The Supreme Court decided two important tax cases last year: Windsor (an estate tax case involving the Defense of Marriage Act) and PPL (foreign tax credits). For the upcoming term, which starts October 7th, the Supreme Court has already agreed to hear one tax case and will decide whether to hear several other important tax cases. It may be a very interesting term from the perspective of tax lawyers.
In March, the Court agreed to hear the Woods case, with an interesting twist. The petition for certiorari asked the Court to decide whether the 40% penalty for a gross valuation misstatement applies when a court disallows a deduction or loss based on various judicial doctrines such as economic substance, substance over form, or sham transaction. The government has long wanted to overturn the precedents in the Fifth and Ninth Circuits, which limit the penalty in such instances to 20%. However, in agreeing to hear the case, the Court asked the parties to address a second issue: whether a court can determine the validity of a valuation misstatement penalty in a partnership proceeding rather than separate proceedings at the partner level. Raising the issue after neither party had challenged the lower court’s jurisdiction suggests the possibility of a major ruling on the TEFRA procedures for partnership cases. The Court will hear oral arguments in Woods on October 9th.
The Supreme Court has not yet decided whether to hear the other cases. Both parties have submitted their briefs in Quality Stores, concerning whether “supplemental unemployment compensation benefits” payments are subject to FICA taxes. Because the government asked the Court to decide the issue, and because of the significant impact, most observers expect the Court to hear the case. The Justices will consider whether to do so at their first conference of the term, on September 30th.
For the other four pending cases, the taxpayers have submitted their petitions and briefs. The government is scheduled to submit its response in these cases by late September, and the Court should decide within a month or two whether to hear those cases. The Crispin case involves the same penalty issue as Woods, whether the 40% penalty applies when the deduction or loss is disallowed without an explicit determination by the court that the basis or value was overstated.
The Amazon.com and Overstock.com cases both involve attempts by the New York State Department of Taxation to collect sales/use tax for sales to New York customers by online retailers. State taxes on interstate sales are valid if the activity has a “substantial nexus” to the taxing state. The New York Court of Appeals ruled that Amazon.com and Overstock. Com did have substantial nexus and the retailers requested review of those decisions by the Supreme Court. These cases, if the Supreme Court decides to hear them, could have a significant impact on Internet sales.
The Ford case has the potential, if the Court agrees to decide it, to be one of the most consequential tax decision in the upcoming term. Ford involves the proper computation of interest payable by the government when taxpayers overpay their taxes. Although there are plausible arguments for both sides of this dispute, we anticipated that the lower court would decide for the government on the merits. But the Sixth Circuit decision for the government relied on a strict construction of the government’s waiver of sovereign immunity rather than a determination on the merits. (For more about sovereign immunity, see our prior blog post here.) There is substantial confusion or inconsistency in the lower courts, which sometimes narrowly construe taxpayers’ substantive rights by treating those as waiver of sovereign immunity. Ford’s petition for certiorari explains the problem well. This problem arises in many different areas of law, not just tax. A clarification by the Supreme Court could have a tremendous impact. However, the government likely will oppose certiorari and the Court may decline to hear the case.
We are continuing to monitor these cases and will report any significant developments. If you have any questions about these cases or issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.
- Bob Probasco, Thompson & Knight LLP
- Mary McNulty, Thompson & Knight LLP
- Lee Meyercord, Thompson & Knight LLP
- Nancy Allred, Thompson & Knight LLP