Noteworthy Cases

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A decision by Maryland’s highest court illustrates the complexities taxpayers face in reporting federal income tax audit changes for state income tax purposes. The Maryland Court of Appeals held that an individual must claim a state income tax refund resulting from a “final” federal audit change within one year of the Internal Revenue Service’s issuance of Form 4549A, Income Tax Examination Changes, rather than the date when the taxpayer could no longer appeal the Service’s determination. King v. Comptr. of Treas., 2012 WL 592788 (Md. Feb. 24, 2012), aff’g Md. App. (unreported), rev’g 2009 WL 6767497 (Calvert Cnty Cir. Ct. Nov. 12, 2009), rev’g Md. Tax Ct. (Aug. 28, 2008), aff’g Md. Comptr. Off. Hrg. and App. Section.

The taxpayer, who is the ex-wife of author Tom Clancy, owned a limited partnership interest in the Baltimore Orioles baseball team. A federal income tax audit of the partnership resulted in the IRS adjusting certain partnership items using Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations. The partnership adjustments flowed through to the taxpayer’s personal income tax return and permitted her to utilize additional losses, thereby reducing her federal taxable income. The IRS reported the impact of the partnership’s flow through adjustments to the taxpayer on Form 4549A, after which the taxpayer had a minimum of six months to challenge the IRS’ adjustments.Continue Reading A Swing and a Miss: No Refund for Baseball Team Owner Following Federal Audit

The Washington Department of Revenue (Department) determined that an out-of-state mail order retailer (Taxpayer) had substantial nexus with the state based on the activities of an in-state affiliate (Affiliate), and therefore, upheld an assessment of business and occupation tax (B&O Tax) and sales tax. Determination No. 10-0057 (released Dec. 20, 2011). The Taxpayer sold tangible…

In an interesting procedural case, and important decision for online intermediaries, the Seventh Circuit Court of Appeals held that the City of Chicago may not require Internet intermediaries to collect and remit the City’s amusement tax on the difference between the original ticket price and resale price of tickets sold online. City of Chicago, Illinois v. StubHub!, Inc., Dkt. No. 09-3432 (7th Cir. Nov. 23, 2011); City of Chicago, Illinois v. eBay, Inc., Dkt. No. 10-1144 (7th Cir. Nov. 23, 2011).

Beginning in 1991, Illinois authorized ticket brokers to resell their tickets at a premium price, provided the broker registered with the State and collected local taxes. The City of Chicago took advantage of this opportunity to tax the incremental price of resold tickets until Illinois amended its ticket scalping laws in 2005. Following the 2005 amendments, an “Internet auction listing service” was relieved of the mandatory collection of local taxes, provided it met certain registration requirements and published a written notice on its website “inform[ing] the ticket reseller of the ticket reseller’s potential legal obligation to pay any applicable local amusement tax.” 720 ILCS 375/1.5(c).Continue Reading Seventh Circuit Not Amused by Chicago’s Amusement Tax

A recent Florida Department of Revenue Technical Assistance Advisement (TAA) applied costs-of-performance (COP) sourcing for corporate income tax purposes in a manner that is more akin to market sourcing. Tech. Asst. Adv. 11C1-008 (Sept. 15, 2011).   

The TAA applied to receipts from the Taxpayer’s two predominant revenue streams: receipts from subscription programming and advertising. The Taxpayer provided subscription content directly to distributors and had no direct contact with its customers’ customers (i.e., retail subscribers/customers). The Department of Revenue stated that the income producing activity is the Taxpayer’s delivery of programming content to distributors and that such delivery constitutes performance. Thus, the Department found that subscription revenue would be sourced to Florida when the distributor is located in Florida. The Taxpayer’s receipts from subscription services provided to out-of-state distributors would not be sourced to Florida, even if that distributor provided the content to Florida residents.Continue Reading “Other Sales in Florida”: COP Sourcing in Regulation, Market in Application

In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty

The Indiana Tax Court granted a motion for partial summary judgment to AE Outfitters Retail Co. and held that the Indiana Department of State Revenue may require combined reporting only after first determining that other alternative apportionment methodologies would result in an equitable apportionment of the taxpayer’s income. AE Outfitters Retail Co. v. Ind. Dep’t of State Revenue (Ind. Tax Ct. Oct. 25, 2011).

The dispute in the case was whether the Department was required to first apply statutorily provided remedies to adjust a taxpayer’s income before applying combined reporting. Like many states, Indiana statutes provide alternative apportionment methods for re-determining income if the taxpayer’s income is not fairly represented, including separate accounting, the exclusion of factors, the inclusion of additional factors, or any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income. Ind. Code § 6-3-2-2(l). Furthermore, in the case of commonly owned or controlled businesses, the statute allows the Department to “distribute, apportion or allocate the income derived from sources within the state of Indiana between and among those organizations, trades or businesses in order to fairly reflect and report the income derived from sources within the state of Indiana by various taxpayers.” Ind. Code § 6-3-2-2(m). The statute, however, limits the Department’s ability to use combined reporting in situations where it “is unable to fairly reflect the taxpayer’s adjusted gross income for the taxable year through use of other powers granted to the department by” those other statutory provisions.Continue Reading Indiana Combination Is Last Resort

The Massachusetts Appellate Tax Board recently upheld the Commissioner of Revenue’s denial of deductions for interest expense on intercompany loans. Sysco Corp. v. Comm’r of Revenue, Docket Nos. C282656 & C283182 (Mass. App. Tax Bd., Oct. 20, 2011).

In Sysco, the taxpayer employed a common cash management arrangement in which cash was swept…

Most multistate taxpayers are audited, assessed, or challenged on their tax positions and are faced with a decision whether to challenge or settle. In this edition of A Pinch of SALT, Sutherland SALT’s Michele Borens and David Pope discuss techniques and considerations for deciding whether to settle; determining the scope of a settlement; developing a settlement strategy; and finalizing…