Archive for TL Fahring

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

The Treasury Inspector General for Tax Administration (“TITGA”) recently has released a report on the status of efforts by the Internal Revenue Service (“IRS”) to develop the digital asset monitoring and compliance strategy mandated by Congress with the Inflation Reduction Act of 2022.

For purposes of federal taxation, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[1] This includes non-fungible tokens and virtual currencies.

As part of the Infrastructure Investment and Jobs Act of 2021, Congress had amended sections 6045 and 6050I to require reports from digital asset brokers and from any person engaged in non-financial trades or business who receives more than $10,000 at least in part in digital assets.[2]

TITGA noted that the IRS has created the Digital Asset Advisory Committee (“DAAC”) in February 2022 to provide service-wide collaboration, planning, and information sharing with respect to digital assets. The DAAC has the following goals:

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TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

The Treasury Inspector General for Tax Administration (“TITGA”) recently has released a report on the status of efforts by the Internal Revenue Service (“IRS”) to develop the digital asset monitoring and compliance strategy mandated by Congress with the Inflation Reduction Act of 2022.

For purposes of federal taxation, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[1] This includes non-fungible tokens and virtual currencies.

As part of the Infrastructure Investment and Jobs Act of 2021, Congress had amended sections 6045 and 6050I to require reports from digital asset brokers and from any person engaged in non-financial trades or business who receives more than $10,000 at least in part in digital assets.[2]

TITGA noted that the IRS has created the Digital Asset Advisory Committee (“DAAC”) in February 2022 to provide service-wide collaboration, planning, and information sharing with respect to digital assets. The DAAC has the following goals:

  • Coordinating collaboration, planning, information sharing, and executive leadership over the IRS’s digital asset strategy related to its compliance programs.
  • Identifying and monitoring the management of digital asset programs and resources to ensure accountability, transparency, and consistency.
  • Recommending funding and investment opportunities for digital asset technology and operational needs such as tracing software, or basis computational tools.
  • Reviewing digital asset related activities, as needed.

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What To Know When Selling The Assets Of A Business

What To Know When Selling The Assets Of A Business

In an “applicable asset acquisition,” the sale of the assets of a business may be subject to certain allocation and reporting requirements for federal income tax purposes. It’s essential for the seller and purchaser to be aware of these requirements.

What’s an Applicable Asset Acquisition?

An “applicable asset acquisition” is any transfer of assets which constitute a trade or business and with respect to which the transferee’s basis in such assets is determined wholly by reference to the consideration paid for such assets.[1] A group of assets is a trade or business if its character is such that goodwill or going concern value could under any circumstances attach to those assets.[2]

Goodwill is the value of a trade or business attributable to the expectancy of continued customer patronage, which may be due to the name or reputation of a trade or business or any other factor.[3] Going concern value is the additional value that attaches to property because of its existence as an integral part of an ongoing business activity.[4] Going concern value includes the value attributable to the ability of a trade or business (or a part of a trade or business) to continue functioning or generating income without interruption notwithstanding a change in ownership.[5] It also includes the value that is attributable to the immediate use or availability of an acquired trade or business, such as the use of the revenues or net earnings that otherwise would not be received during any period if the acquired trade or business were not available or operational.[6]

The basis of an asset generally is its cost as adjusted for various items including depreciation or amortization.[7] Thus, when an asset is sold, its basis generally is the consideration paid for that asset.[8]

What Happens in an Applicable Asset Acquisition?

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Treasury Department Takes Aim At Convertible Virtual Currency Mixing

Treasury Department Takes Aim At Convertible Virtual Currency Mixing

The Treasury Department has recently issued a notice of proposed rulemaking under the Bank Secrecy Act regarding the reporting of convertible virtual currency (“CVC”) mixing.[1]

Perceived Problems with CVC Mixing

The Treasury Department explains that “[t]he public nature of most CVC blockchains, which provide a permanent, recorded history of all previous transactions, make[s] it possible to know someone’s entire financial history on the blockchain.”[2] CVC mixing involves various methods “intended to obfuscate transactional information, allowing users to obscure their connection to the CVC.”[3] These methods include:

  • “combining CVC from two or more persons into a single wallet or smart contract and, by pooling or aggregating that CFC, obfuscating the identity of both parties to the transaction by decreasing the probability of determining both intended”;[4]
  • “splitting a single transaction from sender to receiver into multiple, smaller transactions, in a manner similar to structuring, to make transactions blend in with other, unrelated transactions on the blockchain occurring at the same time so as to not stand out, thereby decreasing the probability of determining both intended persons for each unique transaction”; [5]
  • “coordinat[ing] two or more persons’ transactions together in order to obfuscate the individual unique transactions by providing multiple potential outputs from a coordinated input, decreasing the probability of determining both intended persons for each unique transaction”;[6]
  • “use of single-use wallets, addresses, or accounts . . . that have the purpose or effect of obfuscating the source and destination of funds by volumetrically increasing the number of involved transactions, thereby decreasing the probability of determining both intended persons for each unique transaction”;[7]

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Texas Tax Roundup… Insurance, Data Processing, Video Games!

Texas Tax Roundup | September 2023 | Insurance, Data Processing, Video Games!

Hi folks! Welcome back to the Texas Tax Roundup, September 2023 edition. We got some insurance services, data processing services, and amusement services (a pretty sales tax heavy last month). Let’s see what went down!

Rules

Battery Sales Fee

34 Tex. Admin. Code § 3.711, 48 Tex. Reg. 5739 (Sept. 29, 2023)—The Comptroller adopted proposed amendments to Rule 3.711, relating to the battery sales fee, without change. These amendments implement S.B. 477, 87th R.S. (2021), which required marketplace providers to collect applicable fees related to the sale of lead-acid batteries.

Notable Additions to the State Tax Automated Research (“STAR”) System

Sales and Use Taxes

Insurance Services

STAR Accession No. 202308020L (Aug. 21, 2023)—In this private letter ruling, the Comptroller determined the taxability of various services provided by an employment benefit recordkeeping services provider, retirement plan third-party administrator, and government savings facilitator. The Comptroller found that the taxpayer’s flex spending account services (which involved the design, implementation, and administration of employee health reimbursement and flex spending accounts), Omnibus Budget Reconciliation Act (COBRA) administration services, and retire plan administration and 401(k) recordkeeping services were nontaxable services. The taxpayer’s Affordable Care Act (ACA) comprehensive and eligibility verification service (which involved evaluating employees’ eligibility or qualification for insurance coverage under the ACA) was a taxable insurance service.[1] The taxpayer’s ACA reporting service (which involved the automated generation, printing, distribution, and filing of IRS Forms 1094-C and 1095-C) was a taxable data processing service.[2]

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Written by | Posted in Data Processing Taxes • Insurance Taxes • Video Game Taxes

Seller-Financed Motor Vehicle Sales, Rolling Stock, Seeds!

Seller-Financed Motor Vehicle Sales, Rolling Stock, Seeds!

Howdy folks, and welcome back to the Texas Tax Roundup. This August was a barren wasteland of sun and heat, but the Comptroller still managed to wrangle up some interesting tax issues. Let’s see what they came up with!

Rules

Proposed Rules

Battery Fees

34 Tex. Admin. Code § 3.711 (48 Tex. Reg. 4379 (Aug. 11, 2023))—The Comptroller proposes amendments to this rule that primarily implement legislative changes which require marketplace providers to collect fees related to the sale of lead-acid batteries.

Notable additions to the State Tax Automated Research (“STAR”) System

Natural Gas Production Tax

Determining Market Value

Comptroller’s Decision No. 118,189 (2023)—The ALJ upheld the Comptroller’s partial denial of a natural gas producer’s refund claim of natural gas production based on the producer’s amended marketing costs that included “hot oil treating, gas meter testing and inspection, electric repair, electrical installation, electrical material, valves and connectors, gas pipeline, ES electrical installation, engineering and patriot supervision, electrical material and automation, and gas flowline and installation.” The natural gas production tax is 7.5% of the market value of gas produced and saved in the state by the producer.[1] The market value of gas is its value at the mount of the well from which it is produced.[2] Market value is determined by subtracting the producer’s actual marketing costs from the producer’s gross receipts from the sale of the gas.[3] Marketing costs include: (1) costs for compressing the gas sold; (2) costs for dehydrating the gas sold; (3) costs for sweetening the gas sold; and (4) costs for delivering the gas to the purchaser.[4] Marketing costs do not include: (1) costs incurred in producing the gas; (2) costs incurred in normal lease separation of the oil or condensate; (3) insurance premiums on the marketing facility.[5] The producer in this hearing did not provide any evidence of which of its claimed costs were allowable as marketing costs.

Motor Vehicle Sales And Use Tax

Seller-Financed Motor Vehicle Sales
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Texas Tax Roundup: Mixed Beverages, Mixed Beverages, Mixed Beverages!

Texas Beverage Taxes

Hiya, folks, and welcome back to another edition of Texas Tax Roundup. It seems like a lot of people might have been taking a vacation in July, getting a break from this heat, so not all that much to talk about—other than, for some reason, mixed beverages. Let’s see what happened!

Notable Additions to the State Tax Automated Research (“STAR”) System

Mixed Beverage Taxes

Audit Procedures/Additional Penalties

Comptroller’s Decision Nos. 118,594, 118,595 (2023)—The ALJ determined that the assessment of mixed beverage taxes against a taxpayer was not in error when the assessment was based on a pour test at the taxpayer’s establishment, sales receipts from the pour test, a price sheet, and vendor-reported purchases, and the taxpayer didn’t provide any evidence to support their claim that the assessment was wrong. The ALJ also upheld the assessment of a 50% additional penalty when the error rate for the assessments was approximately 86% and the taxpayer did not establish a plausible explanation for underreporting.

Comptroller’s Decision Nos. 117,911, 117,912 (2023)—The ALJ upheld the assessment of mixed beverage gross receipts tax and mixed beverage sales tax when the assessment was based on sales records and the taxpayer’s mixed beverage gross receipts tax and mixed beverage sales tax reporting and the taxpayer didn’t provide any evidence showing error. The Comptroller also upheld a 50% additional penalty when the taxpayer’s overall error rate exceeded 50% for each assessment and there was not plausible explanation for the underreporting.

Comptroller’s Decision Nos. 118,107, 118,108, 118,109 (2023)—The ALJ agreed with the assessment of mixed beverage taxes and sales and use taxes against a taxpayer that operated a restaurant and full-service bar when the taxpayer failed to provide any records demonstrating that the audit was in error. The ALJ further upheld an assessment of an additional 50% penalty against taxpayer in connection with the mixed beverage tax assessment because of the taxpayers had an overall error rate of 61.87% in the mixed beverage gross receipts tax audit and 58.3% in the mixed beverage sales tax audit with no plausible explanation for the underreporting.

Personal Liability
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Written by | Posted in Beverage Tax • Texas Tax Law

Crackdown On U.S. Taxpayers Use Of Malta Pension Funds

Malta Pension Funds

Amplifying its efforts to crack down on U.S. taxpayers’ use of Malta pension funds to attempt to achieve federal income tax savings, the IRS recently has issued proposed regulations identifying these funds as listed transactions and appears to have launched criminal investigations into these plans.

Background

Some U.S. taxpayers have been taking the position that a combination of the income tax treaty between the United States and Malta and local Maltese law regarding person retirement schemes provides them with an exemption from federal income tax for income associated with pension funds that they establish in Malta.

Here’s a brief explanation. The U.S.-Malta income tax treaty prohibits each state from taxing a pension plan established in the other state that is beneficially owned by an individual resident of the first state if the pension plan would be exempt from taxation in that other state.[1]

Some examples of U.S. pension plans where this provision could apply include an individual retirement account (IRA) under section 408 or a Roth IRA under section 408A of the Internal Revenue Code with an individual beneficiary who is Malta resident.[2] Generally, amounts in an IRA are not taxed until there is a distribution.[3] Likewise, a Roth IRA generally is not taxed on its earnings, and certain distributions from a Roth IRA may be exempt from tax.[4] There are certain limitations, however, on what constitutes and IRA and Roth IRA. Non-cash contributions are prohibited, and such contributions must be limited to the individual’s earned income.[5]

U.S. taxpayers have argued that Malta’s Retirement Pension Act of 2011 should entitle them to a similar exemption from U.S. federal income tax under the treaty with respect to earnings in and distributions from these schemes. The IRS has provided an example of this fact pattern:
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Texas Legislative Update | Qualified Projects

Texas Legislative Update | Qualified Projects

Texas Legislative Update, 88th Legislature, Regular Session | Qualified Projects Under Texas Tax Code Chapter 351, Subchapter C

Summary: The Texas Legislature enacted four bills that 1) expand the list of cities that can build qualified projects (i.e., hotel and convention center projects subject to certain specifications) under Texas Tax Code Chapter 351, Subchapter C; 2) establish a claw back mechanism if state tax revenue generated by a qualified project does not meet certain metrics, 3) require a biennial report from the Texas Comptroller of Public Accounts regarding qualified projects, and 4) clarify that the provisions in Subchapter C do not provide any additional mechanism for taking property for public purposes or economic development.

Bills Enacted:

HB 5012, 88th Leg., R.S. (2023) (effective September 1, 2023)
SB 627, 88th Leg., R.S. (2023) (effective immediately)
HB 3727, 88th Leg., R.S. (2023) (effective immediately)
SB 1420, 88th Leg., R.S. (2023) (effective immediately)

Background: Texas Tax Code Chapter 351, Subchapter C entitles certain cities to receive rebates of state taxes if the cities use their municipal hotel occupancy tax revenue in connection with a “qualified project.”[1] (Note that Texas Tax Code Chapter 351 also envisions qualified projects that are not governed by Subchapter C. For the sake of clarity, I’ll refer to the projects in this post as Subchapter C qualified projects.)

A Subchapter C qualified project is a project to acquire, construct, repair, remodel, expand, or equip a qualified convention center facility, a qualified hotel, and/or certain restaurants bars, retail establishments, spas, and parking areas or structures within a certain proximity to the qualified convention center facility or qualified hotel.[2]

A “qualified convention center facility” means a facility that:
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Written by | Posted in Texas Law Update • Texas Legislature

Texas Tax Update | May 2023 | Hotel Projects, Successor Liability, And More

Texas Tax Update

Welcome back to another installment of the Texas Tax Roundup. Last month was pretty lowkey (aside from the Legislature’s regular session wrapping up, about which more later). Let’s see what happened!

Court Opinions

Jurisdiction

CoTechno Group, Inv. v. Hegar, No. 03-21-00327-CV (Tex. App.—Austin May 26, 2023)—The Austin Court of Appeals upheld a trial court’s dismissal of a case on a plea to the jurisdiction when the taxpayer didn’t submit a written protest to the Comptroller until it had filed its second amended complaint. The Court held that the failure to submit a written protest before suit is filed deprived the trial court of jurisdiction to hear the case, regardless of whether the taxpayer actually was required to make a payment with the protest (at the time suit was filed, Tex. Tax Code § 112.108 provided an inability-to-pay exception to the payment requirement).[1]

Rules

Proposed

Sales and Use Tax

34 Tex. Admin. Code § 3.297 (Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles) (published at 48 Tex. Reg. 2255, 2321-2324) (May 5, 2023))—The Comptroller proposed amendments to implement changes made by HB 4032, 86th Leg. (2019) to Tex. Tax Code Ch. 160 (Taxes on Sales and Use of Boats and Boat Motors) as well prior Comptroller guidance regarding the distinction between boats subject to tax under Chapter 160 as opposed to tax under Chapter 151 (Limited Sales, Use, and Excise Tax).

Boat and Motor Sales and Use Tax

34 Tex. Admin. Code § 3.741 (Boat and Boat Motor Sales and Use Tax) (published at 48 Tex. Reg. 2255, 2324-2331) (May 5, 2023))—The Comptroller proposed amendments to implement H.B. 2926, 78th Leg. (2003), H.B. 1106 83d Leg. (2013), H.B. 4032, 86th Leg. (2019), as well as make changes for consistency, clarity, and to incorporate Comptroller policy.

Notable Additions to the State Tax Automated Research (“STAR”) System

Hotel Projects

STAR Accession No. 202305008L (May 11, 2023)—In this private letter ruling, the Comptroller construed the term “connected to” in Tex. Tax Code § 351.156 (Entitlement to Certain Tax Revenue). This section describes the state hotel occupancy, mixed beverage, and sales and taxes generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to a qualified hotel and qualified convention center facility (the whole constituting a qualified project) to which a qualifying municipality would be entitled. The Comptroller interpreted “connected to” here as meaning:

sharing an adjoining wall or roofline, or joined by an intervening structure with walls or a ceiling that allows passage between buildings; or
located on a lot that:
shares any portion of the boundary line with the lot on which the qualified convention center facility or the qualified hotel is located, and
is developed as part of the municipal hotel and convention center project.
The Comptroller stated that it would adopt this definition of “connected to” in amendment to 34 Tex. Admin. Code § 3.12 (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects).

Franchise Tax

Successor Liability

Comptroller’s Decision Nos. 118,449, 118,451 (2023)—The ALJ found that the Comptroller hadn’t established that successor liability was appropriate when no evidence was presented that consideration passed between the person acquiring the business and the business’s then owner.[2] However, the ALJ found that the Comptroller had shown that the transfer of the business was a fraudulent transfer because, again, there was no exchange of consideration for the transfer of the assets of the business.[3] Therefore, the person who acquired the business was liable for the franchise taxes and sales and use taxes owed by the business prior to acquisition.

Sales and Use Tax

Telecommunications Refund

Comptroller’s Decision No. 117,425 (2023)—The ALJ denied a telecommunications provider’s refund claim for sales and use taxes insofar as the taxes related to purchases of racks, handholes, conduits, ducts, switchboards, chillers, and pipe poles. Telecommunications providers are entitled to a refund of sales and use tax on the sale, lease, or rental or storage, use, or other consumption of tangible personal property if the property is sold, leased, or rented to or stored, used, or consumed by a provider or a subsidiary of a provider and the property is directly used or consumed by the provider or subsidiary in or during the transmission, conveyance, routing, or reception of telecommunications services.[4] The ALJ determined that “directly used or consumed” meant used or consumed during the actual transmission or routing with no intervening cause.[5] The ALJ found that no evidence was presented by the telecommunications provider that any of the items at issue were directly used to actually transmit or route a signal during the performance of telecommunication services.

Nexus

Comptroller’s Decision No. 118,524 (2023)—The ALJ found that a taxpayer had nexus with Texas for purposes of collecting and remitting sales and use tax and was engaged in business in Texas because it derived receipts from the sale of licensed software to customers in Texas.

State and Local Tax Services

Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3000 to discuss your local & state tax concerns and questions.

[1] If a person contends that a tax that they are required to pay is unlawful of that the legal official charged with the duty of collecting the tax may not legally demand or collect the tax, the person must pay the amount claimed by the state, and if the person intends to bring suit, the person must submit with the payment a protest. Tex. Tax Code § 112.051(a) (Protest Payment Required). After making the protest payment, the person must file suit within 90 days. Tex. Tax Code § 112.052(a) (Taxpayer Suit After Payment Under Protest).

[2] See Tex. Tax Code § 111.020 (Tax Collection on Termination of Business).

[3] See Tex. Tax Code § 111.024 (Liability in Fraudulent Transfers).

[4] Tex. Tax Code § 151.3186(b) (Property Used in Cable Television, Internet Access, or Telecommunications Services).

[5] Relying on Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 408 (Tex. 2016) (in another context finding that “a reasonable interpretation of ‘direct’ implies a close link with no intervening causes.”)

Have a question? Contact TL Fahring, Freeman Law, Texas.

Written by | Posted in Texas Tax Update

Rentals Versus Services Under Texas Sales And Use Tax

Rentals Versus Services Under Texas Sales And Use Tax

One of the thorniest issues in Texas sales and use tax is the distinction between the rental of tangible personal property (which is subject to tax) and the provision of a service (which is only taxable if the service is taxable). This distinction not only affects the taxability of charges for the rental or service but also that of equipment that is purchased to provide the rental or service.

What’s a Rental?

The rental of tangible personal property in Texas is subject to sales or use tax.[1] A rental occurs when possession but not title to tangible personal property is transferred for consideration.[2] A person acquires possession of tangible personal property when that person acquires operational control over that property.[3] Operational control, in turn, means that the customer can use, control, or operate the tangible personal property.[4]

What are Taxable Services?

Only the following services are subject to Texas sales or use tax:
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Written by | Posted in Sales/Use Tax • TaxConnections

Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Howdy folks, and welcome back to another edition of the Texas Tax Roundup, where we gab about all things Texas tax and perhaps even some things Texas tax adjacent. As ole T.S. once put it, “April is the cruelest month” [1]—although maybe not for the same reasons he had. Because instead of “breeding lilacs out of the dead land”[2] or some such, which implies at least a glimmer of hope (although that might be why he thought it was so cruel, him being a bit of a downer, you know), April 2023 showered us with a string of taxpayer defeats, the one bright spot being a smackdown on a plea to the jurisdiction by the Texas Comptroller.

Court Opinions
Franchise Tax
Plea to the Jurisdiction/Total Revenue

Hibernia Energy, LLC v. Hegar, No. 03-21-00527-CV (Tex. App.—Austin Apr. 21, 2023, no pet. h.)—The Texas Third Court of Appeals affirmed the trial court’s judgment denying the Comptroller’s plea to the jurisdiction but also denying a taxpayer’s/consultant’s claim for refund for franchise taxes attributable to the inclusion in total revenue of gains from the sale of oil-and-gas leasehold interests.

The taxpayer, a limited liability company, acquired oil-and-gas leasehold interests in 2010, and then sold these interests in 2012 and 2014 at a gain of $95,866,370 and $296,691,853 for each year respectively. The taxpayer included these gains in its total revenue for purposes of determining its franchise tax liability for the respective franchise tax report years and paid the taxes.

In 2015, the taxpayer hired a consultant that filed a refund claim on the taxpayer’s behalf for the franchise taxes paid that were attributable to these gains.[3] The reason given for why the taxpayer was entitled to a refund was that it had overstated total revenue by including gains whose inclusion was not required under applicable law.

A limited liability company by default is treated as a partnership for federal income tax purposes.[4] A partnership is required to file a Form 1065, U.S. Return of Partnership Income to “report the income, gains, losses, deductions, credits, and other information about the operation of the partnership.”[5]

Under the Texas franchise tax, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is calculated by first adding up the amounts reportable as income on various lines on the entity’s Form 1065:
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