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Archive for TL Fahring

The Methods (And Madness) Of Transfer Pricing For Tangible And Intangible Property

The Methods (And Madness) Of Transfer Pricing For Tangible And Intangible Property

Transfer pricing has to do with the allocation of income among parties controlled by the same persons (controlled parties) that engage in transactions with each other (controlled transactions).[1] In the international context where controlled parties may operate in different countries with different tax burdens, the concern is that the controlled parties may shift income from a higher-taxed country from a lower-taxed country. Here’s a simple example:

The Example

Here ProdCo and WidgCo are controlled parties because they are both 100% owned by Owner. And they’re engaged in a controlled transaction, because ProdCo is purchasing Widgets from WidgCo, which ProdCo then incorporates into Product which it sells to consumers for $100 a pop. ProdCo is based out of Country A, which has a 20% income tax rate, while WidgCo is based out Country B with a 10% income tax rate.

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Court Cases: Sales And Use Tax, Franchise Tax, Collections, Adopted Rules, Proposed Rules

Court Cases: Sales And Use Tax, Franchise Tax, Collections, Adopted Rules, Proposed Rules

Court Cases

Sales and Use Tax

Manufacturing Exemption

Hegar v. Tex. Westmoreland Coal Co., Case 21-1007 (Tex. Sept. 30, 2022)—In this case, the Texas Supreme Court denied the Comptroller’s petition for review, leaving the decision of the Third Court of Appeals in favor of the taxpayer in place.  The Court of Appeals had held that equipment used to break apart lignite coal from a coal formation qualified for the manufacturing exemption from sales and use tax.[1] The Court of Appeals disregarded the Comptroller’s argument that the manufacturing exemption didn’t apply because the equipment was used on real property to create tangible personal property, holding that there was no basis in the statute for any requirement that an input to the manufacturing process had to be tangible personal property.

Franchise Tax

Apportionment

Citgo Petroleum Corporation v. Hegar, 21-0997 (Tex. Sept. 30, 2022)—The Texas Supreme Court denied the taxpayer’s petition for review in this case, so the decision of the Third Court of Appeals in favor of the Comptroller remains the law of the land. The Court of Appeals had held that only the net proceeds of sales of commodity futures contracts and options on commodity futures contracts could be included in the calculation of the taxpayer’s apportionment factor for purpose of calculating Texas franchise tax.

Rules

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International Tax Withholding: Chapter 3 Of The Internal Revenue Code

TL FAHRING - International Tax Withholding: Chapter 3 Of The Internal Revenue Code

One of the more confusing areas of international tax law is determining when withholding is required. Getting it wrong can have dire consequences.

Currently, U.S. international withholding provisions can be found in Chapters 3 and 4 of the Internal Revenue Code.  Chapter 3 contains the withholding provisions that are intended to approximate a foreign person’s U.S. federal income tax liability. Chapter 4, on the other hand, deals with withholding provisions put in place by the Foreign Accounts Tax Compliance Act of 2010 and is primarily aimed at obtaining information regarding account holders of foreign financial institutions and owners of certain foreign entities.

In this post, we’ll focus on Chapter 3 withholding, setting aside Chapter 4 for another time.

But first . . .

Why International Tax Withholding?

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Shocking Court Cases In Texas: Franchise Tax, Sales & Use Tax, Miscellaneous Gross Receipts Tax, Beverage Tax

Shocking Court Cases In Texas: Franchise Tax, Sales & Use Tax, Miscellaneous Gross Receipts Tax, Beverage Tax

Court Cases

Franchise Tax

Apportionment

Conagra Brands, Inc. v. Hegar, No. 03-21-00111-CV (Tex. App.—Austin Aug 24, 2022, no pet. h.)—The Third Court of Appeals held that a taxpayer could not include gross receipts from certain securities in its apportionment-factor denominator for purposes of calculating its Texas franchise tax.[1]

  • The taxpayer in question was in the business of producing food products for sale to grocery stores, convenience stores and food service businesses. In order to mitigate the risks associated with potential fluctuations in the price of necessary components and raw materials, the taxpayer bought and sold commodity futures contracts.
  • The taxpayer argued that these securities were inventory for federal tax purposes and that the gross proceeds from the sale of these securities should be included in its apportionment factor denominator. On appeal, however, the taxpayer didn’t dispute the trial court’s finding that the securities weren’t inventory as defined in the Internal Revenue Code. Instead, the taxpayer argued that the securities were in substance inventory under the U.S. Supreme Court’s decision in Corn Products Refining Co. v. Comm’r, 350 U.S. 46 (1955).

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Texas Makes It Easier To Challenge State Tax Assessments

Texas Makes It Easier To Challenge State Tax Assessments

Texas Legislature Adds Suits After Redetermination As Option To Challenge State Tax Assessments

In 2021, the Texas Legislature made it easier for taxpayers to challenge tax assessments without first paying the disputed amounts of tax due.

Prior to this change, pay-to-play was the only game in town. Under pay-to-play, a taxpayer first has to pay the total amount of tax, penalties, and interest assessed before challenging that assessment in court.[1]

This obviously created problems for taxpayers who can’t afford to pay, which could violate the Open Courts Provision in the Texas Constitution.[2] The Open Courts Provision provides that “[a]ll courts shall be open, and every person for an injury done him, in his lands, goods, person or reputation, shall have remedy by due course of law.”[3] The Texas Supreme Court has indicated that under certain circumstances a statute that requires prepayment of a tax assessment for judicial review may violate this provision.[4]

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Moments In Tax History | The Child Labor Tax Case | What’s A Tax?

Child Labor Tax Case

Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) (a/k/a “Child Labor Tax Case”)

SummaryIn the Child Tax Labor Case, the U.S. Supreme Court ruled that a purported “tax” was really a “penalty” and therefore an unconstitutional exercise of Congress’s power to tax. While the breadth of the decision has been limited in light of subsequent interpretations of Congress’s power to regulate interstate commerce, it remains relevant when Congress passes a “tax” that’s unsupported by any other enumerated power.

Background:  Among the powers that the U.S. Constitution grants to Congress are “Power To lay and collect Taxes, Duties, Imposts and Excises”[1] (the “Taxing Power”) and “to regulate commerce . . . among the several states” (the “Interstate Commerce Clause”).[2] The Tenth Amendment to the Constitution clarifies that “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”[3]

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Moments In Tax History: Income, An Origin Story

Moments In Tax History

Eisner v. Macomber, 252 U.S. 189 (1920)

Summary: In Eisner v. Macomber, the U.S. Supreme Court ruled that for purposes of the Sixteenth Amendment, “income” was “a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being ‘derived,’ that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.”  Macomber introduced the realization requirement to the federal income tax, and the decision continues to be cited in such contexts as cryptocurrency hard forks and the constitutionality of provisions denying deductions for cannabis businesses.

Background:  The U.S. Constitution prohibits Congress from imposing an unapportioned direct tax.[1]  In 1895, the U.S. Supreme Court ruled that an attempt by Congress to tax incomes uniformly throughout the United States was unconstitutional due to this constitutional prohibition.[2]

On February 3, 1913, the Sixteenth Amendment to the U.S. Constitution was ratified. According to the Sixteenth Amendment, “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”[3]  That same year, Congress passed the Revenue Act of 1913, inaugurating the modern federal individual income tax.[4]

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Texas Tax Roundup – Taxes Heat Up In Texas | June 2022

Taxes Hot In Texas

Things have been heating up this summer. Let’s see what’s been cooking with the Texas Comptroller’s office.

Cases

U.S. Fifth Circuit Court of Appeals

Texas Entertainment Association (TEA) v. Hegar, 10 F.4th 495 (5th Cir. 2021)—On June 21, 2022, the U.S. Supreme Court denied the Comptroller’s petition for writ of certiorari with respect to the Fifth Circuit’s opinion.

  • The case involved the sexually oriented business fee under Bus. & Com. Code § 102.052 (Fee Based on Admissions; Records). This fee is imposed on certain commercial enterprises that provide live nude entertainment or performances, with “nude” meaning “entirely unclothed” or “clothed in a manner that leaves uncovered or visible through less than fully opaque clothing any portion of the breasts below the top of the areola of the breasts, if the person is female, or any portion of the genitals or buttocks.” See id. §§ 102.051(1), (2) (Definitions), 102.052(a).
  • The Comptroller had enacted a rule defining “clothing” to exclude “[p]aint, latex, wax, gel, foam, film, coatings, and other substances applied to the body in a liquid or semi-liquid state . . . .” 34 Tex. Admin. Code § 3.722(a)(1) (Sexually Oriented Business Fee). The rule was aimed in part at so-called “latex clubs,” which required that dancers wear shorts and opaque latex over their breasts.
  • The Fifth Circuit held that the Comptroller’s rule violated the First Amendment to the U.S. Constitution because the rule was directed at the essential expressive nature of latex clubs’ business and the Comptroller had made no showing that the rule was narrowly tailored to serve a compelling state interest. The Court also held that the retroactive application of the rule upon latex clubs violated the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution.
  • However, the Fifth Circuit determined TEA had not shown that the rule violated the Equal Protection Clause of the Fourteenth Amendment, because there was no showing that latex clubs were treated differently from similarly situated establishments. The TEA had argued that sports bars with scantily clad waitresses and concerts, body paint competitions, and bodybuilding competitions where latex was worn were similar to latex clubs. But, the Fifth Circuit wasn’t buying it.
  • With denial of cert, the Fifth Circuit’s decision in this case stands.

Texas Supreme Court

Hegar v. Health Care Service Corporation, No. 21-0080 (Tex. June 17, 2022)—The Texas Supreme Court held that premiums from Blue Cross Blue Shield’s stop-loss policies sold to employers who self-funded their employee’s health insurance (i.e., the policies indemnified the employers for amounts paid to reimburse healthcare claims over a certain threshold) were subject to insurance premium and maintenance taxes.

Texas Third Court of Appeals

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Ninth Circuit Rejects Constitutional Challenges To Section 965 Tax

Ninth Circuit Rejects Constitutional Challenges to Section 965 Tax

In Moore v. United States, the U.S. Ninth Circuit Court of Appeals recently rejected arguments that the mandatory repatriation tax imposed under section 965 of the Internal Revenue Code violated the Constitution’s Apportionment Clause and Fifth Amendment Due Process Clause.[1]

Background

The case involved a U.S. couple (“Taxpayers”) that invested in an Indian company that was a controlled foreign corporation (“CFC”) under subpart F of the Internal Revenue Code.[2]  Under subpart F, a CFC is a foreign corporation more than 50% of which is owned (directly, indirectly, or constructively) by U.S. shareholders.[3]  U.S. shareholders, in turn, are U.S. persons that own at least a 10% interest in a foreign corporation.[4]

Foreign corporations generally are not subject to federal income tax except on U.S. source income and income that is effectively connected to the conduct of a U.S. trade or business.[5]  Thus, foreign income earned by a foreign corporation that is not effectively connected to the conduct of a U.S. trade or business generally is deferred from taxation in the United States unless or until the foreign corporation distributes earnings to a U.S. person or such person sells an interest in that foreign corporation.

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Congress Hears From Small Businesses About Problems Caused By Wayfair

Congress Hears From Small Businesses About Problems Caused By Wayfair

On June 14, 2022, the Senate Finance Committee heard testimony on the impact on small businesses and remote sales of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018).

In Wayfair, the U.S. Supreme Court ruled that a business’s physical presence in a state (or lack thereof) wasn’t determinative for purposes of whether a state could require the business to collect sales and use taxes from customers located in the state.[1] Overturning decades of precedent, the decision effectively gave states the green(ish) light to force remote sellers to collect sales and use taxes.[2]

Witnesses before the committee discussed a number of difficulties that remote sellers were having in complying with tax collection requirements across multiple states. These include dealing with varying dollar and transaction thresholds, different items subject to sales and use tax, the complexity of local taxes, and costs associated generally with staying compliant across multiple jurisdictions.

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Highlights From The Lummis- Gillibrand Responsible Financial Innovation Act (Introduced)

Highlights From The Lummis- Gillibrand Responsible Financial Innovation Act (Introduced)

On June 7, 2022, a bill was introduced in the U.S. Senate that would provide greater clarity regarding the taxation and regulation of digital assets. Here are some of highlights.

Definitions

The bill would provide definitions in connection with digital assets that would be generally applicable in such areas of law as federal income tax, commodities regulation, and securities regulation. Terms that the bill would define would include the following:

  • “Digital asset” would be defined as “natively electronic asset that . . . confers economic, proprietary, or access rights or power . . . and . . . is recorded using cryptographically secured distributed ledger technology.”[1]
  • Distributed ledger technology” would mean “technology that enables the operation and use of a ledger that . . . is shared across a set of distributed nodes that participate in a network and store a complete or partial replica of the ledger; . . . is synchronized between the nodes; [and] . . . has data appended to the ledger by following the specified consensus mechanism of the ledger . . . .”[2]
  • Smart contract” would mean “computer code deployed to a distributed ledger technology network that executes an instruction based on the occurrence or nonoccurence of specified conditions . . . or any similar analogue . . . and . . . may include taking possession of a digital asset and transferring the asset or issuing executable instructions for these actions.”[3]
  • “Virtual currency” would be defined as “a digital asset that . . . is used primarily as a medium of exchange, unit of account, store of value, or any combination of such factors; . . . that is not legal tender . . .; and . . .  does not derive value from or is backed by an underlying financial asset . . . .”[4]

Federal Income Tax

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Texas: Administrative Judges Rulings On Tax Matters

Texas: Administrative Judges Rulings On Tax Matters

Proposed Rules

General

34 Tex. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller proposed amendments to this rule to address reporting requirements for distributors of certain off-highway vehicles that were added as a result of SB 586, 87th Leg., R.S. (2021).  Prior to SB 586, Tex. Tax Code § 151.482 (Reports by Manufacturers and Distributors) only required manufacturers of such vehicles to file reports with the Comptroller.  See HB 1543, 86th Leg., R.S. (2019).

Notable Additions to the State Automated Research System

General

Fraudulent Transfers

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