TL Fahring | TaxConnections

24 Aug 2022

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

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

Summary: In 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]

Written by TL Fahring | Posted in Child Labor Tax Case

05 Aug 2022

Moments In Tax History: Income, An Origin Story

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]

Written by TL Fahring | Posted in Tax History

13 Jul 2022

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

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

Written by TL Fahring | Posted in Texas Legal Roundup

06 Jul 2022

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.

Written by TL Fahring | Posted in IRC Section 965 Tax

24 Jun 2022

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.

Written by TL Fahring | Posted in Small Business And Wayfair • TaxConnections

17 Jun 2022

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

Written by TL Fahring | Posted in Lummis- Gillibrand Responsible Financial Innovation Act

09 Jun 2022

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

Written by TL Fahring | Posted in Administrative Judges Rulings • Texas

13 May 2022

Texas Tax Roundup – Interesting Tax Court Cases And Rulings

[In this very special “throwback” edition of the Texas Tax Round Up, newly reemerged from out the Super-Saragossa Sea of the Internet, we travel back to a much simpler time—February 2022.]

Howdy y’all! Has it been a month already? We’ve got another action-packed month of Comptroller-related news. Here we go!

Court Cases

Courts of Appeals

Hegar v. Black, Mann, and Graham, L.L.P., No. 03-20-00391-CV (Tex. App.—Austin Feb. 25, 2022)

The Texas Third Court of Appeals held that a taxpayer may self-assess and pay tax under protest for subsequent periods after the filing of a protest suit and include those periods in the suit by amending the petition— in other words, there’s no requirement that the Comptroller actually assess tax for those periods. Thus, the Court of Appeals upheld that the District Court’s denial of the Comptroller’s plea to the jurisdiction for those subsequent periods.
On the merits, however, the Court of Appeals held that the taxpayer—a law firm that specialized in preparing loan packages for lending institutions—purchased taxable data processing (instead of nontaxable legal or paralegal) services from vendors when the vendors created an interface between each lenders’ loan origination systems and the vendors’ document generation systems that produced the loan package, which the law firm then reviewed to ensure the legal requirements were met.

Proposed Rules

Franchise Tax

Written by TL Fahring | Posted in Texas Tax Law • Texas Taxes

23 Mar 2022

FinCEN Provides Reminder About BSA Reporting Requirements

FinCEN And Bank Secrecy Act Reporting

On March 7, 2022, the Financial Crime Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury alerted financial institutions “to be vigilant against efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s further invasion of Ukraine.”[1] Such restrictions include sanctions actions taken by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) involving certain Russian and Belorussian persons.

The alert reminds financial institutions of potential red flags for identifying sanctions evasion activity and of financial institutions’ reporting obligations under the Bank Secrecy Act (“BSA”), including those relating to convertible virtual currencies (“CVCs”).

What’s A “Financial Institution”?

Written by TL Fahring | Posted in BSA Reporting Requirements

16 Mar 2022

Foreign Gifts | When Do You Have To Report Them?

Foreign Gifts And IRS Reporting

U.S. persons who receive gifts or bequests from foreign persons beware—these gifts or bequests may need to be reported to the Internal Revenue Service (“IRS”). The consequences for failing to do so can be costly.

What Are The General Requirements To Report Foreign Gifts?

For purposes of federal income tax, gross income generally does not include the value of property acquired by gift, bequest, devise, or inheritance.[1] However, a U.S. person who receives foreign gifts that exceed certain threshold amounts during the taxable year must report the gifts on a Form 3520.[2]

Who’s A U.S. Person?

A “U.S. person” includes 1) a U.S. citizen or resident, 2) a domestic partnership 3) a partnership; 4) an estate other than a foreign estate; and 5) a trust if a U.S. court can exercise primary supervision over the trusts administration and U.S. persons have authority to control all substantial decisions of the trust.[3] A “foreign estate” is an estate whose income is foreign source and not effectively connected to the conduct of a U.S. trade or business.[4]

What’s A Foreign Gift?

Written by TL Fahring | Posted in Reporting Foreign Gifts

09 Mar 2022

Tax Court In Brief: Determination of Costs Of Goods Sold

Tax Court in Brief: Lord v. Comm’r—Marijuana and COGS

Lord v. Comm’r, T.C. Memo. 2022-14 | March 1, 2022 | Kerrigan, J. | Dkt. No. 19224-18

Short Summary: In 2012, Mr. Lord owned interests in a limited liability company and an S corporation, both of which were formed in the State of Colorado and both of which were licensed by that state to cultivate, process, and distribute medical marijuana. The businesses did not have audited financial statements for 2012 and were not otherwise required to maintain books and records or financial reports in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The businesses calculated the depreciation included in their cost of goods sold (“COGS”) for the year by using the accelerated cost recovery method in section 168(a), and they claimed bonus depreciation under section 168(k). The businesses used methods under section 168(a) and (k) that did not conform with GAAP.

Written by TL Fahring | Posted in Determination of Costs Of Goods Sold

18 Feb 2022

Federal Income Tax Characterization of Transactions Involving Computer Programs

The sale of a computer program—it seems simple. But, as illustrated by the Treasury Regulations’ computer program characterization rules, the issue of just what a sale of computer program is can become confusing fast.

The Computer Program Characterization Regulations

Treasury Regulation § 1.861-18 provides rules for characterizing primarily cross-border transactions involving computer programs.[1] For these purposes, a “computer program” means “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.”[2] The term also includes certain items incidental to the operation of a computer program.[3]

In characterizing a transaction involving a computer program, neither general principles of copyright law nor the parties’ characterization of the transaction are determinative.[4] For instance, it doesn’t matter if the parties label a transaction a license or payments as royalties if factors present in the transaction warrant a different treatment.[5] The means by which the computer program is transferred also is irrelevant.[6]

Ultimately, there are six possible results from the application of the computer program characterization rules: 1) the sale or exchange of copyright in a computer program, 2) the license of a copyright in a computer program (generating royalties income), 3) the sale or exchange of a copy of a computer program, 4) the lease of a copy of a computer program, 5) the provision of services for the development/modification of a computer program; or 6) the provision of know-how relating to computer programming techniques.[7]

To get to these results, the regulations first require that we distinguish between the transfer of the copyright in a computer program versus the transfer of a copy of a computer program.[8]

A transaction is the transfer of a copyright right if the purchaser acquires any one of the following rights:

the right to make copies of the computer program for purposes of public distribution;
the right to prepare derivative computer programs based on the copyrighted computer program;
the right to make a public performance of the computer program;
the right to publicly display the computer program.[9]