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The Texas Supreme Court rejected a partnership's claim that the Texas franchise tax violates Article VIII, §24, of the Texas Constitution (known as the "Bullock Amendment") by imposing a tax on the net incomes of natural-person partners without approval in a statewide referendum (see +In Re Allcat Claims Service, L.P. and John Weakly, Relators+, Tex. Sup. Ct. No. 11-0589, November 28, 2011).


The Bullock Amendment provides, in relevant part, that voters must approve "[a] general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person's share of partnership and unincorporated association income" before it becomes effective. Allcat Claims Services (Allcat), which is a limited partnership, claimed that the franchise tax taxes each partner's allocated share of its income because the income of a partnership is allocated to each partner according to the partner's partnership interest. In this manner, Allcat asserted, the franchise tax is a tax on the net incomes of its partners and violates the Bullock Amendment as to partners who are natural persons. On the other hand, the Texas Comptroller argued that whether the tax is an income tax is irrelevant because Texas has adopted the entity theory for partnership law and a tax imposed on a limited partnership entity does not constitute a tax on the net incomes of the partnership's individual partners.


The court agreed with the Comptroller that Texas adheres to the entity theory, under which a partnership is considered an entity separate and distinct from its partners. In addition, the court rejected Allcat's argument that the separate entity concept applies only in contexts unrelated to net income, such as property ownership and enforcement of liability, or that §152.202(a) of the Texas Business Organizations Code provides an exception to the separate entity concept for partnership income. Thus, according to the court, the tax does not violate the Bullock Amendment because it constitutes a tax on the partnership as an entity, rather than a tax on the net income of the partnership's natural-person partners.


Under Michigan Public Act 38 (2011), which takes effect January 1, 2012, certain pensions will no longer be deductible and certain taxpayers will no longer be entitled to a personal exemption. On May 31, 2011, Gov. Rick Snyder requested an advisory opinion by the Michigan Supreme Court regarding the constitutionality of Public Act 38. The governor requested the opinion so that the constitutionality of the pension deduction and personal exemption changes could be determined before the law took effect. The court recently issued an advisory opinion that, for the most part, upholds the changes made by Public Act 38.


Before the enactment of Public Act 38, public pension benefits were completely deductible, private pension benefits were deductible up to $42,240 for a single return and $84,480 for a joint return (subject to annual inflation adjustments), and all taxpayers were entitled to a personal exemption of $2,500 (subject to annual inflation adjustments). However, as a result of Public Act 38, only taxpayers whose total household resources are less than $75,000 for a single return or $150,000 for a joint return are entitled to the entire personal exemption, while taxpayers whose total household resources are between $75,000 and $100,000 for a single return or $150,000 and $200,000 for a joint return are entitled to a portion of the personal exemption, and taxpayers whose total household resources exceed $100,000 for a single return or $200,000 for a joint return are not entitled to any portion of the personal exemption.


In addition, while Public Act 38 does not affect the available pension deductions of taxpayers born before 1946, it does affect the pension deductions of taxpayers born in 1946 and thereafter. For taxpayers born from 1946 to 1952, public and private pensions are subject to the same deductions up to $20,000 for a single return and $40,000 for a joint return. Furthermore, upon reaching the age of 67, although the pension deductions are no longer available, a general deduction is available for taxpayers up to $20,000 for a single return and $40,000 for a joint return as long as the taxpayer's total household resources do not exceed $75,000 for a single return or $150,000 for a joint return. Finally, for taxpayers born after 1952, although the pension deductions are no longer available, upon reaching the age of 67, a general deduction is available up to $20,000 for a single return and $40,000 for a joint return as long as the taxpayer's total household resources do not exceed $75,000 for a single return or $150,000 for a joint return. However, if a taxpayer takes the general deduction, he or she cannot take the deduction for social security benefits or the personal exemption.


In its advisory opinion, the Michigan Supreme Court held that (1) reducing or eliminating the statutory exemption for public pension income does not impair accrued financial benefits of a pension plan or retirement system of Michigan or its political subdivisions under the state constitution; (2) reducing or eliminating the statutory exemption for pension income does not impair a contract obligation in violation of the federal or state constitutions; (3) determining eligibility for exemptions on the basis of date of birth does not violate equal protection under the federal or state constitutions; and (4) determining eligibility for exemptions on the basis of total household resources does create a graduated income tax in violation of the state constitution. However, even though the portion of the statute that determined eligibility for exemptions was deemed unconstitutional because it created a graduated income tax, the court determined that it could be severed from the remainder of the act.



As Glenn Wesley of CCH recently reported, the Pennsylvania Department of Revenue Board of Appeals is now accepting taxpayer requests to compromise tax appeals that are timely filed with the board. "Taxpayers can now resolve tax appeals in a matter of weeks, rather than endure a process that could last years," Department of Revenue Secretary Dan Meuser said in a news release.


The compromises must be based on doubt as to liability or the promotion of effective tax administration, or both. Appeals relating to denials of property tax/ rent rebate claims, denials of charitable tax exemptions, the revocation of sales tax licenses, and the Gaming Control Act are not eligible for compromise.



A taxpayer's request for compromise has to be submitted in writing on a form entitled "Board of Appeals – Request for Compromise," which is available on the department's forms website . Taxpayers requesting a compromise will have to submit this form along with the Board of Appeals Petition Form or as soon as possible after the petition is filed.


A Board of Appeals hearing officer will then conduct an informal conference, either by phone or in person, to determine if the appeal can be resolved in a way that is satisfactory to both parties. If so, an order reflecting the compromise will be submitted to the board for approval.


While one board member can approve compromises granting relief of less than $10,000, a compromise granting relief of $10,000-$99,999 requires the approval of two board members, and a compromise granting relief of $100,000 or more requires approval of three board members. In addition, all compromises have to be reviewed and approved by the Department of Revenue's Office of Chief Counsel.


Furthermore, compromises granting relief of less than $50,000 must be approved by a Deputy Chief Counsel and compromises granting relief of $50,000 or more must be approved by the Chief Counsel and the Deputy Secretary for Tax Policy.


The Department of the Auditor General will continue to play an independent role in approving proposed decisions and orders of the Board of Appeals on corporate tax cases, including proposed compromise orders.



As CCH's Irene Goodman has reported, the New Jersey Tax Court has determined that taxpayers who were victims of the Madoff Ponzi scheme were entitled to file amended New Jersey gross (personal) income tax returns for 2005 through 2007 to claim refunds for interest, dividends, and capital gains reported and taxed in those years from which they received no economic gain (see +Dalton v. Director, Division of Taxation+, Tax Court of New Jersey, No. 020540-2010, November 10, 2011). The Division of Taxation argued that the taxpayers constructively received the income previously reported and, therefore, that the income was taxable and no refunds were due. However, by virtue of the Ponzi scheme itself, investors who demanded and received a distribution of income on their investments were not receiving income, but, instead, were receiving either their own original investments or the funds of others who also invested in the scheme. Thus, according to the Tax Court, the income never existed and, therefore, was not taxable.


Furthermore, the Tax Court determined that the division's notice of April 15, 2010, wherein the division held the position that taxpayers who had Ponzi scheme losses had to treat such losses as investment losses in 2008 (the year of discovery) and comply with federal Revenue Procedure 2009-20, which treated the losses as theft losses, was self-contradictory. The Tax Court agreed with the taxpayers that their election to treat the loss as a theft loss on their 2008 federal income tax return did not preclude them from claiming refunds under the Gross Income Tax (GIT) Act. The court did not find a statutory reason why the taxpayers could not amend and correct their returns to remove income that was never properly taxable under the GIT Act and to recalculate the tax. The division's position was unreasonable because the taxpayers should not have been required to use a federal procedure that relies upon federal tax code concepts that are not recognized for New Jersey personal income tax purposes. In addition, the GIT Act would have required the taxpayers to net any 2008 loss against a 2008 gain in the same category of income. The taxpayers had no such gain in 2008 and would have received no GIT Act benefit and, thus, no economic gain that was taxable. For these reasons, the taxpayers were granted summary judgment.


On Nov. 14, the U.S. Supreme Court agreed to review an interesting case out of Indiana about the extent to which a city’s fiscal needs and administrative convenience will justify its refusal to pay refunds to property owners who paid an assessment that was later eliminated. The case name is Armour v. Indianapolis, Dkt. 11-161


The specific question raised is whether the Equal Protection Clause of the U.S. Constitution precludes Indianapolis from refusing to refund payments made by those who paid a sewer assessment in full, while forgiving the obligations of identically situated taxpayers who were paying over a multi-year period under an installment plan.


The background is that, after Indianapolis adopted a new assessment scheme that reduced each taxpayer's burden, the city discharged all outstanding assessments owing as of a particular date. However, it did not give refunds to those property owners who had previously paid their assessments. Owners who had paid their assessments in full filed a lawsuit seeking a refund equal to the assessments forgiven for the installment taxpayers.


The Indiana Supreme Court held, however, that the city did not violate the property owners' federal constitutional rights because forgiving only the outstanding assessment balances was rationally related to legitimate governmental interests. These interests included reducing the city's administrative costs, providing relief for property owners experiencing financial hardship, establishing a clear transition to the new assessment scheme, and preserving the city's limited resources.


On November 9, 2011, a bipartisan group of 10 U.S. senators announced the introduction of legislation that would give states implementing simplification requirements the authority to require remote sellers to collect sales and use tax, unless a seller qualifies for a small seller exception. Similar to the Marketplace Equity Act (H.R. 3179), introduced on October 13, but unlike most other legislation on this topic introduced during this and former Congresses, the Marketplace Fairness Act (S. 1832) would not limit the authorization to member states of the Streamlined Sales and Use Tax (SST) Agreement.

A full member state of the SST Agreement would receive collection authority for remote sales sourced to that state under the Agreement. This authority would begin no earlier than the first day of the calendar quarter that is at least 90 days after the date of enactment of this legislation.

Alternative collection authority would be granted to any non-SST member state that implements a series of minimum simplification requirements specified in the legislation. This alternative authority would begin no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to implement each of the requirements. The minimum simplification requirements that a non-SST member state would have to implement in return for collection authority are much less extensive than the current requirements for SST member states.

Under either method for gaining collection authority, a small seller exception would relieve a remote seller of the collection mandate if the seller, and related entities, had $500,000 or less in gross annual receipts in total remote sales in the United States in the preceding calendar year.



As Brian Nudelman of CCH recently reported, New Jersey automobile dealerships will now have to pay sales and use tax on amounts they pay to a website for sales leads provided by the website via email or fax. The website at issue lists dealer inventory, makes it searchable by prospective car buyers, collects prospective buyer information, and verifies the accuracy of the information.


The sales leads consist of the lists of car dealer inventory that prospective customers may be interested in. The lists include vehicle descriptions, names, addresses, phone numbers, and email addresses.



According to the New Jersey Division of Taxation's Technical Advisory Memorandum TAM-21, the website's provision of sales leads is taxable as an information service. "Information services" are defined as the furnishing of information of any kind, which has been collected, compiled, or analyzed by the seller, and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.


The sales lead information is not exempt as personal or individual information because it is nonexclusive and may be provided to all participating dealerships that have the same automobile make and model in their inventory. Also, the service is taxable whether it is billed per sales lead or by flat fee for a monthly subscription. 


The Division of Taxation is enforcing New Jersey's tax on automobile sales leads on a prospective basis as of November 5, 2011. 


The New Mexico Taxation and Revenue Department is [encouraging |] both retired and active Native American veterans to contact the state to determine if they are eligible to receive a personal income tax refund from the Native American Veterans Income Tax Settlement Fund. Native American veterans domiciled on tribal lands during their periods of active military service may have been exempt from paying state personal income taxes on their military income, but may have had New Mexico personal income taxes improperly withheld from their military income. Such veterans or their successors may claim settlement payments from the Native American Veterans Income Tax Settlement Fund. A claim for a settlement payment from the fund may be made for any period of active duty in the armed forces of the United States during which the claimant or, where the claimant is a successor, the deceased veteran:

· was a member of a federally recognized Indian nation, tribe, or pueblo;

· was a resident within the boundaries of the Indian member's or the member's spouse's reservation or pueblo grant, or within the boundaries of lands held in trust by the United States for the benefit of the member or spouse or the member's or spouse's nation, tribe or pueblo; and

· had New Mexico personal income tax withheld from his or her active duty military pay, and the amount withheld (1) has not already been refunded to the claimant or the claimant's representative, and (2) cannot be claimed as a refund by filing a New Mexico personal income tax return because the period for filing a refund has run under the applicable statute of limitations.

Settlement payments will be made on a first come, first served basis until the fund is exhausted or until no further claims are received. However, no claim for a settlement payment may be made after December 31, 2012.


On Nov. 1, the U.S. House of Representatives passed the Wirelss Tax Fairness Act of 2011 (H.R. 1002). The legislation would bar states and localities, for five years, from imposing a new discriminatory tax on mobile services, mobile service providers, or mobile service property. A “new discriminatory tax” would be a tax imposed on mobile services, mobile service providers, or mobile service property that is not generally imposed, or is generally imposed at a lower rate, on services or transactions, businesses, or commercial or industrial property that do not involve a mobile service. A grandfather clause would exempt from the prohibition a tax that was imposed and actually enforced on mobile services, mobile service providers, or mobile service property prior to the enactment of this legislation.

The legislation will now go to the U.S. Senate for its consideration. Similar legislation (S. 543) was introduced there on March 10, 2011, by Sen. Ron Wyden, D-Ore., and several cosponsors, but no action has been taken yet on the Senate bill.


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