Tax News

CCH (cch.taxgroup.com) reports:

  The city of Anaheim was barred from invoking the constitutional pay first requirement in litigation that arose when the city assessed a local transient occupancy tax against a number of online travel companies (OTCs). The pay first rule applies only to actions against the state or an officer of the state and the local ordinance did not contain a similar requirement.

  Under Article XIII, Section 32, of the California Constitution, a taxpayer who wishes to challenge the assessment of a state tax must pay the disputed amount of tax before seeking recourse in the courts to recover the amount assessed. That provision, however, applies only to actions against the state or an officer of the state. After the city assessed the tax and interest against the OTCs, the OTCs, without first paying the assessed amounts, filed actions in superior court that sought mandamus and declaratory relief against the city and its administrative hearing officer. The city cited the pay first rule and demurred to the petitions on the ground that the OTCs had not paid the taxes allegedly due prior to filing suit. The superior court overruled the demurrers and the appellate court denied the city's petition for writ of mandate.

  Moreover, the local transient occupancy tax ordinance did not contain a pay first requirement and it did not provide taxpayers with an adequate remedy at law, such as a refund procedure, to challenge the legality of the tax. As such, the city had no statutory authority to impose a pay first requirement on the OTCs. The city argued that a pay first requirement should be imposed based on the public policy underlying Article XIII, Section 32. The appellate court, however, held that the city could not rely on a public policy argument because the taxes the city seeks to collect from the OTCs do not represent a predictable income stream on which the city has come to rely. Although the transient occupancy tax has been in effect since 1977, the city had sought to collect the tax only from hotel operators until 2007 when the city issued a notice of audit to the OTCs regarding unpaid taxes. The city had not collected any of the taxes it claimed the OTCs owed.

  The appellate court limited its holding to the procedural issue of whether the OTCs could seek mandamus and declaratory relief in the superior court without first paying the taxes. The court did not consider issues relating to the merits of the OTC claims, such as whether they are "operators" as defined in the ordinance, the applicability of Proposition 218, the possibility of criminal sanctions for nonpayment of the tax, or the due process concerns that arise from the fact that the city seeks to impose the transient occupancy tax for a seven-year period in which the OTCs had no notice that the city considered them subject to the tax.

City of Anaheim v. Superior Court of Los Angeles County , California Court of Appeal, Second Appellate District, No. B216250, November 24, 2009, ¶404-019

  Other References:

  Explanations at ¶60-480

CCH (cch.taxgroup.com) reports:

  The California Franchise Tax Board (FT has announced that it will not impose the personal income tax e-pay penalty against taxpayers required to make their tax payments electronically. The FTB states that since the mandatory e-pay requirements were instituted in 2009, compliance has been increasing steadily. However, rather than imposing penalties now, the FTB will continue to focus its efforts on outreach and education so that taxpayers and their representatives can implement processes and procedures to comply with the law. The FTB will continue to monitor compliance levels to determine the appropriate time to begin implementation of the penalty.

Announcement , California Franchise Tax Board, November 24, 2009
 

CCH (cch.taxgroup.com) reports:

  The IRS was required to pay specified taxpayers' costs and attorney fees associated with remand proceedings attributable to the IRS's misconduct during the "Kersting" tax shelter project litigation. The proceedings for which fees and costs were awarded were directly related to the IRS's sanctionable conduct.

  CCH Comment . The IRS attorneys' unreasonable conduct involved arranging secret settlements with two of the test-case plaintiffs involved in the "Kersting" tax shelter test cases. The effect of these settlements was to pay the test-case plaintiffs' attorney to provide the appearance of independent representation of the test-case plaintiffs in the test-case trial. The Ninth Circuit Court of Appeals held that the IRS's conduct was a fraud upon the court ( Dixon , 2003-1 USTC ¶50,194) and remanded the remaining 27 cases to the Tax Court to settle the remaining cases on the same terms as those secretly settled. The Tax Court recently imposed similar sanctions against the IRS with respect to attorneys who worked in the same proceedings on a contingency fee basis ( Dixon,
Dec. 57,766). The Tax Court plans to address fees incurred by other attorneys involved in the proceedings in a future opinion.

  Related decision sub nom Dixon, CA-9, 2003-1 USTC ¶50,194.

R.F. Hongsermeier, TC Memo. 2009-273, Dec. 58,005(M)

Other References:

 
Code Sec. 6673

  CCH Reference - 2009FED ¶39,790.451

  Tax Research Consultant

  CCH Reference - TRC LITIG: 6,816.15

 

CCH (cch.taxgroup.com) reports:

  A married couple was required to include in income Social Security disability benefits received by the wife and was not entitled to exclude discharge of indebtedness income arising from the forgiveness of certain credit card debt. Although the Social Security disability benefits reduced the amount the wife was entitled to receive tax-free under a private long-term disability (LTD) policy, the LTD policy only entitled the wife to receive benefits on top of what she received from Social Security. Pursuant to Code Sec. 86, the Social Security benefits were required to be included in income.

  The credit card debt which was relieved had been incurred for legal fees that the couple's attorney allegedly promised that they would be entitled to recoup. When the couple discovered they were not entitled to recoup such fees, they disputed the credit card charge and were relieved of the liability. Although the couple acknowledged that they were not eligible for any exception under Code Sec. 108 for discharge of indebtedness income, they claimed they should have been entitled to an offsetting theft loss for the attorney's misrepresentation. The couple failed, however, to establish that the alleged misrepresentation constituted a theft. Futhermore, even if such theft had occurred, it would have been deductible in a later year when the litigation concluded and they discovered they were not entitled to recoup the fees.

K.A. Seaver, TC Memo. 2009-270, Dec. 58,002(M)

Other References:

 
Code Sec. 86

  CCH Reference - 2009FED ¶6421.17

 
Code Sec. 108

  CCH Reference - 2009FED ¶7010.25

 
Code Sec. 165

  CCH Reference - 2009FED ¶10,101.103

  Tax Research Consultant

  CCH Reference - TRC INDIV: 6,204
CCH Reference - TRC SALES: 12,150
CCH Reference - TRC INDIV: 54,100
CCH Reference - TRC INDIV: 54,254

 

CCH (cch.taxgroup.com) reports:

  Bracing themselves for a long Senate health care reform debate, President Obama's chief budget and health care reform advisors on November 25 argued that the pending legislation meets the administration's four key criteria for being a fiscally responsible bill. The Senate package: (1) is deficit-neutral; (2) raises revenue by imposing an excise tax on insurers of high-end ("Cadillac") health care policies; (3) establishes an independent commission to improve health care quality and rein in Medicare health care expenditures; and (4) implements delivery system reforms, noted Office of Management and Budget (OM Director Peter Orszag.

  The tax on insurance companies offering Cadillac health plans aims to curtail private insurers' premium increases and encourage employers to seek higher-quality and lower-cost health benefits, Orszag noted in a conference call with reporters. He cited an analysis of the Senate Finance Committee proposal by leading economists who estimated the excise tax would increase workers' take home pay by more than $300 billion over 10 years, or approximately $173 annually per family.

  The findings were included in a letter to President Obama on November 17 from 23 leading economists, including Alice Rivlin, Robert Reischauer, Mark McClellan, and Laura D'Andrea Tyson. "As economists, we believe that it is important to enact health reform, and it is essential that health reform include these four features that will lower health care costs and help reduce deficits over the long term," Henry Aaron of the Brookings Institution stated in the letter.

  By Paula Cruickshank, CCH News Staff