALT deduction cap was not unconstitutionally coercive.

 

U.S. SUPREME COURT UPDATE

Cert Denied

UMB Bank NA v. Landmark Towers Association Inc., U.S. Supreme Court Docket No. 19-241. Petition denied November 25, 2019. The Court declined to review a Colorado Court of Appeals decision that found because the revenue from a special district tax on condominium owners was intended to fund infrastructure for a separate development and would not benefit the condo owners, the tax violated the federal due process clause. The homeowner’s association filed suit to challenge the creation of the special taxing district.


FEDERAL CASES OF INTEREST


IRS Levy Against Law Professor Sustained

The U.S. Tax Court granted the Internal Revenue Service (IRS) summary judgment and sustained a levy action against a law professor to collect over $1.2 million in taxes based on substitutes for return the IRS prepared for him. The court found no abuse of discretion, noting the taxpayer’s failure to provide requested information and his failure to participate in the collection hearing.

The taxpayer is a clinical professor of law at Harvard Law School and the faculty director of the Harvard Trial Advocacy Workshop and the Harvard Criminal Justice Institute. He did not file a Federal income tax return for 2012 or 2013 and records show that he also did not file returns for 2005-2011. The IRS prepared substitutes for returns (SFRs) that met the requirements of section 6020(b) for tax years 2012 and 2013 and issued the taxpayer notices of deficiency for 2012 and 2013 on the basis of the SFRs. Both notices were sent by certified mail and addressed to him at 1338 Commonwealth Ave., West Newton, Massachusetts 02645 and the notice of deficiency for 2013 was returned to the IRS as undeliverable. The taxpayer did not petition the court with respect to either notice and, on September 7, 2015, and August 29, 2016, respectively, the IRS assessed the tax as determined for each year. After the taxpayer did not pay these liabilities, the IRS issued a Notice of Intent to Levy to the taxpayer at a Winthrop House address. The bulk of the assessed liability for 2013 appears to be attributable to the taxpayer’s sale that year of his former residence at the Newton address.
The taxpayer timely filed a Request for a Collection Due Process or Equivalent Hearing, listing his address as the Winthrop House address and said he could not pay the tax. The IRS sent the taxpayer a letter, addressed to his Winthrop House address, acknowledging receipt of his hearing request and advised him of the steps he would need to take to be eligible for a collection alternative, including the filing of delinquent returns for a number of years.
He did not respond to this letter and did not supply any of the requested documents. The case was assigned to a settlement officer (SO) in the IRS Appeals Office, who reviewed the file and verified that all requirements of law and administrative procedure had been satisfied. On October 11, 2017, the SO sent the taxpayer a letter mailed to his Winthrop House address scheduling a telephone CDP hearing and reminded the taxpayer that the IRS could consider a collection alternative only if he became current in his Federal tax obligations and supplied the requested financial information. Petitioner failed to call in for the scheduled hearing and provided no tax returns or financial data. On November 21, 2017, The SO sent subsequently sent the taxpayer a “last chance” letter advising that, if he provided no additional information within 14 days, she would make a determination on the basis of the administrative file. He did not respond to this letter and on February 5, 2018, the SO closed the case and issued a notice of determination sustaining the levy notice. The taxpayer filed a timely appeal, listing his address as the Winthrop House address, arguing that he had no notice of Appeals hearing or pre-hearing meetings and no notice if IRS filed tax returns or opportunity to correct.

The parties jointly moved for a continuance of trial, with the IRS taking the position that the taxpayer had not properly preserved, during the CDP hearing, the issue of his underlying tax liability for 2012 or 2013. The IRS, however, expressed hope that, if the taxpayer provided an accounting of what he believed his proper tax liabilities for those years to be, the parties might be able to resolve the case without the need for trial. The court granted a continuance and directed the taxpayer to provide to counsel for the IRS, on or before June 15, 2019, a statement showing all income he received for tax years 2012 and 2013 and the dollar amount of each deduction to which he believes he was entitled for each year. The taxpayer supplied no documents to the IRS.

The court began by reviewing the standard for summary judgment and found in this matter that the case was appropriate for summary adjudication because there were no material facts in genuine dispute. The court then turned to the taxpayer’s challenge to the underlying liability. The court noted that the taxpayer did not dispute that the notices of deficiency for 2012 and 2013, which were sent by certified mail to his Newton address, were properly mailed to his “last known address.” He contended that he did not receive either notice and the administrative record indicated that the notice for 2013 was in fact returned to the IRS as undeliverable. The court said that for purposes of ruling on the IRS’s motion, it assumed that the taxpayer did not receive either notice of deficiency and was entitled to dispute at the CDP hearing his underlying liabilities for 2012 and 2013. The court said that this right carried with it certain obligations on his part. The court noted that the taxpayer had numerous opportunities to submit evidence relevant to his underlying tax liabilities before or during the CDP hearing. The SO notified him of that hearing by letter sent to his Winthrop House address, the address he used when submitting his CDP hearing request and filing his petition with the court, and he declined to participate in that hearing or otherwise communicate with the SO. The court found that because he supplied no evidence relevant to his underlying tax liabilities despite being given multiple opportunities to do so, he did not advance a proper challenge to those liabilities at the Appeals Office and is thus precluded from advancing that challenge in the court. The court then turned to the issue of whether the SO abused her discretion in sustaining the proposed levy and considered whether she properly verified that the requirements of applicable law or administrative procedure had been met, considered any relevant issues the taxpayer raised, and considered whether any proposed collection action balanced the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. The court concluded that the record established that the SO properly discharged all of her responsibilities and found no abuse of discretion. Ronald Sylvester Sullivan v. Commissioner, U.S. Tax Court, No. 4619-18L; T.C. Memo. 2019-153. 11/19/19


DECISION HIGHLIGHTS

Sales and Use Tax Decisions


Medical Office's Purchases Not Exempt

The Missouri Supreme Court held that a medical office was not entitled to a use tax exemption on purchases of medical supplies from an out-of-state supplier. The court found that the taxpayer failed to meet its burden of proving that its purchases were used in the compounding of a product for sale.

The taxpayer is a medical office located in the state that treats and manages patients' pain, including the medical service of injecting pain-relieving drugs administered by an interventional pain physician. As part of its pain management care, the taxpayer purchases from an out-of-state supplier needles, cannulas, filters, catheters, syringes, and trays for preparing or administering the pain-relieving prescription drugs to achieve the desired therapeutic effect. These items purchased from an out-of-state supplier for use in-state are typically subject to the use tax unless they come within a statutory exception, including one for materials used in a compounding operation. The director of revenue (Director) conducted an audit and discovered that, for at least five years, the taxpayer did not file a use tax return or pay use tax on out-of-state purchases. An assessment was filed, and the taxpayer conceded liability for most of the assessment but contested use tax liability for certain items used for the injection of prescription drug compounds, claiming that the devices are exempt from use tax as “materials” used in a compounding operation under the statutory exemption. The taxpayer filed an appeal to the administrative hearing commission, which held for the Director and the taxpayer filed this appeal.

The court noted that while statutes imposing a tax are construed strictly in favor of the taxpayer, the court strictly construes tax exemptions against the taxpayer and a taxpayer bears the burden to prove an exemption applies by “clear and unequivocal proof.” The court reviewed the rules of statutory construction, including the goal of statutory interpretation to give effect to the legislature’s intent as reflected in the plain language of the statute at issue. Under the standard of review, the court said that the taxpayer must unequivocally demonstrate that the contested items are consumed or used in the compounding of a product eligible for the exemption. The court said that to successfully demonstrate eligibility for this use tax exemption, therefore, the taxpayer must show it used the disputed items in compounding a product output with market value that can be marketed to various buyers. The devices at issue include syringes, needles, and other items used and consumed in the delivery of its pain management services and the taxpayer used these devices for the purpose of safely mixing or administering medications to a patient. These devices are used and consumed in the process of compounding medications and delivering pain management care to patients, so the court said that the first two prongs of the three-part test in the exemption were arguably satisfied. But the court determined that the devices failed the final prong of the test in that they are not used or consumed in the compounding of “a product.” The court said that the exemption for products used in compounding requires that the injectable drug itself be a marketable “product” with value independent of the medical care. The court said that the marketable product, if there was one, is the professional expertise the taxpayer provides. Interventional Ctr. for Pain Mgmt. v. Dir. of Revenue, Missouri Supreme Court, No. SC97582. 11/19/19

 

 


Personal Income Tax Decisions

Professor Domiciled in State Despite Working Elsewhere

The Minnesota Tax Court affirmed a couple's income tax assessment. The court determined that the couple were domiciled in Minnesota despite the husband traveling between Minnesota and Florida for work as a university professor.

The taxpayer has been employed as a clinical professor by Florida International University since 2010. For a period, the taxpayer commuted between Minnesota where his wife and two sons resided and Miami, staying in hotels in Miami, but in January 2014 he rented a furnished apartment in hopes of being appointed director of entrepreneurship at the university. Between January 2014 and July 2015, he frequently returned to Minnesota, where his wife continued to live. During the spring of 2015, when it became clear that he would not receive the desired appointment, the taxpayer let his apartment lease lapse and resumed commuting between Miami and Minnesota. On their 2014 and 2015 Minnesota income tax returns, the couple declared the husband to be a Florida resident and therefore did not pay Minnesota income tax on his Florida earnings. The Commissioner of Revenue (Commissioner) disagreed and assessed the couple as though the husband was a Minnesota resident in both 2014 and 2015. The taxpayers filed this appeal.

The facts show that the husband agreed to a five-year contract appointment at the university beginning in 2010 and although the university offered to pay the husband’s moving expenses, he declined the offer and his furniture and belongings remained in Minnesota. The wife is a licenses and tenured teacher in the Hopkins school district and both of the couple's children were students at the University of Minnesota in 2014. The couple's younger son was still attending the University of Minnesota in 2015. The husband obtained a Florida driver's license but sent the majority of his important mail to Minnesota. While he opened an account in Miami at a national bank, he continued to maintain a joint account with his wife at a Minnesota credit union. The facts showed that between January 2014 and July 2015, the husband would typically fly from Minnesota to Miami on Tuesday, work 40 to 60 hours a week while in Miami, and return to Minnesota for the weekend either three days or ten days later. While in Florida, the husband saw at least one physician and obtained a Florida driver's license. He received health insurance through his employer but continued to use his Minnesota address on his passport. The wife continued to live in their Minnesota home, which was never listed for sale. If the husband was appointed director of entrepreneurship, as he hoped, the wife was willing to leave her teaching position, sell the house in Minnesota, and move to Florida. Until then, however, the couple were not willing to forfeit the wife’s tenure as a teacher in Minnesota. Both of their cars remained in Minnesota, where they were driven by the wife and by the couple's sons. The husband rented cars, took taxis and buses, or used ride-sharing when he was in Florida. During 2014, the facts showed that the husband spent all or part of 178 days in Minnesota. Of those 178 days, only four of them were spent working, namely, teaching a summer course in finance at the University of Minnesota. The remainder of the days spent in Minnesota were typically weekends and periods during which Florida International was not in session. Of the days spent outside of Minnesota in 2014, 150 of them were spent working.

Sometime in the first six months of 2015, the dean of the College of Business at Florida International was fired and the acting dean would not commit to appointing the husband as director of entrepreneurship. In April 2015, his contract with Florida International University was renewed, but only for three years. The couple decided that once the lease on the furnished apartment in Florida was up , the husband would resume commuting back and forth to Florida because doing so was more convenient and less expensive than continuing to rent an apartment. During 2015, the husband spent 180 days in Minnesota, four of which were spent working, again teaching a summer course in finance at the University of Minnesota. The remainder of the days spent in Minnesota were typically weekends and periods during which Florida International was not in session. Of the days spent outside of Minnesota in 2015, 146 of them were spent working.

The court concluded that the taxpayer intended to make Florida his domicile, but only if and when he was appointed director of entrepreneurship. Because he was not appointed director of entrepreneurship in either 2014 or 2015, his domicile remained in Minnesota during those years. The wife intended to make Florida her domicile, but only if and when her husband was appointed director of entrepreneurship. The court concluded that the taxpayers did not introduce evidence sufficient to overcome the presumption that the husband, domiciled in Minnesota before 2014, remained domiciled in Minnesota in 2014 and 2015. Rao v. Comm'r of Revenue, Minnesota Tax Court, Docket No. 9255-R. 9/18/19

Business-Related Deductions Denied

The Oregon Tax Court held that an individual and his deceased spouse were not entitled to deductions for travel miles, meals and entertainment expenses, and cell phone costs. The court concluded that the taxpayers presented insufficient proof to substantiate the deductions.

The taxpayer husband is a commercial insurance broker with a clientele consisting of mostly publicly traded companies. He testified that he traveled often to meet clients and entertain them for business reasons and that he kept all his receipts and tracked his business expenses using the computer program Quicken. He testified that his spouse was a “residence director” and she handled all the family tax matters, but that after she passed away in June 2014, he had a difficult time preparing their 2014 tax return. He challenged the state Department of Revenue’s (DOR) denial of his deductions for meals and entertainment, travel and cell phone expenses.

The taxpayer presented five pages of a Quicken ledger showing a listing of all the entertainment related expenses and testified that only those ledger items with a “memo” listing the business person or entity entertained should have been claimed as business expenses. He testified that the entertainment expenses on his two credit cards could be cross-referenced against his work calendar and the Quicken ledger to substantiate the deduction.
He conceded during cross-examination, however, that he did not write down all work-related meetings on his work calendar and did not present the court with receipts. DOR denied deductions for entertainment expenses in their entirety because it found the taxpayer’s records were unreliable. The taxpayer’s tax return shows a calculation for deduction for personal vehicle expenses on the basis of 10,990 business miles, or 78.44 percent of the total vehicle miles for that year. The taxpayer opted to use actual expenses of $1,881 for fuel, $628 for auto insurance, and $4,000 in depreciation, for a total deduction of $5,968, and DOR denied deductions for vehicle expenses in their entirety because it found the written records did not meet the substantiation requirements of IRC section 274(d). The taxpayer’s tax return shows a deduction for cell phone expenses in the sum of $3,094. He testified that he had one cell phone for business and his spouse had a cell phone she used in her business that was kept on after her death for personal reasons. He testified that there is a third phone included in the expenses but was not clear whether it was used for business. The cell phone expenses listed in the Quicken ledger matches the deduction taken on the tax return. The bank accounts document payments to the cell phone provider in the sum of $2,899.20. The taxpayer testified that he could not give an estimate of the percentage of business use of the cell phones for which he is seeking a deduction.

The court said it was guided by the intent of the legislature to make Oregon's personal income tax law identical in effect to the federal Internal Revenue Code (IRC) for the purpose of determining taxable income of individuals. Allowable deductions from taxable income are a matter of legislative grace and the burden of proof is placed on the individual claiming the deduction. In addition, taxpayers are required to keep records sufficient to show whether or not they are liable for tax. The IRC allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The court noted that although all tax deductions require proof, there are more stringent rules for travel related expenses. A taxpayer must substantiate the amount, time, place, and business purpose of the expenses by adequate records or by sufficient evidence corroborating his or her own statement.

With regard to the taxpayer’s deductions for meals and entertainment, the court tested the first page of the Quicken ledger as a sample. That page listed 57 separate expenses of which 36 contained business or individual names in the memo category. Those 36 items were cross-referenced against the taxpayer’s calendar of events and the court was unable to corroborate any of the claimed expenses. In most cases, there were no items listed on the calendar corresponding to the date of the expenses and in those few instances where there is a calendar item, the entity did not match, or the listing was improbable because the calendar notes that he was in a different city. The court found that the documentary evidence did not support any amount for entertainment expenses and disallowed the deduction.

The taxpayer asserted that he traveled in his personal vehicle to meet with clients. The court noted that a denial of a deduction for travel miles did not mean that the taxpayer did not actually travel for business but meant in this case that the taxpayer had not met the stringent evidentiary burden imposed by the tax code to prove mileage expenses. The court acknowledged that the taxpayer’s testimony that he traveled for business purposes was credible but found that he did not keep a contemporaneous log of his business travel or any other written records by which the court could verify the mileage. The taxpayer acknowledged that he did not log all his business appointments on his calendar and on cross-examination was unable to explain why his calendar for a given date could claim mileage more than 500 miles but there were no corresponding expenditures for fuel. The court found that the taxpayer failed to provide documentary evidence corroborating his testimony of the mileage claimed.

With regard to the cell phone deduction, the court noted that cell phones are not subject to the strict substantiation requirements of IRC section 247(d) and the court can apportion cell phone expenses if the taxpayer uses the cell phone for both personal and business use and can even make a reasonable estimate of the deduction if a taxpayer cannot establish the precise amount but any estimate will bear heavily against the taxpayer who failed to more precisely substantiate the deduction. The taxpayer testified that he used his cell phone for both business and personal use, but he was unable to offer any estimate for the percentage of business and personal use. In addition, he testified that the expenses for cell phones included two additional phones and did not present any actual cell phone bill to show how many phones were in use or how the charges were broken down. The court believed his testimony that he used his cell for business calls, but the court was unable to even estimate what percentage of the up to three phones were used for business. The court concluded that the taxpayer failed to substantiate the deductions for meals and entertainment, travel miles, and cell phone expense.
Biege v. Dep't of Revenue, Oregon Tax Court, No. TC-MD 180399R. 11/15/19


Corporate Income and Business Tax Decisions

Bus Company Subject to B&O Tax

The Washington Supreme Court held that a bus company is not eligible to be taxed under the public utility tax statute and is subject to the business and occupation tax (B&O) on school bus services provided to school districts. The court found that school buses are excluded from the definitions of the terms "motor transport business" and "urban transportation business" for public utility tax purposes.

The taxpayer is a registered Washington business that owns and operates school buses that are primarily used to provide transportation services for schoolchildren through contracts with various school districts. Since the taxpayer registered as a business in 1990, it has consistently reported its income under the B&O tax classification, but in 2013, it requested a letter ruling from the Department of Revenue (DOR) contending that it should have been taxed under the Public Utility Tax (PUT) rather than the B&O tax. DOR declined to change its interpretation that school buses are subject to the B&O tax and not the PUT, an interpretation that has remained consistent for more than 70 years. The taxpayer submitted refund requests to the DOR for B&O taxes paid regarding its school bus services provided to school districts for the time period between December 1, 2008 and December 31, 2014, which were denied by the DOR. The taxpayer appealed through the administrative review process, ultimately resulting in a denial of its refund request and the taxpayer filed an appeal with the superior court. The trial court found no genuine issues of material fact and granted summary judgment in favor of the DOR. The taxpayer appealed and the Court of Appeals affirmed the trial court. This appeal was filed.

The court reviewed the rules of statutory construction, including the goal to carry out the intent of the legislature. The state’s B&O tax applies to the act or privilege of engaging in business activities and activities not explicitly taxed elsewhere in the statutory scheme are subject to the general statutory tax rate. PUT businesses, however, are not subject to the B&O tax, and the tax rate differs for those businesses. The PUT applies to businesses of “motor transportation” and “urban transportation” and is collected from every person for the privilege of engaging in those businesses at varying rates. These terms are defined and, as relevant here, require that the vehicle be used to convey persons or property for hire. At issue here is whether the taxpayer’s transportation of students qualifies as transporting persons "for hire" subjecting it to the PUT rather than the general B&O tax. The term "for hire" is not defined in the statute and DOR adopted a regulation in 1970 excluding school buses from the definitions of "motor transportation business" and "urban transportation business." This regulation continued the State Tax Commission's previous classification that excluded school buses from these PUT definitions, an interpretation the court said has remained unchanged and had remained unchallenged since its adoption in 1943. The taxpayer asserted, however, that DOR’s regulatory exclusion of school buses from the PUT definitions of "motor transportation business" and "urban transportation business" is contrary to the plain language of the statute, which it argued is unambiguous. The Court of Appeals rejected the taxpayer’s argument, finding the meaning of “for hire” to be ambiguous, concluding that it was unclear whether the legislature intended the term "for hire" to be given its ordinary or technical meaning. The court said the ordinary meaning of the term "for hire" could be understood as "effecting the engagement or purchase of labor or services for compensation or wages," while the technical meaning, derived from a Black's Law Dictionary entry for "for hire or reward," contemplated the passengers being directly responsible for any compensation paid. The court said that while Washington common law did not explicitly define the term "for hire," cases suggested that the passenger must, in some way, effectuate the compensation for transportation. While the taxpayer’s school buses would convey persons "for hire" if the term merely meant to transport people for compensation, it would not meet the definition of "for hire" under Black's definition because the students being transported do not pay the taxpayer.
The court concluded that the differing definitions failed to establish the legislature's understanding of the term "for hire" at the time of the amendments to the PUT and led the court to conclude that “for hire” was ambiguous as used here.

The court said that in interpreting an ambiguous statute, it will afford agency interpretations that are within an agency's special expertise great weight and noted that it had previously recognized that rules and regulations promulgated by the tax commission were entitled to great weight in resolving doubtful meanings of taxing laws. The long-standing agency interpretation excluding school buses from the PUT definitions existed from the time the term "for hire" was first added in the 1943 amendments and this interpretation had remained unchallenged until the present case. The court noted that shortly after "for hire" was added to each of the PUT definitions, the Tax Commission revised rule 180, continuing to treat school buses as excluded from the PUT and subject to the general B&O tax. It further noted that school buses had consistently been excluded from the PUT. The court concluded that the ambiguity should be resolved in favor of the long-standing interpretation that school buses are excluded from the definitions of "motor transportation business" and "urban transportation business" the statute. First Student Inc. v. Dep't of Revenue, Washington Supreme Court, No. 96694-0. 11/14/19


Property Tax Decisions

Printing Company Not Liable as Successor

The Texas Court of Appeals held that a commercial printing company was not a successor in business liable for the delinquent property taxes of another company. The court found that the taxpayer did not purchase the other company's name or goodwill when it entered a royalty agreement for the purchase of assets.

The School District (District) filed suit against Page International Communications, L.L.C. (Page). here to collect delinquent taxes on business personal property. The City of Houston and Harris County subsequently intervened. Page subsequently filed a Chapter 11 involuntary bankruptcy proceeding. The city and county learned that Page had entered into a Royalty Agreement (Agreement) with Southwest Precision Printers LP (Southwest) five months before the Chapter 11 filing for the purchase of certain assets. The District, the City and the County added Southwest as a defendant on the theory of successor liability pursuant to the tax code and dismissed Page, contending that Southwest purchased Page's name and goodwill through the Agreement and is, therefore, liable for the taxes assessed against Page for tax years 2015 and 2016. The trial court found for Southwest and the District, City and Cunty filed this appeal arguing the trial court's judgment was against the great weight and preponderance of the evidence.

The appellants' argued the Agreement unambiguously establishes Southwest purchased Page's name and goodwill. The court determined that the record indicated the trial court determined
the Agreement was ambiguous, and it resolved that ambiguity in Southwest's favor, but said that the court on appeal was not bound by that determination. Whether a contract is ambiguous is a question of law, and the court's primary duty is to determine the intent of the parties as expressed in the instrument. The court reviewed the provisions of the Agreement
and found that the purchase price did not include Page's name. The court also found that the sections of the Agreement to which appellants referred did not demonstrate Southwest purchased Page's goodwill and the purchase price did not include Page's goodwill, finding there was no language in the contract by which Southwest purchased Page's goodwill.
The court concluded that the express language of the Agreement reflected that Southwest did not purchase Page's name or goodwill and Southwest, therefore, was not liable as a successor to Page. Spring Branch Indep. Sch. Dist. v. Sw. Precision Printers LP, Texas Court of Appeals, No. 14-18-00559-CV. 11/14/19

Property Owners Prevail in Tax Lien Case

The Arizona Court of Appeals held that property owners did not need to pay delinquent taxes before suing in tax court to challenge the sale of a property tax lien. The court found that payment was not required because the taxpayers were not challenging the validity or amount of the taxes owed on the property and remanded the case to the tax court to determine whether the county complied with statutory requirements for the tax liens at issue.

In 2010, the taxpayer purchased real property in Mohave County and since then have paid property taxes as they have come due. The property is located in an area known as the "Disputed Triangle," a triangular-shaped piece of land east of the Colorado River near the Fort Mojave Indian Reservation. In 1994, the federal government filed the Aria lawsuit to determine whether the Disputed Triangle should be held in trust for the Fort Mojave Indian Tribe (Tribe) and in 2009, the District Court ruled that the federal government, on behalf of the Tribe, had no claim to the Disputed Triangle. During the 15 years the Aria case was pending, the county did not collect property taxes on the affected parcels and made no demand for payment. That changed in 2010 when the County demanded payment of all past due taxes and told property owners that delinquent taxes due on the parcels involved would be sold at future tax lien sales unless payment arrangements were made with the Treasurer. The taxpayers in this matter admitted that some taxes accrued on the property before 2010 and have not been paid. In 2016, the county offered to waive the interest and fees accrued through June 2010 if the taxpayers would pay the base property tax, plus interest accrued after July 2010, but the taxpayers refused the county's offer. The County Treasurer sent the taxpayers a Delinquent Tax Notice in January 2017 threatening to sell the tax liens on the property if payment was not made. Taxpayers did not pay, and the county offered the tax liens for years 2003-2009 on the property at its February 2017 tax lien sale. The liens went unsold and they were assigned to the state.

Taxpayers joined a lawsuit filed by other Disputed Triangle property owners seeking a declaratory judgment that the county's sales of tax liens on their properties were time-barred. The tax court found in favor of the county, concluding that A.R.S. § 42-11004 prohibited the taxpayers from challenging the sale of the liens unless and until they paid the delinquent taxes. Taxpayers filed this appeal.

The taxpayers argued that § 42-11004, which requires a property owner to pay a tax before filing a lawsuit to challenge the amount or validity of the tax, does not apply here because their lawsuit applies to the sale of tax liens and does not constitute "a challenge to the validity or amount of the tax" underlying the liens. The section at issue provides in pertinent part that a person on whom a tax has been imposed or levied under any law relating to taxation may not test the validity or amount of tax if any of the taxes have not been paid. The taxpayers in this case sought a declaratory judgment that the county could not sell the tax liens on the property because the county did not advertise the sale within five years of the delinquency as required by the statute. The court noted that the state’s supreme court has explained in a related context, the law limiting the right to bring an action for taxes to five years does not operate to remit, release nor extinguish the obligation, but simply deprives the taxing authority of the remedy for their collection. The statutory provision cited by the taxpayers here deprives the county of the right to sell a tax lien if it does not advertise the sale within five years of the delinquency that created the lien. The court said that by invoking that statutory provision, the taxpayers were not challenging the validity or amount of the taxes due on the property but were seeking a declaration that the county is time-barred from selling tax liens on the property for the unpaid years.

Taxpayers then argued that the provision which requires the county to advertise a tax-lien sale within five years of the delinquency that created the lien, prohibited the county from selling tax liens on the property in February 2017. They argued that the advertisement for the actual sale must occur within five years. Section 42-18105 of the statute provides that no sale for an unpaid tax may be commenced at a date later than five years after delinquency unless the sale is advertised within the five-year period. The statute also requires the county to advertise the sale no more than three weeks and no less than two weeks before the sale date noticed. The county argued that although it did not actually offer the tax liens for sale during the Aria litigation, it advertised sales of the liens at various points dating back to 1995 and it, therefore advertised the sale within five years of delinquency. The court said that as a matter of law, tax liens created before 2010 could not be offered for sale for the first time in February 2017 and declined to interpret § 42-18105 in a way that would permit a taxing officer to avoid the five-year time limitation by "timely" advertising a sale that never takes place. Instead, the court found, once a delinquency occurs, the statutes create a five-year-and-three-weeks limitations period, after which the tax lien remains valid but cannot be sold by the county.

The county argued it presented evidence to show that it offered some liens for sale after the conclusion of the Aria litigation but within five years of delinquency, and the taxpayers conceded the record was not clear as to whether liens on the property were offered for sale before February 2017. The court remanded the matter to reconsider taxpayers' motion for summary judgment and determine whether the County complied with the requirements of § 42-18105 for any of the tax liens at issue. Nayeri v. Mohave Cnty., Arizona Court of Appeals, No. 1 CA-TX 18-009. 11/14/19


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]

 
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