In this Ropes & Gray podcast, Brittany Cvetanovich, an associate in the tax group, is joined by Kat Gregor, tax partner and co-founder of the tax controversy group, to discuss a notable Supreme Court decision, South Dakota v. Wayfair. On June 21, 2018, the Supreme Court ruled in Wayfair that the State of South Dakota may constitutionally require large online retailers without actual physical presence in the state to collect and remit sales tax.
Tax partner Jim Brown and tax associate Franziska Hertel authored a recent Tax Notes Special Report article, in which they analyzed whether the commodity trading safe harbor is available to foreign investors engaging in virtual currency trades. The IRS has taken an interest in the developing tax implications and laws associated with the taxation of virtual currencies including bitcoin and BlockChain. Disputing Tax has previously reported on this topic as seen here.
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.
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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
In a recent Law360 article, Kat Gregor comments on current and future tax obligations Meghan Markle, Duchess of Sussex, should consider as a U.S. citizen living abroad and married to a non-U.S. resident. Kat notes that the Duchess is still responsible for reporting and paying taxes on her worldwide income in accordance with Section 61 of the Code. One way to avoid these obligations would be to renounce her U.S. citizenship after becoming a British citizen. In the event that the Duchess decides to expatriate, it would be advisable to do this before the couple has children to avoid unwanted U.S. citizenship “…because she and Prince Harry cannot expatriate their children, all of the income and assets of those children would need to be reported to the U.S.”
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In a recent The Drawdown article, “Tax Comes Under ESG Spotlight,” tax partner Andrew Howard provides commentary on how companies might approach assessing reputational risks from tax decisions in the ESG global arena. Howard notes, that in light of recent attitude shifts toward tax transparency, we may see “policymakers bring forth rules that erode confidentiality in tax affairs in favour of greater openness to the general public, not just authorities.”
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In a recent Law360 article, Kat Gregor comments on a Supreme Court’s decision to grant cert to BNSF Railway Co.’s petition for review of whether payroll taxes should be deducted from compensation owed to a former employer for lost wages in connection with a workplace injury. This case is an appeal from an Eighth Circuit decision that leaves a disconnect between the definitions of taxable compensation described in the Railroad Retirement Tax Act and the Railroad Retirement Act. The IRS has historically held that taxable compensation should include pay for time lost pursuant to Treasury regulations. Kat notes that if the Supreme Court were to determine that the IRS did not have authority to issue the applicable regulations, “…it could make the IRS feel as if their hands are a little bit more tied in putting together tax reform guidance. So, it’s possible it can have an effect on new regulations.”
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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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