Delaware: Qui Tam Action Filed Alleging Violation of Unclaimed Property Law
A Delaware Superior Court complaint was unsealed alleging that transactions between certain retailers and gift card servicing companies were sham transactions designed to avoid Delaware's unclaimed property laws. According to the complaint, over two dozen named Delaware-incorporated retailers have excluded gift cards from their unclaimed property compliance because those entities maintain agreements with third party gift card servicing companies in which the third party companies purport to be the holder of the unredeemed cards and to manage unclaimed property payments to various other states. The third party servicing companies are generally formed in states that do not require the escheat of gift cards to the state, such as Florida and Ohio.
The complaint, a qui tam action where a private individual assists the state in prosecution of another, was originally filed in June 2013 by an Ohio resident but was under seal from June 2013 and only made public recently. The complaint alleges that the contractual arrangements between the gift card servicing company and Delaware retailers lack substance because the retailers issuing the cards retain possession, custody, and control of the value of unredeemed gift cards. Therefore, the complaint argues, the agreements are sham transactions designed to defraud the state out of millions of dollars in unclaimed property revenue.
If the complaint is decided in favor of the state, it could expose the defendant companies to millions of dollars of unclaimed property liability as well as significant damages, interest, and other costs. It is anticipated that this litigation may well spur similar litigation against other gift card servicing companies as well as against arrangements where a card issuer has not used a card servicing company, but instead has formed its own, separately incorporated gift card subsidiary. Delaware is reportedly challenging the gift card subsidiary structure of some companies under audit.
GAO Report - Effects of Budget Cuts on IRS Staffing, Performance
On April 21, the U.S. Government Accountability Office (GAO) release a report concerning the effects of budget cuts on IRS staffing and performance. In its report—Internal Revenue Service: Absorbing Budget Cuts Has Resulted in Significant Staffing Declines and Uneven Performance, GAO-14-534R (April 21, 2014)—the GAO findings reflect that:
"Killer B" Final Regulations to be Revised
On April 25, the IRS released Notice 2014-32 announcing modifications and clarifications to the regulations under section 367(b) relating to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations. Revisions to be made to the regulations, known as the "Killer B regulations," would include:
California: Senate Bill to Change California Corporate Tax Rates
On April 1, California Senate Bill 1372 was amended to provide for revised tax rates on corporate entities. Under current law, the corporate income/franchise tax rate is 8.84 percent. As amended, Senate Bill 1372 would, if enacted, for tax years beginning on and after January 1, 2015, revise the rate for taxpayers that are publicly held corporations, as defined. Such corporations would be subject to tax at a rate from 7 percent to 13 percent.
The rate applied to a particular taxpayer would be based on the so-called compensation ratio of the corporation. The numerator of the "compensation ratio" would equal the greater of the compensation paid to the taxpayer's chief operating officer or the taxpayer's highest paid employee while the denominator would equal the median compensation of all the taxpayer's U.S. employees. The amount of the compensation is determined based on the calendar year preceding the tax year at issue.
Taxpayers required to be included in a combined report would be treated as a single taxpayer for purposes of determining the compensation ratio. Corporate taxpayers with a compensation ratio over 400 would be subject to tax at the highest 13 percent tax rate.
Senate Bill 1372 would also increase the applicable tax rate by 50 percent for those taxpayers that have a specified decrease in full-time employees employed in the United States as compared to an increase in foreign and contract employees.
GAO Report on Large Partnerships and IRS Audits
On April 18, the U.S. Governmental Accountability Office (GAO) released a report providing data on the number and characteristics of large partnerships and IRS audits of large partnership returns. For these purposes, "large partnerships" were defined as those that reported having 100 or more direct partners and $100 million or more in assets.
In this report, the GAO found:
2013 APA Statistics Released
On March 27, the IRS released the advance pricing agreement (APA) statistics for calendar year 2013.
Number of Cases:
|Canceled or Revoked||0||0||0||0||11|
Average Number of Months to Complete:
|Bilateral / Multilateral||41.8||36.2||39.2|
From 2012 to 2013, the number of applications filed slightly decreased from 126 to 111 while the number of cases executed slightly increased from 140 to 145, resulting in a reduction in the number of pending cases from 391 to 331.
Of the total number of bilateral APAs executed in 2013, 53% of the cases were agreed between the U.S. and Japan, with the other two treaty countries with significant activity being Canada (19%) and the United Kingdom (8%).
House Judiciary Committee Hearing on Marketplace Fairness Act
On March 12, the House Judiciary Committee held a hearing on "Exploring Alternative Solutions on the Internet Sales Tax Issue." The purpose of the hearing was to examine several proposed alternatives to requiring vendors to collect tax on sales made over the Internet under the Marketplace Fairness Act of 2013 (MFA) which was passed by the Senate last year. In September 2013, the Chairman of the committee, Bob Goodlatte, published seven guiding principles on the issue including 1) tax relief; 2) tech neutrality; 3) no regulation without representation; 4) simplicity; 5) tax competition; 6) states' rights; and 7) privacy rights.
In his opening statement at the hearing, Chairman Goodlatte observed that, in his view, the MFA suffers from several fundamental defects including 1) the public perception that the MFA imposes a new tax on Internet sales; 2) significant costs of compliance; and 3) the potential to expose remote sellers to multiple audits in jurisdictions where the sellers have no presence.
The witnesses including various state and local tax professionals from industry, private law practice and policy groups presented the following alternatives:
U.S. Supreme Court: Severance Payments are Wages Subject to FICA
On March 25, the U.S. Supreme Court held (8 to 0) that severance payments made to employees who are terminated against their will are taxable wages and are subject to certain withholding taxes, including FICA taxes. United States v. Quality Stores, Inc., 12-1408 (S. Ct. March 25, 2014).
The Supreme Court found that the Sixth Circuit's decision upholding the refund claim by the taxpayer was wrong because the Sixth Circuit relied on the definition of wages under a provision governing income tax withholding (section 3402(o)) rather than FICA's definition of wages. The Court noted that the IRS (in Rev. Rul. 90-72) still provides that severance payments tied to the receipt of state unemployment benefits are exempt from, not only income tax withholding, but also from FICA taxation.
New York: Corporate Tax, Banking Tax Reform Bills Enacted
On March 31, New York Governor Andrew Cuomo signed the bills which enact the tax changes included in the Executive Budget and provide an estimated $2 billion tax relief. On the corporate tax side, the bills repeal the Article 32 Banking Franchise Tax and substantially revise the Article 9-A general corporate franchise tax. Under the new regime, banks are subject to the revised Article 9-A tax. The corporate tax changes are generally effective for tax years beginning on or after January 1, 2015. The changes do not apply for New York City corporate and banking tax purposes unless and until New York City enacts its own conforming legislation.
Highlights of the corporate tax reform are as follows:
Ways and Means Chairman's Tax Reform Proposal
On February 26, House Ways and Means Committee Chairman Dave Camp (R-MI) released a proposal for comprehensive tax reform. The 979 pages of the proposal would rewrite the Internal Revenue Code in much the same way Congress did in 1986 and modify hundreds of provisions of the Code.
Business Provisions in the proposal include the following:
International Provisions of the proposal include the following:
Individual Provisions of the proposal include the following:
Other technical changes for current provisions of the Code are extensive and are designed to eliminate inconsistencies and overlaps, as well as to more narrowly target them. For example, while there are 15 tax benefits for higher education currently, the proposal would consolidate them into five including American Opportunity Tax Credit, deduction for work-related education expenses, exclusion for scholarships and grants, gift tax exclusion for tuition payments, and tax-free section 529 plans.
It would also make extensive changes to the provisions in the areas of insurance, real estate, tax-exempt financing, executive compensation, and partnerships and other pass through entities.
The Joint Committee on Taxation (JCT) prepared a series of documents that examine the various provisions in the tax reform proposal.
IRS Releases Transfer Pricing Audit "Roadmap"
On February 16, the IRS Large Business & International (LB&I) division released a transfer pricing audit "roadmap."
The roadmap is developed by Transfer Pricing Operations (TPO) to provide the transfer pricing practitioners with audit techniques and tools to assist with the planning and execution of transfer pricing examinations. The roadmap is organized around a basic 24-month audit time-line and provides advice and links to useful reference material.
Revenue Procedure on Changes in Accounting Methods for Disposition of Tangible Property
On February 28, the IRS released Rev. Proc. 2014-17 that describes the accounting method changes under the proposed disposition regulations. Specifically, the 91-page revenue procedure:
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.