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On June 21, 2018, the Supreme Court ruled 5-4 in South Dakota v. Wayfair et al. that the Constitution does not prevent the State of South Dakota from requiring large online retailers without actual physical presence in the state to collect and remit sales tax. The Supreme Court’s decision is based on a South Dakota statute that it viewed as not imposing significant burdens on interstate commerce, because, among other things, it was prospective in its application, imposed a single level of tax and applied only to non-resident sellers that deliver more than $100,000 in goods or services or engage in 200 or separate transactions for the delivery of goods and services into South Dakota. The Court otherwise left open the question of whether other statutory conditions would render a similar result.

Click here to read the full alert.

On May 21, 2018, the IRS Large Business & International Division (“LB&I”) announced its fourth set of compliance campaigns.  The six new campaigns include one campaign centered on Forms 3520 and 3520-A compliance.  A Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed to report certain transactions regarding foreign trusts under section 6048 of the Internal Revenue Code, including:

  • Creation of a foreign trust by a U.S. person
  • Any transfer of money or property to a foreign trust, including by reason of death
  • Ownership of foreign trusts, including death of the U.S. owner of a foreign trust
  • Loans and distributions from foreign trusts
  • Gifts or bequests from foreign individuals or estates
  • Gifts from foreign corporations or partnerships

A Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, must be filed annually by a foreign trust with a U.S. owner.

The other five new compliance campaigns focus on (1) withholding, depositing, and reporting requirements of withholding agents under Forms 1042 and 1042-S; (2) compliance with tax treaties providing for exemptions from U.S. income; (3) itemized deductions claimed on Form 1040-NR, the U.S. Nonresident Alien Income Tax Return; (4) tax credits claimed on Form 1040-NR; and (5) the capitalization of interest associated when the construction of real and certain personal property.  As in prior campaigns, in addition to conducting audits, education of taxpayers and practitioners will be an important aspect of most of these campaigns.

As previously described in part in Disputing Tax and in a recent Bloomberg article that included remarks from Kat Gregor, Facebook has been involved in a multi-front litigation with the IRS for almost two years.  It began when Facebook refused to extend the statute of limitations for a sixth time to allow the IRS to continue to its nearly five-year long audit of Facebook for the tax years 2008 to 2010.  The IRS responded by filing suit to enforce a summons and then by issuing a Notice of Deficiency alleging that Facebook owed additional tax as a result of its $7 billion undervaluation of certain intangibles transferred to Facebook Ireland.  Facebook appealed the Notice of Deficiency in Tax Court and also filed two separate lawsuits in the U.S. District Court for the Northern District of California. Continue Reading Northern District of California Strikes a Blow to the Taxpayer Bill of Rights in Facebook Decision

On May 14, 2018, the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) in Murphy v. NCAA. PASPA was passed in 1992 to prevent the expansion of sports gambling by the states. Prior to PASPA, only four states, Nevada, Delaware, Montana and Oregon, had legalized sports wagering. Until the Supreme Court’s decision, PASPA prevented any additional states from joining their ranks.

The Supreme Court was presented with a challenge to the state of New Jersey’s attempts to repeal prior states laws prohibiting sports wagering. The state argued that its actions could not be constitutionally prohibited under principles of state sovereignty. The Supreme Court agreed, reasoning that, under the Tenth Amendment, the federal government could either pass its own federal legislation regulating sports wagering and thereby pre-empt state legislation or leave the states to regulate sports wagering as they saw fit, but it could not compel state legislatures to enact state laws in service of federal interests.

Although the decision leaves open the possibility that the federal government could pass legislation prohibiting sports wagering affecting interstate commerce, unless it does so, the right to authorize sports wagering has been returned solely to the states. Several states in addition to New Jersey, including New York, Pennsylvania, Connecticut, Mississippi, and West Virginia, recently passed legislation authorizing sports wagering in anticipation of PASPA being struck down. Nearly 20 states have separately passed legislation to allow for fantasy sports gaming, including most of New England, New York, and the Mid-Atlantic, as well as a collection of states across the Southern and Midwestern United States.

As states rush to change their laws, industry experts estimate that the sports wagering industry could grow to tens or even hundreds of billions of dollars in gross revenue. Although some commentators have already issued warnings about the regressive nature of gambling taxes and the limited profitability of sports wagering, many states are betting on a sports wagering payday and tacking revenue raising measures onto these legalization efforts. A new Pennsylvania law, for instance, requires a license fee of up to $50,000 to conduct fantasy contests and a 15% tax on gross gaming revenues, the total revenue after deducting prizes paid out, and a $10,000,000 license fee and a 34% tax on gross gaming revenue. A new Mississippi law will charge a license fee of $5,000 to fantasy sports operators and impose a tax on 8% of revenues. Legislation introduced in Kentucky would charge a $250,000 initial license fee to sports wagering operators and impose a 20% tax on gross gaming revenue. Although New York has already passed authorizing legislation, it is considering a modified law that would enable mobile sports wagering and charge a tax of 8.5% on gross gaming revenue. As for Massachusetts, it has already legalized fantasy sports gaming through July 31, but is now proposing a permanent provision that would also add a $100,000 license fee and a 15% tax. At this rate, the main wager may be whether the new laws will be fully operational in time for football season.

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In this Ropes & Gray podcast, Gabby Hirz, counsel in the tax controversy group, is joined by Loretta Richard, a partner in the tax and benefits group and co-founder of the tax controversy group, and Christi Lazo, counsel in the private client group, to discuss another notable Tax Court decision, Lender Management LLC v. Commissioner of Internal Revenue. Lender Management considered whether a family office was operating a trade or business and could therefore deduct investment expenses as business expenses.

In a recent Tax Notes International article, “Is Fishing in Tax Waters Getting Easier or Just More High Tech?,” Brian Studniberg, Gabby Hirz and Loretta Richard provide commentary on the continued role of international information exchange on request given the availability of automatic information exchange.

Click here to read the full article including further insight from the group.

 

In a recent Law360 article, “IRS Could Replace Offshore Voluntary Disclosure Program,” Gabby Hirz comments on the pending closure of the IRS Offshore Voluntary Disclosure Program (OVDP), which allows U.S. taxpayers who have not disclosed foreign bank accounts to come forward while avoiding criminal penalties and paying a reduced civil penalty. Gabby observes that the IRS’s request for comments has caused speculation as to whether IRS is developing a new version of the OVDP. To read more observations from Gabby, please click here.

 

On February 27, 2018, the Boston Chapter of the Federal Bar Association (FBA) Tax Section and Ropes and Gray co-hosted an event that featured Judge David Gustafson of the United States Tax Court. The event provided the opportunity for attendees to network and connect with other practitioners from Boston area law and accounting firms, the Internal Revenue Service, local non-profit organizations and LLM students from Boston University School of Law and Suffolk Law School.

Judge Gustafson was appointed as judge by former president George W. Bush in 2008. Prior to his appointment, Judge Gustafson served as a trial attorney, Assistant Chief and eventual Chief in the Court of Federal Claims Section of the Tax Division in the U.S. Department of Justice. He offered a variety of interesting remarks about his experience as a Tax Court judge, and provided a behind-the-scenes look at the process behind reviewed opinions.

To view photos from the event, please click here. For more information about the FBA Tax, or to be notified about future events by email, please contact Boston co-chair Gabby Hirz at gabrielle.hirz@ropesgray.com

On March 13, 2018, the IRS announced its first substantive Large Business and International Division (“LB&I”) compliance campaigns focused on partnerships and their partners. Although in January 2017, the IRS announced its intent to conduct a “TEFRA Linkage Plan Strategy Campaign” geared toward new procedures and techniques for assessing tax on partners after TEFRA-audits, its other 23 campaigns announced in 2017 were largely industry-specific campaigns, focused on discrete transactions, or focused on other kinds of taxpayers, such as individuals and foreign corporations. That changed last week with the announcement of three new campaigns focused uniquely on entities taxed as partnerships and their partners and members. The campaigns will focus on three particular circumstances: (1) individual partners or members who provided services to their partnership or LLC without reporting income subject to self-employment tax; (2) individual partners who have reported sales of partnership interests who may have improperly reported the character of their gain or loss; and (3) partnerships who have failed to file returns although continuing to engage in business activities and their partners who have not reported corresponding income. Partners and partnerships who fall into these categories may receive an examination notice for an issue-based examination, or a soft letter alerting them that their tax return may be incorrect. In addition, partners intending to sell partnership interests or report income from services to a partnership this year may want to watch for changes to forms and instructions, including in their tax software.

For more information regarding the new LB&I compliance campaigns, read our full alert here.