In its 2019 Spring Term, the Supreme Court published five decisions regarding tax matters, three of which limit states’ taxing authority. In a February decision, Dawson v. Steager, the Court held that a state cannot tax a federal retiree’s pension benefits while declining to tax a similarly situated state retiree. The March decision in BNSF Railway Co. v. Loos held that lost wages paid to a worker who was injured on the job constitute taxable compensation under the Railroad Retirement Tax Act. Later in March, the Court held in Washington State Department of Licensing v. Cougar Den that a state tax imposed on a member of the Yakama Nation on importation of fuel via public highway is pre-empted by the 1855 Treaty Between the United States and the Yakama Nation of Indians. Then, in May, in Franchise Tax Board of California v. Hyatt, the Court held that a state may not be sued in another state’s court in a private suit, unless it waives immunity. Finally, the Court issued its decision in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, covered in a separate Disputing Tax post available here.

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On June 21, 2019, the U.S. Supreme Court unanimously held that a state cannot tax trust income solely because the beneficiaries are state residents.

At issue in North Carolina Dep’t of Revenue v. Kimberly Rice Kaestner 1992 Family Trust (“Kaestner”) was North Carolina’s law imposing tax on any trust income that “is for the benefit of” a North Carolina resident. North Carolina’s Department of Revenue relied on this statute to tax the income of a trust purely because the beneficiaries were residents of North Carolina. No other connections between the trust and North Carolina existed: neither the trustee nor the settlor was a resident of North Carolina; the trust was administered in New York and Massachusetts; and there were no direct investments in North Carolina. Moreover, during the years in question, the beneficiaries received no distributions, had no right to demand trust income or to control trust assets, and had no assurance of ever receiving trust income; the out-of-state trustee had “absolute discretion” over the trust, including its termination.

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The IRS will continue to focus its compliance efforts on taxpayers’ offshore activities in the coming months.

At the June 2019 New York University Tax Controversy Forum, acting director of IRS field operations (foreign payments practice) Kimberly A. Schoenbacher stated that the IRS will soon launch a compliance campaign targeting foreign banks that have not reported foreign assets of their U.S. account holders on a Form 8966, as required under the Foreign Account Tax Compliance Act (“FATCA”).
Separately, on April 16, 2019, the IRS Large Business & International Division (“LB&I”) announced three compliance campaigns, bringing the total number of announced campaigns to 53.1 The stated goals of the new campaigns are to “improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.”

Please click here to read the full article authored by Elizabeth Smith and Ropes & Gray summer associate Lucas Follett.

On May 16, 2019, the Large Business and International (LB&I) Division of the IRS unveiled the Large Corporate Compliance (LCC) program. The LCC uses data analytics to automatically target the largest and most complex corporate taxpayers having the most compliance risks for examination. The LCC is part of a larger push toward “portfolio management”—ensuring that the IRS’s limited resources are spent on tax returns with the highest compliance risk.

Please click here to read the full article authored by tax controversy counsel Elizabeth Smith and Ropes & Gray summer associate Michael Rochford.

In a recent Law360 article, tax partner and tax controversy group co-founder Kat Gregor, tax controversy counsel Elizabeth Smith and tax associate Stefan Herlitz analyze the costly risks that loom if retailers collect too much sales tax including private class action lawsuits seeking refunds of over-collected sales tax.

The authors explain that the trend of consumer sales tax class action suits will grow with the proliferation of states’ Wayfair sales tax collection regulations, and retailers’ struggling to keep up with the requirements. In response, more retailers may add class action waivers to their terms of use.

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Tax partner and tax controversy group co-founder Kat Gregor recently spoke on a panel of leading experts on “Hidden Wealth”: The Global Campaign for Tax Transparency –the Latin Response” at the 12th Annual U.S. and Latin America Tax Practice Trends Conference on June 13^th in Miami, Florida. Topics included the Common Reporting System (CRS); Golden Passports; Economic Substance Requirements for Shell Companies; Beneficial Ownership Disclosure; Tax Haven Black Lists; and the OECD Global Forum on Tax Transparency. Please click here to view the slides used during the presentation.

On June 7, 2019, the Ninth Circuit re-issued a decision in Altera v. Commissioner, upholding an IRS Regulation that had been previously struck down by the Tax Court.  (This follows a decision in the same case that had previously been released by the Ninth Circuit on July 24, 2018, only to be precipitously withdrawn on August 7, 2018, as previously reported by Ropes & Gray with respect to the July 2018 and August 2018 decisions).

At issue is Treasury Regulation 1.482-7A(d)(2)’s requirement that related parties allocate stock-based compensation costs when entering into cost-sharing agreements to develop intangible assets.  The Ninth Circuit upheld the Treasury Regulation 1.482-7A(d)(2) (the “Regulation”), reversing the Tax Court’s decision.  The court held that the Regulation did not exceed the authority delegated to the Commissioner by 26 U.S.C. §482, regarding the allocation of income and deductions among taxpayers.  The court then applied Chevron deference to conclude that the Regulation was a reasonable method for achieving the results required by 26 U.S.C. §482.  The decision was again 2-1, with Chief Judge Sidney R. Thomas and Judge Susan P. Graber in the majority, and Judge Kathleen M. O’Malley again dissenting.  The decision is available here.