Archive for the ‘Supreme Court’ Category

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The Supreme Court Takes Up a Wealth Tax; You May Need to File a Protective Claim for Refund

Monday, June 26th, 2023

At the end of 2017, Congress passed the Tax Cuts and Jobs Act (TCJA).  This complex measure added some deductions (such as the Deduction for Qualified Business Income), added restrictions on other deductions (such as the $10,000 limit on taxes as an itemized deduction), and added a few taxes.  One of the taxes added was the Section 965 Repatriation Tax.

Charles & Kathleen Moore invested in 2006 in an Indian company that was profitable. Under this tax, they had to pay (in 2017) tax on all the accumulated income even though they had never received any of the income.  They owed about $14,729 in tax.  They paid the tax, but then filed a Claim for refund (which was denied).  They then filed a lawsuit in federal district court in Washington to recover the tax.  The district court dismissed the case; the 9th Circuit Court of Appeals affirmed the dismissal on appeal.  You can read the Moore’s petition here; you can read the United States’s brief in opposition here; and you can read the Moore’s reply here.

If you were impacted by the Section 965 tax, you may have only until July 15, 2023 to file a “Protective Claim for Refund” for the 2019 tax year.  Two of our clients are impacted by this, and we notified both of them today.  (An option available with the tax was to pay this over an eight-year period; both of our impacted clients chose this option so they can still file a protective claim for 2019.)

I’ll have more on this case in the next few weeks, as it impacts the idea of wealth taxes (something that Senator Sanders, among others, likes the idea of).

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Posted in IRS, Supreme Court | Comments Closed

FBAR Non-Willful Penalty Is Per Report, Not Per Account

Tuesday, February 28th, 2023

Let’s assume you have a non-willful violation of filing the FBAR (Form 114, the Report of Foreign Bank and Financial Accounts).  Is the maximum penalty ($10,000) per account or per report?  The Circuit Courts of Appeal had split on this question; the Supreme Court decided this issue in Bittner v United States today.

[T]he question before us boils down to this: Does the BSA’s $10,000 penalty for nonwillful violations accrue on a per-report or a per-account basis? Mr. Bittner urges us to agree with the Ninth Circuit and hold that the law authorizes a single $10,000 fine for each untimely or inaccurate report. The government defends the judgment of the Fifth Circuit and asks us to hold that a new $10,000 penalty attaches to each account not timely or accurately disclosed within a report.

That’s the beginning of the Supreme Court opinion in Bittner.  Justice Gorsuch’s majority opinion goes back to the days of Form TD F 90-22.1 (the original form number for the FBAR) and notes,

Instructions included with the FBAR form have cautioned that “[a] person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000.” IRS, Form TD F 90–22.1, p. 8 (Mar. 2011). An IRS “Fact Sheet” has advised that, “[f]or the FBAR, the penalty may be up to $10,000, if the failure to file is non-willful.” IRS, Offshore Income and Filing Information for Taxpayers with Offshore Accounts, FS–2014–7 (June 2014). Ms. Boyd herself received a similarly worded letter alerting her that “‘[f]or the failure to file [the FBAR] . . . the penalty cannot exceed $10,000.’”…The drafting history of the nonwillful penalty provision undermines the government’s theory too…

On the government’s view, too, those who willfully violate the law may face lower penalties than those who violate the law nonwillfully. For example, an individual who holds $1million in a foreign account during the course of a year but withdraws it before the filing deadline and then willfully fails to file an FBAR faces a maximum penalty of $100,000. But a person who errs nonwillfully in listing 20 accounts with an aggregate balance of $50,000 can face a penalty of up to $200,000. Reading the law to apply non-willful penalties per report invites none of these curiosities; the government’s per-account theory invites them all. [citations omitted; emphasis in original]

There is good news: Logic and common sense prevailed, and:

Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.

This means the maximum non-willful FBAR violation is now $10,000 per year rather than per account per year.  Of course, there’s an easy way of avoiding all penalties: Just file the FBAR!

 

 

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Posted in FINCEN, International, IRS, Supreme Court | Comments Closed

Is It One Penalty of $10,000 or Multiple Penalties of $10,000?

Tuesday, June 21st, 2022

Suppose you are a resident of a foreign country–say, Romania–and you have foreign financial accounts.  You need to file the FBAR (Report of Foreign Bank and Financial Accounts) to tell the Financial Crimes Enforcement Network (FINCEN) what foreign accounts you have.  There is no tax due; however, there are substantial penalties for not filing the FBAR.  The penalty for willfully not filing the form starts at $100,000 per account.  The non-willful penalty is up to $10,000.

But a questions is unanswered regarding the non-willful penalty: Is the penalty per account that is not reported or per form that is not reported?  The Fifth Circuit Court of Appeals has held that it’s per foreign account; the Ninth Circuit Court of Appeals has held it’s per form.  This can make a huge difference (as you might imagine).

Alexandru Bittner failed to file his FBARs.  His violation was held to be non-willful.  He’s in the Fifth Circuit (he resides in Texas); he was assessed a penalty of $2.7 million.  Had Mr. Bittner resided in Nevada, he would have been fined $50,000.  That’s a difference of $2.65 Million, surely a large enough difference to file a petition for certiorari.

The Supreme Court doesn’t take many tax related cases.  Almost all of them relate to circuit conflicts such as this one.  Indeed, one of the primary purposes of the Supreme Court is to make sure that federal law is uniform among the states.  The Supreme Court granted certiorari this morning; the case will likely be heard late this year with a decision probably coming in early 2023.  At that point in time, we’ll know whether the non-willful penalty is based on accounts or forms.

One reminder to everyone: If you have an FBAR filing requirement, just file the form (including all of your accounts) and you avoid all these penalties.  I’d much prefer paying no fine at all then paying $50,000 (or $2.7 million).  The FBAR deadline coincides with the tax filing deadline (with an automatic extension to October 15th).

Case: Bittner v. United States

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Posted in International, Supreme Court | Comments Closed

California 7, Arizona 2

Thursday, February 27th, 2020

The state of Arizona (specifically, Arizona Attorney General Mark Brnovich) is not happy with California’s policy of coming after any Arizona business that is even remotely doing business in California (passive or not) to collect the $800 minimum California franchise tax. Arizona tried to do something about it: The Grand Canyon State asked the US Supreme Court for leave to sue California over the policy. On Monday, the Supreme Court said that Arizona couldn’t sue.

That said, I suspect one day someone will get legal assistance from a foundation and try to stop the process in federal court. The Southeastern Legal Foundation and the Cato Institute filed a joint Amicus Curiae brief in favor of Arizona. Sooner or later California’s extraterritorial grabbing of money will be stopped.

Unfortunately, the problem with individual businesses doing anything about it is the cost. California’s tax is $800 per year. The cost of filing a federal court lawsuit is probably in the tens of thousands of dollars. This case isn’t “sexy”; it’s about routine commerce. Now, if it could be a class action case (I’m not an attorney so I can’t speak to whether that’s possible or not) then there would be a good shot of that happening. Until then, I suspect California will successfully extort millions of dollars, $800 at a time.

As to the title of the post, the reason it’s seven to two is because two Supreme Court justices thought the case should be heard and dissented. It takes four justices for a case to be heard, so Arizona lost.

Posted in Arizona, California, Supreme Court | Comments Closed

An Update on Arizona v. California

Monday, December 23rd, 2019

There’s been some news on Arizona’s attempt to stop California from requiring indirect passive owners of LLCs who happen to own other LLCs that invest in California from having to pay California’s $800 minimum franchise tax.

When we last looked at this, the Supreme Court asked the Solicitor General (of the U.S.) to file a brief commenting on the case. That brief has been filed.  The Solicitor General believes that the motion to file a bill of complaint should be denied because, “…this is not an appropriate case for the exercise of this Court’s original jurisdiction.”  The Solicitor General believes that Arizona entities can file their own lawsuits and that the case is not one appropriate for the Supreme Court.

Not surprisingly, Arizona didn’t like the Solicitor General’s brief and filed a reply brief of its own.  Arizona believes that the Solicitor General got it wrong, and that leave should be granted.

It’s probable that the Supreme Court will decide whether or not to grant leave within the next two months.

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Arizona v. California Update

Monday, June 24th, 2019

The State of Arizona has asked the US Supreme Court to stop California’s illegal (in Arizona’s view) scheme of requiring indirect passive owners of LLCs who happen to own other LLCs that invest in California from paying California’s minimum $800 franchise tax. Because this is a dispute between the states, the proper venue for Arizona to challenge this is an original action at the Supreme Court.

Today, the Supreme Court had a one-line order on the case:

The Solicitor General is invited to file a brief in this case expressing the views of the United States.

This can be expected in the next few months. Once that brief is filed, the Supreme Court will again consider whether to hear the case; it’s probable that decision will be late this year. If the case is heard, it would likely be sometime next Spring.

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Arizona Asks Supreme Court to Stop California From Imposing California Tax on Passive LLC Investments

Tuesday, March 12th, 2019

We’ve highlighted this issue before. Suppose you are an Arizona resident, and you form Primary LLC in Arizona. Its main purpose is owning a warehouse in Phoenix. But you have some extra money in the LLC, so you invest in Secondary LLC, a Nevada LLC. Secondary invests in various things, including Tertiary LLC, a California LLC. Would the Franchise Tax Board, California’s income tax agency, allege that Primary LLC is doing business in California? You bet. Would they come after you for California’s minimum $800 a year LLC tax? Absolutely. Would they then assess late filing penalties, filing fees, and interest if you don’t pay, and issue payment demands through banks? Of course they have and will do so.

Arizona’s Attorney General, Mark Brnovich, doesn’t like this. He alleges that California is illegally going after Arizona LLCs, and illegally demanding payments from Arizona banks. Mr. Brnovich is asking the US Supreme Court to allow Arizona to sue California at the Supreme Court, as there’s no other venue for such a lawsuit. The Supreme Court will likely rule on the first issue–whether the lawsuit can proceed–before the end of June. If the Supreme Court allows the lawsuit, it would likely be heard next fall or winter in Washington.

By the way, those entities who have fought the FTB in California courts have won their cases. The problem, though, is it costs just $800 to pay the LLC tax; it costs thousands of dollars to fight the FTB. Mr. Brnovich is absolutely correct that it doesn’t make sense for most companies to fight California.

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Gilbert Hyatt and the Franchise Tax Board Head Back to the Supreme Court…Again

Sunday, January 6th, 2019

Back in 1993 (that is not a typographical error), California’s Franchise Tax Board (FTB) initiated a residency audit of Gilbert Hyatt. Mr. Hyatt invented some technology relating to microprocessors in 1990. In 1991 he realized he was going to receive some large royalty payments; he moved from high-tax California to low-tax Nevada. The question was when did he move–was it in April 1992 or October 1991?

The auditors for the FTB committed various torts (for example, they rummaged through Mr. Hyatt’s garbage and did not obey privacy rules). The FTB ruled against Mr. Hyatt; Mr. Hyatt sued the FTB in Nevada state courts. That lawsuit is now heading to the US Supreme Court for the third time. This case will be heard on Wednesday (January 9th). SCOTUSBlog has an excellent preview of the arguments in this case.

Dan Walters is reporting that the FTB has also asked for a rehearing of the decision which went against the FTB at the Board of Equalization. The request for a rehearing is at the new California Office of Tax Appeals. If the rehearing isn’t granted (or if the FTB loses of the Office of Tax Appeals), expect the FTB to appeal the decision into the California court system. It’s likely this case will still be going on when I retire (which is many years away).

There are several points that the average person should realize regarding this case. First, if you’re going to move from a high-tax state to a low-tax state, really move. Make sure you have a clean break from the state.

Second, if you have a high income be aware that your old state may conduct a residency audit. Like almost everything in tax, you’re guilty until proven innocent. In a residency audit, the tax agency will look at your bank and credit card statements to see where you really were. If you said you relocated on July 1, and your credit card statement shows charges from your old state through September 30, you’re going to have a problem.

Finally, California tries to exhaust litigation opponents. The phrase “Pyrrhic Victory” absolutely comes to mind when you deal with the Franchise Tax Board. Additionally, the FTB believes that the whole world owes California tax. Their institutional mentality is definitely not pro-taxpayer.

As for Mr. Hyatt, if he wins this case at the Supreme Court he will eventually be collecting his reduced judgment (in the case in Nevada). If he loses, it’s probable he will be out a ton in legal fees and 15 years of his life and get nothing out of it.

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Mr. Hyatt Goes to Washington…Again

Tuesday, June 30th, 2015

The saga of Gilbert Hyatt and the Franchise Tax Board, California’s income tax agency, continues. As you may remember, the Nevada Supreme Court ruled last September that the FTB committed fraud against Mr. Hyatt (false representation and intentional infliction of emotional distress), but threw out most of the Mr. Hyatt’s other claims. The FTB filed a Petition for Certiorari in March; it was granted today.

From Chris Smith of the Franchise Tax Board I learned that the Supreme Court will look at two issues: “Whether Nevada may refuse to extend to sister States haled into Nevada courts the same immunities Nevada enjoys in those courts.” As Mr. Smith notes, this relates to monetary damages that Mr. Hyatt received. Second, “Whether Nevada v. Hall, 440 U.S. 410 (1979), which permits a sovereign State to be haled into the courts of another State without its consent, should be overruled.”

The latter will be the key issue for me. In the Nevada trial, the FTB was found to have committed fraud. If Mr. Hyatt had resided in California (instead of Nevada), he would have been powerless to sue the FTB for damages (California law does not allow this). Consider if the FTB were to repeat the same actions against you where you reside; wouldn’t you like to have some recourse against them? Remember what Bill Leonard wrote about this case:

Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.

Remember, those actions occurred not in California but in Nevada.

This is the second time that the Hyatt case has been to the US Supreme Court. Back in 2003, the Supreme Court ruled 9-0 that Mr. Hyatt could sue, and that Nevada v. Hall should not be overturned. It will be interesting to see what happens this time. The case will likely be heard this Fall with a decision probably coming in early 2016.

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Posted in California, Supreme Court | 1 Comment »

The Real Impact of the Wynne Decision

Tuesday, May 19th, 2015

Yesterday’s decision in Comptroller of the Treasury of Maryland v Wynne Et Ux generated some reporting in print media. Yet much of what I saw was incorrect in part or in whole.

New York does give full tax credits for individuals with out-of-state income; I do not believe they will be impacted. However, many states do not give credits for local taxes. Joe Kristan highlighted Iowa today; Kentucky is another state that does not currently offer such tax credits. Under Wynne I believe they’ll be required to offer such credits. (I only know about Kentucky because I had a client impacted by this.) Joe noted that Tax Analysts saw that North Carolina and Wisconsin (along with a host of local governments) also don’t offer such credits. That’s where I think the real impact will be.

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Posted in Kentucky, Maryland, New York, North Carolina, Supreme Court, Wisconsin | 2 Comments »

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