Source: http://www.ustaxdisputes.com/category/litigation
Timestamp: 2019-04-25 14:06:09+00:00

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In a 5-4 decision just issued this morning, the Court upended 50 years of precedent and renounced the “physical presence” standard it had long held in determining when a remote taxpayer’s presence in a state triggered the requirement to collect tax. In an opinion delivered by Justice Kennedy, the Court held that the physical presence rule affirmed in Quill is “unsound and incorrect” and thus its prior decisions, Quill (1992) and National Bellas Hess (1967), are overruled.
In Quill v. North Dakota, the US Supreme Court affirmed the existence of a bright-line “physical presence” standard for substantial nexus under the Commerce Clause as the jurisdictional basis before a state or locality could impose a duty on a remote retailer to collect use tax from its customers. In a direct challenge to that decision, South Dakota enacted a law in 2016 imposing a tax collection requirement on remote sellers having a mere “economic presence” in the state (i.e., merely having sales to South Dakota customers exceeding $100,000 in a calendar year, or 200 or more separate sales, no matter what size, into the state in a calendar year).
In September 2017, the South Dakota Supreme Court affirmed a lower court holding which had struck down the South Dakota law as unconstitutional in violation of the Quill physical presence requirement. The US Supreme Court accepted cert. this past January, essentially addressing whether in light of today’s electronic age and the “legal and practical developments over the last 25 years”, its 1992 Quill decision (and before that its decision in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967)) should still be the law of the land.
(2) Quill creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that decide to limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced.
(3) The physical presence rule of National Bellas Hess and Quill is also an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions citing that forty-one States, two Territories, and the District of Columbia have asked the Court to reject Quill’s test.
Again citing the Court’s own language: When the day-to-day functions of marketing and distribution in the modern economy are considered, it becomes evident that Quill’s physical presence rule is artificial, not just “at its edges,” 504 U.S. at 315, but in its entirety. Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. And the Court should not maintain a rule that ignores substantial virtual connections to the State. As the Court states: It is not clear why a single employee or a single warehouse should create a substantial nexus while “physical” aspects of pervasive modern technology should not.
Further quoting the Court: The Quill Court (in 1992) did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. When it decided Quill, the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller. The Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency.
As the Court indicates, the argument that the physical presence rule is clear and easy to apply is unsound, as attempts to apply the physical presence rule to online retail sales have proved unworkable. Because the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, arguments for reliance based on its clarity are misplaced. Stare decisis may accommodate “legitimate reliance interest[s],” United States v. Ross, 456 U. S. 798, 824, but a business “is in no position to found a constitutional right on the practical opportunities for tax avoidance,” Nelson v. Sears, Roebuck & Co., 312 U. S. 359, 366. For these reasons the Court concludes that the physical presence rule of Quill is unsound and incorrect.
Justice Kennedy’s decision was matched with short concurring opinions by Justice Thomas and Justice Gorsuch.
Chief Justice Roberts along with Justices Breyer, Sotomayor, and Justice Kagan filed a dissent.
Also, as a separate matter, under the Commerce Clause Congress has the ultimately authority to “regulate commerce among the several states”. However, thus far it has not exercised its power in this area. It remains an open question as to what extent if any Congress may now decide to act.
Stay tuned for more, we are quite sure that we are far from hearing the last on this issue.
While it appears that Ford’s petition for certiorari to the Supreme Court yielded Ford some of the answers it was looking for, Ford is still without the approximately $470 million in what it argues is overpayment interest. As we discussed in a previous article, the Supreme Court asked the Sixth Circuit to address the question of proper venue. The Government had previously argued that the Tucker Act (28 U.S.C. § 1491(a)) is the only general waiver of sovereign immunity regarding overpayment interest. As such, the Government urged a district court would not have jurisdiction under 28 U.S.C. § 1346(a)(1) as Ford was not seeking to recover money that was already paid. In an opinion dated October 1, the Sixth Circuit denied the Government’s claim that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court. This issue had previously been decided by the Sixth Circuit in Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005). In Scripps, the Sixth Circuit held that a suit to obtain overpayment interest includes a “recovery” of money as is described in 28 U.S.C. § 1346(a)(1). The Sixth Circuit, in seeing no reason to revisit the Scripps decision, declined to revisit the issue and held against the Government’s jurisdiction claim.
Once the Sixth Circuit confirmed proper jurisdiction of the case, it then turned to the merits of the case. The Sixth Circuit initially addressed whether Section 6611 (relating to overpayment of interest) constitutes a “waiver of sovereign immunity that must be strictly construed,” which would, in turn, require a narrow reading of the term “overpayment.” The Government argued that Section 6611 constitutes a waiver of sovereign immunity, and as such, the term “overpayment” should be subject to the strict construction canon. Ford argued that 28 U.S.C. § 1346(a)(1) was the appropriate waiver of sovereign immunity, and that Section 6611 was instead a substantive right underlying the claim. The Sixth Circuit found that, during the years at issue, any distinction between overpayments of “deposits in the nature of a cash bond” and “advance tax payments” had been made by the Service and not by Congress. As such, the Sixth Circuit held that the any distinction between deposits and advance tax payments are substantive only, and do not implicate sovereign immunity.
Next, the Sixth Circuit turned to the “date of overpayment,” and whether such date is properly determined as the day that Ford remitted deposits or, alternatively, the date that on which such deposits were converted into advance tax payments. The Sixth Circuit determined that this issue turns on whether the payments were made by Ford “for the purpose of discharging its estimated tax obligations.” The Sixth Circuit looked to the “tradeoffs” presented in Rev. Proc. 84-85 (which had been in effect during the years at issue). In essence, the Sixth Circuit determined that in order for Ford to stop the accrual of underpayment interest, Ford had the ability to either (i) remit a cash-bond deposit which would not pay Ford potential overpayment interest, but which could be returned upon Ford’s demand, or (ii) make an advance tax payment, which would allow Ford to recoup interest with respect to an overpayment, but would deny Ford the immediate ability to recoup the funds. The Sixth Circuit viewed the form of the remittances, either as a cash-bond deposit or an advance tax payment, as dispositive of the purpose of the payment. As such, since Ford initially remitted cash-bond deposits, the Sixth Circuit found that Ford “did not remit those deposits to discharge its estimated tax deficiency.” Thus, the Sixth Circuit held for the Government and found that the remittances were cash-bond deposits that were not entitled to overpayment interest, and that the “date of overpayment” did not begin until the date the payments were converted to advance tax payments.
While Ford received favorable rulings from the Sixth Circuit regarding both proper venue and whether Section 6611 constitutes a separate waiver of sovereign immunity, Ford ultimately lost regarding when an “overpayment” begins. Ford now has the ability to file yet another petition for certiorari to the Supreme Court. While any potential petition remains to be seen, it appears that the case at hand is finally narrowed down to the sole issue of when an “overpayment” begins.
Very few areas involve more tax rules and more controversies (with many more opponents than just the Internal Revenue Service) than the area of employee benefits. You may know this better as the realm of ERISA and ERISA plans. Occasionally, I will be contributing posts to this blog from the perspective of controversies, tax and otherwise, involving ERISA matters. This is my first.
There are a variety of ways that an ERISA plan can end up in court. ERISA provides three basic jurisdictional paths to the courthouse, the most commonly used of which is a suit by a participant or beneficiary for benefits payable by an ERISA-covered benefit plan under section 502(a)(1)(B) of ERISA, 29 USC section 1132(a)(1)(B). The jurisprudence governing suits of this nature is long and surprisingly complex, and it will provide grist for this blog on multiple occasions in the future.
The U.S. Supreme Court recently addressed a recurring problem area in the jurisprudence under section 502(a)(1)(B) of ERISA in a 9-0 opinion released on December 16, 2013. In that opinion, the Court determined that a statute of limitations written into a plan document can be enforceable. Heimeshoff v. Hartford Life & Accident Insurance Co., 571 U.S. ___ , 2013 WL 6569594 (S. Ct. Dec. 16, 2013).
Julie Heimeshoff was covered under a long term disability plan insured by Hartford and sponsored by Wal-Mart Stores, Inc. On August 22, 2005, she filed a claim for LTD benefits under the plan. For a lot of valid reasons, the final denial of her benefits was not issued until November 26, 2007. Ms. Heimeshoff then filed suit for the unpaid benefits on November 18, 2010, almost three years to the day after the final denial was issued. Experienced lawyers among you would look at a claim first asserted in 2005 and at a suit filed on that claim more than 5 years later and think, there has to be a statute of limitations defense in these facts. You would be correct, but not as clearly as you might suspect.
ERISA has a statute of limitations provision for some lawsuits, but has no stated statute of limitations for actions brought under section 502(a)(1)(B) of ERISA. The courts have developed a process for providing a statute of limitations for these suits to fill this statutory void. Like many of its counterparts, the Wal-Mart LTD plan also had reacted to the void by creating its own statute of limitations for these suits. It contained a provision that stated: “Legal actions cannot be taken against The Hartford … [more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.” Ms. Heimeshoff’s lawsuit was filed more than three years after proof of loss was required, but within three years (barely) after the date of the last denial in the plan’s internal administrative review process under section 503 of ERISA. The question answered by the U. S. Supreme Court was whether after considering these plan terms, Ms. Heimeshoff’s suit was filed too late. The answer was, yes, it was filed too late. This three year statute of limitations (that accrued on the date written proof of loss was required) was enforceable so long as the length of the limitations period was “reasonable” and there was no controlling statute to the contrary.
(1) Seriously consider reviewing any of your existing ERISA plan terms that create a contractual statute of limitations for claims under section 502(a)(1)(B) of ERISA for that statute’s compliance with the requirements of Heimeshoff. Be sure that during your review, you are differentiating between the plan’s deadline for initially filing a claim for benefits under the plan and the plan’s deadline for filing a lawsuit to attempt to recover unpaid, denied benefits. Only the latter has been affected by Heimeshoff. Your plan’s new statute may overlap with the period of time needed to exhaust the plan’s administrative remedies under section 503 of ERISA, but it must leave time afterwards for filing suit, so integrate your plan’s new statute of limitations carefully with its internal administrative review procedures and time frames. The fact that three years was a reasonable length for the statute does not mean that three years or fewer will always be reasonable or that longer than three years will always be unreasonable. The fact that 9 Justices agreed that three years was reasonable in these circumstances provides no small amount of comfort that three years ought to be reasonable again.
(2) In cases where it does not already exist in your ERISA plans, seriously consider adding a plan-based statute of limitations for suits brought under section 502(a)(1)(B) of ERISA to seek benefits under your ERISA plan. In doing so, be careful to select an accrual date trigger (a start date) that will yield consistent results in a variety of circumstances, is as objective and easily discernable by a participant and court as possible and will be viewed by a disinterested trier of fact as being a reasonable way to begin the statute’s running. For some insured plans, the trigger accrual date used in Heimeshoff – the “time written proof of loss is required” – will work for some insured plans, but not in all such plans, and it is more troublesome as an accrual date for an ERISA plan that is not funded with insurance.
(3) Heimeshoff said that if the results from applying a plan’s statute of limitations were viewed as too harsh, equitable principles could be used to mitigate the impact. Not too long ago, the U.S. Supreme Court said in U.S. Airways v. McCutchen that ERISA plans could by their terms limit the application of equitable principles to the plan. Should your ERISA plan take up the invitations of Heimeshoff and McCutchen and revise its plan terms accordingly?
(4) Consider whether Heimeshoff can be extended to allow your ERISA plan to add and enforce a statute of limitations for suits brought under section 502(a)(3) of ERISA.
Did Ford commit a venue foot-fault? The Government thinks so. An opinion from the Supreme Court last week gives lawyers yet another illustration of the principle that jurisdictional challenges may be raised at any time – even in a court of last resort. In response to Ford Motor Company’s petition for certiorari to recover overpayment interest of approximately $470 million in deposits in the form of cash bonds remitted to the IRS before Ford converted them to payments (see our previous post), the Supreme Court of the United States vacated the Sixth Circuit’s judgment and remanded to the Sixth Circuit. The opinion can be found here. The Supreme Court is asking the Sixth Circuit to determine whether the district court lacked jurisdiction under 28 U.S.C. § 1491(a) (the “Tucker Act”), which requires claims against the U.S. founded insofar as relevant upon any Act of Congress be brought in the Court of Federal Claims. Essentially, the Government argues that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court. To explain why it was raising this novel argument for the first time before the Supreme Court, the Government argued that it had failed to previously raise the issue due to controlling circuit precedent holding that 28 U.S.C. § 1346(a)(1) grants original jurisdiction over claims for overpayment interest both to district courts and the U.S. Court of Federal Claims. Under this precedent, an award of overpayment interest is typically considered to be an essential component of the relief sought under a tax or penalty refund claim and is interpreted to fall within a district court’s refund jurisdiction under 28 U.S.C. § 1346.
The Supreme Court determined that, because it is a court of “final review” and not one of “first view,” the Sixth Circuit should be the initial court to consider the Government’s claim. The Supreme Court also urged the Sixth Circuit to consider if such determination impacts whether or not Section 6611 of the Internal Revenue Code (relating to overpayment interest) is a waiver of sovereign immunity that should be narrowly construed. Interestingly, if the Sixth Circuit again determines that Section 6611 of the Code is the provision that waives sovereign immunity for claims of overpayment of interest, then presumably Ford is in the same place it was before the Supreme Court vacated and remanded the Sixth Circuit’s decision: seeking certiorari and “arguing that the Sixth Circuit was wrong to give [Section] 6611 a strict construction.” Alternatively, if the Government is correct regarding its interpretation of the Tucker Act, and if the case cannot be transferred to the Court of Federal Claims, Ford may be time-barred from filing a claim for refund, potentially losing its claim to $445 million – an important reminder of the importance of choice of venue when filing suit.
Approximately five years after its Detroit counterparts received billions of dollars from the federal government, Ford Motor Company is attempting to recoup approximately $470 million in overpayment interest it believes it is owed from the federal government. Ford has petitioned the Supreme Court of the United States claiming that the Sixth Circuit improperly extended the “narrow construction” of a waiver of sovereign immunity to a narrow construction of Section 6611 of the Internal Revenue Code (relating to interest on overpayment of taxes). In arguing that certiorari is warranted, Ford noted that there is confusion among the circuit courts over the application of the strict construction canon to waivers of sovereign immunity. The Supreme Court docket for Ford’s case can be found here, and the petition for certiorari is here.
Originally, for the tax years 1983-1989, 1992, and 1994, the IRS determined that Ford had underpaid its taxes. In an effort to toll potential interest charges on its potential underpayment, Ford took advantage of a special rule in Rev. Proc. 84-58 that allowed it to make additional payments as a cash bond (i.e., a deposit), which had the effect of stopping the accrual of underpayment interest. Years later, Ford converted the deposit into an “advance payment” to satisfy further tax liabilities. However, the IRS subsequently determined that Ford had overpaid its taxes for the years in question. Ford then received from the IRS the amount of the overpayment, plus interest. The parties agree on the amount of the overpayment, but disagree as to when the overpayment interest should begin to accrue.
Ford argued, unsuccessfully, that the date of overpayment began once Ford had submitted the deposit. The government argued that since the payments must be made with respect to a tax liability, the date of overpayment did not begin until Ford requested that the IRS treat the cash bonds as “advance payments” to satisfy further tax liabilities. The district court agreed with the government, holding that Ford was not entitled to overpayment interest until it converted the deposit into an advance payment. Ford Motor Co. v. United States, 105 A.F.T.R.2d 2010-2775 (E.D. Mich. 2010) (available through PACER and major commercial reporting services).
On appeal, the Sixth Circuit, acknowledging that Ford’s interpretation of Code Section 6611 was “strong,” applied a strict construction canon to Code Section 6611 and affirmed the holding of the district court. Ford Motor Co. v. United States, 508 Fed. Appx. 506 (6th Cir. 2012) (not recommended for publication). The Sixth Circuit found that that Code Section 6611 is the provision that waives sovereign immunity for claims of overpayment interest and that the canon of narrow construction should apply to resolve the interpretation of Code Section 6611 in the government’s favor.
Ford is now asserting that 28 U.S.C. § 1346(a)(1) is the provision that waives the government’s sovereign immunity with respect to overpayment interest, and Code Section 6611 is the provision that confers the substantive right underlying the claim for overpayment interest. As such, and consistent with Supreme Court precedent, Code Section 6611 should not, Ford argues, be subject to the strict construction canon. In Ford’s petition for certiorari, it argued that “in direct conflict with [the Supreme] Court’s precedents, the Sixth Circuit invoked the strict construction canon to construe not the waiver of sovereign immunity, but instead the separate, substantive provision.” If the Supreme Court rules in Ford’s favor (and sends the case back to the Sixth Circuit on remand), the Sixth Circuit’s seemingly sympathetic view of Ford’s reading of Code Section 6611 may ultimately lead to a decision that could lead to some taxpayers seeking additional interest on overpayments. However, in 2004 Congress enacted Code Section 6603, which provides, in general, that if a taxpayer follows certain procedures pursuant to a deposit made after October 22, 2004, interest may accrue from the date of the deposit so long as the deposit is with respect to a “disputable tax.” Thus, even if Ford were to prevail, taxpayers that follow the requirements of Code Section 6603 (and corresponding Revenue Procedure 2005-18) will not have to rely on the Ford case.

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