Larry's Tax Law

Basic Rules

IRC § 6501(a) generally requires the IRS to assess tax within three (3) years after a tax return is filed by the taxpayer. 

There are two (2) notable exceptions to this rule under IRC § 6501(c) and (e), namely:

1. Under IRC § 6501(c), an unlimited assessment period exists in the case of a false or fraudulent return where the taxpayer has the intent to evade tax; and
2. Under IRC § 6501(e), a six (6) year period for assessment exists in the case where the taxpayer understates gross income by more than 25 percent, unless there is adequate disclosure on the taxpayer’s original tax return.

In the case of a shareholder of an S corporation, the analysis is generally conducted at the shareholder level.  In other words, the focus is on the shareholder’s tax return, and the issue is whether there is a problem with that return that would extend the limitation period for assessment.

As we know from the basic rules, absent fraud or an undisclosed substantial understatement of gross income, the limitation period for assessment is three (3) years.  Likewise, absent fraud, an undisclosed substantial understatement of gross income extends the limitation period for assessment to six (6) years.

As I previously reported, the Washington state capital gains tax has had a turbulent ride, commencing with a rough ride through the legislative process where it almost hit disastrous terrain on at least six (6) occasions.  Then, it was hit with a lawsuit to strike it down as unconstitutional before Governor Inslee could even sign the legislation into law.  Days later, it was sideswiped with a second lawsuit to end its short life.

As I reported on March 2, 2022, the new tax regime took a near lethal blow when Douglas County Superior Court Judge Brian C. Huber struck down the newly enacted Washington state capital gains tax as unconstitutional. 

Judge Huber concluded:

ESSB 5096 violates the uniformity and limitation requirements of article VII, sections 1 and 2 of the Washington State Constitution. It violates the uniformity requirement by imposing a 7% tax on an individual's long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold. It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.

As suspected by many local commentators, the state would not let the tax regime die without a fight.  It is now seeking a higher court review of Judge Huber’s ruling, hoping to bring life back into the tax.

On March 25, 2022, Attorney General Robert W. Ferguson filed a notice of appeal.  Instead of appealing to the Washington Court of Appeals (the normal course of review), Mr. Ferguson filed a petition requesting the Washington State Supreme Court hear the case. 

As previously reported on May 7, June 17 and November 4 of last year, two lawsuits were filed in Douglas County Superior Court in Washington, seeking a declaration that the state’s new capital gains tax is unconstitutional.  The court consolidated the cases.  The parties filed cross motions for summary judgment, along with legal briefs in support of their positions.  The lawyers for the State of Washington asked for a judgment that the tax regime meets constitutional muster.  On the other hand, the lawyers for the taxpayers that initiated the case sought a judgment that the tax regime is unconstitutional.

During these trying times, especially with stay-at-home orders still in effect in most states, it is difficult not to over-focus on the uncertainty that lies ahead.  Hopefully, we can find healthy distractions to refocus our attention. 

In normal times, one of the many healthy distractions in our lives was viewing live sporting events such as basketball, football, baseball and soccer.  Unfortunately, COVID-19 shut down these activities.  The television networks quickly responded, without letting their stations go dormant, rebroadcasting historic sporting events. 

In accordance with ORS 305.157, the director of the Oregon Department of Revenue (“DOR”) ordered an automatic extension of the 2019 tax year income tax filing and payment due dates. Oregon now joins several other states and the U.S. Department of the Treasury in this regard.

For Oregon personal income taxpayers, the order means:

• • The Oregon income tax return filing due date for tax year 2019 is automatically extended from April 15, 2020 to July 15, 2020.
  • The Oregon income tax payment deadline for payments due with the 2019 tax year return is automatically extended to July 15, 2020.
  • The time for making estimated tax payments for tax year 2020 is not extended.
  • The tax year 2019 six-month extension to file, if requested, continues to extend only the filing deadline until October 15, 2020.
  • Taxpayers do not need to file any additional forms or notify the DOR to qualify for this Oregon tax filing and payment extension. 

I apologize in advance for focusing my blog these past several weeks on the new Oregon Corporate Activity Tax (“CAT”), but my mind keeps finding new facets to this tax regime that I suspect most tax practitioners and even the lawmakers who passed the legislation may not have envisioned or anticipated.  So, please indulge me as I explore another one of these numerous issues in this installment of the blog.

After the passage of the Tax Reform Act of 1986 and the introduction of Code Section 469, we started seeing tax practitioners focusing attention on trying to figure out how their clients could be characterized as active participants in a trade or business activity.  Their goal is simple – they want to avoid the deduction limitations imposed by the passive activity loss rules contained in Code Section 469. 

As we have been discussing these past several weeks, the Tax Cuts and Jobs Act (“TCJA”) drastically changed the Federal income tax landscape. The TCJA also triggered a sea of change in the income tax laws of states like Oregon that partially base their own income tax regimes on the Federal tax regime. When the Federal tax laws change, some changes are automatically adopted by the states, while other changes may require local legislative action. In either case, state legislatures must decide which parts of the Federal law to adopt (in whole or part) and which parts to reject, all while keeping an eye on their fiscal purse.

The NYU 76th Institute on Federal Taxation (IFT) is taking place in New York City on October 22-27, 2017, and in San Francisco on November 12-17, 2017.  This year, I will be presenting my latest White Paper, The Built-in Gains Tax Revisited.  My presentation will include a discussion about the history of the tax; application and impact of the tax; ways to avoid or potentially minimize the tax; the complexities of Code Section 1374 and the regulations promulgated thereunder; valuation issues; planning opportunities; traps that exist for the unwary; relevant cases and rulings; and practical tax practitioner guidance.

The IFT is one of the country's leading tax conferences, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters.  The speakers on our panel include some of the most preeminent tax attorneys in the United States, including Jerry August, Terry Cuff, Wells Hall, Karen Hawkins, Stephen Looney, Stephen Kuntz, Mark Peltz and Bobby Philpott.  I am proud to be a part of IFT.

This will be my fifth year as an IFT presenter, and I am speaking as part of the Closely Held Business panel on October 26 (NYC) and November 16 (San Francisco).  As in previous years, the IFT will cover a wide range of fascinating topics, including tax controversy, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estates, and ethics.

I hope you will join us this year for what will be a terrific tax institute.  Looking forward to seeing you in either New York or San Francisco!

View the complete agenda and register at the NYU 76th IFT website.

Please join me at the NYU Summer Institute in Taxation this July in New York City. This year, I will be presenting "Entity Classification – Another Look at the Check-the-Box Regulations" on Day 2 (July 27) of the Institute’s Advanced Income Tax and Wealth Planning Conference, where I will discuss recent developments, flexibility and planning opportunities created by the regulations, traps that exist for the unwary, and practical tax practitioner guidance.

As reported in my November 2013 blog post, for tax years beginning in 2015 or later, under ORS 316.043, applicable non-passive income attributable to certain partnerships and S corporations may be taxed using reduced tax rates.  The reduced tax rates are as follows:

• • 7 percent for taxable income of $250,000 or less;

• • 7.2 percent for taxable income greater than $250,000 but less than or equal to $500,000;

• • 7.6 percent for taxable income greater than $500,000 but less than or equal to $1,000,000;

• • 8 percent for taxable income greater than $1,000,000 but less than or equal to $2,500,000;

• • 9 percent for taxable income greater than $2,500,000 but less than or equal to $5,000,000; and

• • 9.9 percent for taxable income greater than $5,000,000.