Governor Newsom signed SBX1-2, the “Gas Price Gouging Law,” into law on March 28h. The law begins with a reflection  on the gasoline price history in 2022, and then the new law declares: “Fundamental change is necessary to prevent future extreme price spikes and price gouging by oil companies.”  SBX1-2 will expand current reporting requirements into a comprehensive reporting regime affecting every link in the petroleum supply chain. The recipient of these reports, the State Energy Resources Conservation and Development Commission (Commission), is then empowered to set a “maximum gross gasoline refining margin,” in effect, a price ceiling for gasoline. The penalty for exceeding this price will be a percentage of the amount over this price multiplied by all gallons sold for the month. A court injunction would also be possible to allow the state to prevent higher prices from continuing to be charged and fees simply paid. Collected penalties will be kept in the “Price Gouging Penalty Fund,” newly created “to address any consequences of price gouging on Californians” upon subsequent acts by the legislature.

SBX1-2 will take effect on the 91st day after the legislature’s special session ends, June 26, 2023. Exemptions are possible upon proving to the Commission that “the maximum gross gasoline refining margin would be unconstitutional as applied to the refiner.” Alternatively, the Commission may impose a different maximum margin or other conditions “upon a showing by the refiner of good cause.”

A notice and comment period of at least 30 days will be required before a public hearing to determine the maximum margin and penalty. The maximum margin and penalty would then come into effect on the 60th day after the establishment or adjustment. Before the maximum margin and penalty can be set, the Commission must find “that the likely benefits to consumers outweigh the potential costs to consumers.” All relevant factors must be considered, including the possibility of supply shortages and higher average prices. Although two advisory subagencies will be created, the Commission will be solely responsible for setting and enforcing the margin and its penalties. The Commission currently has about 30 attorneys and a few accountants, and SBX1-2 did not increase the funding for the Commission.

The California State Auditor will be responsible for reviewing the efficacy of SBX1-2 in 2033. By operation of law, absent action from the Legislature, the margin and its penalty will be terminated within 180 days of the State Auditor’s report if the State Auditor determines that they should be terminated.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The Income Verification Express Service (IVES) is the program that authorized third parties use to receive a copy of a tax transcript from the IRS. The IRS Inspector General reviewed the tax transcript request process and found that request volumes fluctuate considerably. In FY 2020, there were 12.4 million transcript requests which increased to 15.4 million in FY 2021 and then decreased to 8.3 million in FY 2022.

Section 2201 of the Taxpayer First Act, enacted in 2019, required the IRS to modernize the process of disclosing tax transcripts by January 1, 2023. The cost of this modernization would be paid for through user fees. The Inspector General faulted the IRS for having unduly low user fees for IVES and at the same time failing to modernize the processing of business transcript requests, missing the January 1, 2023, deadline. “Although Information Technology (IT) organization management indicated that this capability was delayed due to technical complexities, we found it was delayed due to a lack of planning by the IT organization.” The IRS now promises it will be implemented by July 2023.

Skepticism of IRS technological aptitude across the tax preparation industry raises issues with the prospect of requiring all transcript requesters to participate in the modernized system. The IRS has yet to make use of the new system mandatory, but promised to do so by January 15, 2025 based on a study they plan on beginning in January 2024. This leaves efaxing as an option for the time being.

The report continued with the Inspector General’s concerns about the sufficiency of signature validation for efaxing: “[T]he IRS has no way of verifying the signature is the true taxpayer before releasing important tax return information.” The report suggested requiring notarization. It was noted in the Inspector General’s report that this problem would not arise if IVES was fully operational and mandatory. It was also suggested that the IRS notify taxpayers when a transcript request form is processed. This would afford taxpayers the opportunity to object to unauthorized requests. The IRS protested that “a secondary confirmation of taxpayer intent” would ruin the goal of processing the requests within 72 hours. The Inspector General, in effect, responded that it was not requesting a secondary confirmation, but a primary confirmation.

Although “IVES employees work 22 hours out of a 24-hour period,” some transcripts have taken more than 7x the anticipated processing time at 22 days. This was the result of intermittent outages of the relevant software, the cause of which took nearly 6 months to diagnose “after a ‘priority one’ ticket was submitted.” “The IRS defines a priority one ticket as any issue causing severe, mission-critical work stoppage. The impact may be on multiple internal or external customers and service to taxpayers. Immediate action is required (i.e., the ticket should be resolved in four hours).”

IVES could be useful to nonlending participants, including attorneys. Although such participants have been admitted to the IVES Program, the IRS expressed concerns that large nonlending participants (such as tax preparation companies) would overwhelm IVES. The administration of the IVES Program requested a policy decision from IRS management for the matter on May 19, 2021. On June 14, 2022, the Inspector General warned the IRS that many applications from nonlending participants have been waiting for over a year. There were 282 such pending applications by July 2022. The IRS promised to make a decision by June 2023.

If you have questions or concerns about how changes to tax reporting systems may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The 9th Circuit decided, en banc, Seaview Trading, LLC v. Commissioner, vacating a decision the court previously made in 2022. For the purposes of this article the 2022 decision will be referred to as Seaview (2022) and the decision overturning that decision will be referred to as Seaview (2023).

Seaview (2022) concerned the filing requirements of a partnership tax return for the 2001 tax year. It was a debate of the extent technicalities should control all else, and the reliability of IRS guidance. This is an area that typically does not lead to much infighting on the 9^th circuit, yet this decision was uncommonly contentious. According to the dissent, “in addition to being deeply implausible and contrary to law, the majority’s analysis and conclusions are logically absurd and should not be the holding of this court.”[1]

Representatives of Seaview Trading, LLC faxed its 2001 Form 1065 in 2005 to a revenue agent and mailed it to an IRS attorney in July 2007. The IRS then disallowed a $35.5 million loss associated with a tax shelter in October 2010. If either Form 1065 transmission constituted a filing, the statute of limitations would bar the reassessment. The court in Seaview (2022) ruled in favor of the taxpayer, relying on IRS guidance that seemingly contradicted regulations requiring returns to be filed in specific locations. Seaview (2023) focused on prior caselaw requiring “meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation.”[2] As the taxpayer never filed Form 1065 to the designated location, it could not benefit from the statute of limitations. This all may seem rather technical, and ultimately it is, but in this case it was the deciding factor in determining if $35.5 million was owed or not.

The dissenting judge in Seaview (2023) was the majority opinion author of Seaview (2022), Circuit Judge Bumatay. He exclaimed: “Today, our court throws our tax system into disarray. Now taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns.”[3]

The taxpayer presented three pieces of IRS material in its defense:

1. A “2006 policy statement, provides that absent an indication of fraud, ‘[a]ll delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted.’” [4]
2. The Internal Revenue Manual of 2005 instructing examiners to request delinquent returns and to forward those returns “to the appropriate campus.”[5]
3. The 1999 Chief Counsel Advice providing that a revenue agents could accept hand-carried returns and that “taxpayers may file their delinquent returns either with the applicable Service Center or with a revenue officer.”[6]

Seaview (2023) held that the Chief Counsel Advice was inapplicable because it was concerned with whether the taxpayers could be required to hand-file delinquent returns to revenue agents rather than mail them.[7]

Regarding the passage in the Internal Revenue Manual, Seaview (2023) remarked “even assuming the revenue agent in Seaview’s case was required to follow this guidance and failed to do so, that fact would not alter our analysis because the ‘Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers.’”[8]

The majority opinion dismissed the 2006 policy statement: “That statement does nothing more than confirm that delinquent returns submitted by taxpayers will be ‘accepted’ rather than rejected on the ground they are late. It does not purport to override the regulatory requirements that otherwise govern the manner in which, and the place at which, returns must be filed.”[9]

Seaview (2023) also highlighted the respect, if not deference, the 9th Circuit pays to Tax Court decisions: “The Tax Court has also repeatedly held that a return is not properly ‘filed’ unless it is submitted to, or eventually received by, the person or office specified in the applicable regulations as the designated place for filing. Although Tax Court decisions do not bind us, we have consistently recognized that court’s unique expertise in tax matters, and here we find its decisions persuasive.”[10]

The dissent to Seaview (2023) directly linked the case to the recent Supreme Court case Bittner v. United States, claiming that the majority in Seaview (2023) permitted the IRS to “speak out of both sides of its mouth” which the Supreme Court disallowed, using discrepancies in IRS statements in the taxpayer’s favor.[11] It seems that, all else being equal, IRS guidance at variance with its current litigation position is most persuasive when the legal interpretation is to be strictly construed against the government (as with penalties, i.e. rule of lenity) and least persuasive when the matter must be strictly construed against the taxpayer (as with the statute of limitations). Unfortunately for the taxpayer, perhaps most disputes (i.e. dealing with exclusions and deductions) in tax law require strict construction in favor of the government.[12]

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] Seaview Trading, LLC v. Comm’r of Internal Revenue, 34 F.4th 666, 680 (9th Cir.), reh’g en banc granted, opinion vacated, 54 F.4th 608 (9th Cir. 2022), and on reh’g en banc, No. 20-72416, 2023 WL 2442606 (9th Cir. Mar. 10, 2023).

[2] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *4 (9th Cir. Mar. 10, 2023)(quoting Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930)).

[3] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[4] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[5] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[6] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[7] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[8] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023)(quoting Fargo v. Comm’r, 447 F.3d 706, 713 (9th Cir. 2006)).

[9] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[10] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *5 (9th Cir. Mar. 10, 2023)(omitting internal citation).

[11] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *8 (9th Cir. Mar. 10, 2023)

[12] “But allowance of deductions from gross income does not turn on general equitable considerations. It depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” Deputy v. du Pont, 308 U.S. 488, 493 (1940)

Protection of personal information is an advantage gained when using  a trust. Whereas  a probated will is an announcement of an orderly succession of proprietary ownership to the world, and wills are available to anyone. Not everyone is comfortable with making that announcement and creating a record that could last centuries or even millennia. On the other hand, trusts can be secret, but even the secrecy they provide is not perfect. Disclosure is sometimes required as proof of ownership rights over an asset. However, California law accounts for that, and so California law permits a trust to be used for this purpose without being completely disclosed. For example, if a bank needs to know certain details of a trust in order to confirm ownership of an asset, Probate Code § 18100.5 ensures that the bank will know only what is necessary. It does so by allowing presentation of a “certification of trust” proving the trust’s existence, the trustee’s authority, the settlor’s identity, the manner of taking legal title, and other key trust terms. If this certification of trust is presented then there is no need to provide the full terms of the trust, so important information such as the identity of beneficiaries is not required to be disclosed.

If presented with a trust certification, then the requestor must accept that trust certification as if it were the actual trust instrument or potentially be liable for damages and attorney’s fees resulting from the refusal. Although there are some laws and regulations requiring financial institutions to ascertain into the identity of trusts heir beneficial ownership “as needed,” the required disclosures can be made without divulging the full trust instrument, thus maintaining the secrecy that the trust was intended to protect.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

An Incomplete Non-Grantor Trust (ING) is designed to be a separate taxpayer for income tax purposes which receives assets without gift tax consequences. No gift tax is incurred because the gift is “incomplete,” and the income is not taxable to the grantor because the ING is a non-grantor trust. However, the income generated from the trust assets is taxed to the trust. An ING’s income is taxed only on the federal level when the trust is in a state without an income tax.

States that tax income use tax codes mostly copied from the federal Internal Revenue Code (IRC). This allows an ING to work favorably in a state without a state income tax. For example, California taxes neither distributions from an ING established in Nevada nor the ING’s grantor in California. The ING’s distributions are not taxed by California because the ING is in Nevada. California does not tax the grantor because the IRC does not, and California follows the IRC regarding the tax treatment of trust grantors. Meanwhile, Nevada does not tax income at all. The Californian grantor would still be taxed on distributions received, but would have the authority to decide whether there would be a distribution.

Governor Newsom proposed an Anti-ING law in his 2023-2024 budget that would tax the net income of INGs, defeating the primary purpose for most INGs. Governor Newsom’s proposal bears few details, but the law would take retroactive effect to the beginning of 2023. There does not appear to be a bill adopting this proposal as of this writing on March 28, 2023.

Anti-ING laws are rare but not new. Rather soon after INGs became popular, New York conducted a study resulting in a new law targeting INGs, enacted in 2014. In 2020, the California Franchise Tax Board (FTB) proposed an Anti-ING law derived from New York’s creation. Both are simple (within a tax law context). They define an ING, proclaim it a grantor trust, and tax its net income to the grantor. Particularly as the FTB’s estimate of the increased annual revenue ($17 million) is the same as Governor Newsom’s estimate, his proposal will likely adopt the FTB’s 2020 suggestion. However, the governor has not disclosed the text of the proposed law.

Political parties are never monolithic. Yet Governor Newsom’s power over his party was seemingly demonstrated last year through his victory over Proposition 30’s multimillionaire tax. With well more than a sufficient number of Democrats for two-thirds majority votes in the Legislature, Governor Newsom may soon make California the second Anti-ING state.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

California experienced extreme weather recently. As a result, the Internal Revenue Service and its Californian equivalent, the Franchise Tax Board (FTB), extended the tax filing deadline for most (but not all) Californians. Whether an individual has been given more time to file is determined by the county that the individual resides in. This deadline extends the time to pay one’s taxes and file tax returns, which would normally be April 18. [“The due date is April 18, instead of April 15, because of the weekend and the District of Columbia’s Emancipation Day holiday, which falls on Monday, April 17.”] Both the FTB and the IRS extended the deadline to May 15. The IRS later extended the date to October 16, and the FTB announced on March 2 that its deadline will also be October 16. Please see the chart below for how each county is categorized.

“If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.”

We are currently living through the Information Age, harvesting, selling, and protecting information has become a significant undertaking both by private individuals and corporations, as well as by the government. One person who has huge amounts of information about you without your explicit consent is the reader of your Individual Master File. The Individual Master File (IMF) is the profile the IRS creates for every individual taxpayer, there is also a counterpart for legal entities called the Business Master File. Any taxpayer may learn about their IMF (or Business Master File) by requesting a “tax transcript.” This request may be made through Form 4506-T, by calling 800-908-9946, or by accessing it online. There are five transcript types and together they reveal what has been reported to the IRS (by the taxpayer and third parties) as well as what the IRS has done with that information. 

Unfortunately for anyone interested in learning what the IRS knows about them, the IMF is not always complete. In addition to the Master File, there is Non-Master File (NMF). The NMF is a special repository containing information beyond the IMF’s technological capacity (which is several decades old and uses magnetic tape records). This accounts for certain specialized circumstances, such as overdue child support or balances of $1 billion or more. Unfortunately, there is not an expedited process to access an NMF, nor is there even a website to visit or a phone number to call. Instead, a written request must be mailed to the Philadelphia IRS Campus (for individuals) or the Cincinnati IRS Campus (for businesses). The IRS is slowly transferring information to CADE 2, IMF’s replacement. However, this has not affected the process of obtaining transcripts so far. The IRS usually only gives transcripts redacted (“masked”) for personally identifiable information.

Ultimately, a significant amount of the difficulty of gaining anything from tax transcripts lies in reading them rather than retrieving them. They are replete with codes, and although these codes are accompanied by a description of two or three words, “sometimes these descriptions don’t adequately explain the account transaction,” according to the National Taxpayer Advocate. Complete understanding requires consulting Document 6209, an information systems guide nearly 400 pages long. Specifically, section 8 of Document 6209 discusses the thousands of possible codes for the IMF, some of which have multiple meanings or are redacted.

Aside from potentially satisfying idle curiosity, tax transcripts are useful to fill gaps in records held by taxpayers and to provide information trusted by banks to obtain a loan.

“If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.”

California issued $9.2 billion to 16.8 million residents to relieve the rising costs of inflation. The payment is known as the “Middle Class Tax Refund.” It has finally been determined that the payments will not constitute taxable income for either California or the federal government. California’s position was clear from the time the funding legislation was enacted on June 30, 2022. However, the IRS delayed its determination until February 10, 2023, well after the tax season started. The late timing received scathing criticism from the National Taxpayer Advocate.

The income threshold levels for the Middle Class Tax Refund are as follows:

If you have questions or concerns about how these new reports may affect you or your business, please contact the Burton Law Firm at 916-822-8700 or email info@lawburton.com for a consultation.

Arbitration is part of modern American life—even reading this likely required agreeing to at least one arbitration agreement, whether for the electronic device, its software license, or its internet connection. This results from the Federal Arbitration Act (FAA) that has been in effect since 1926. The core of FAA is just two sentences, one containing 91 words and the other containing 131 words. One of those sentences permits arbitration agreements for every “transaction involving commerce,” and the other defines “commerce” as “commerce among the several States or with foreign nations” but excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Recently, in 2019, California enacted AB 51, a law that pushes back on the proliferation of arbitration agreements by criminalizing the practice of requiring an arbitration agreement for employment. On February 15, 2023, the 9th Circuit found that AB 51 was preempted by the FAA, and therefore struck it down.

Perhaps no other law enacted by President Calvin Coolidge spurred such controversy and litigation. Even then, the litigation did not heat up for years after its passage. Until 1983, there were only 10 Supreme Court cases interpreting the FAA. Yet beginning in 1983, the past four decades have seen at least 58 such cases, including Circuit City Stores, Inc. v. Adams, which found that the FAA applied to employment contracts (except for transportation workers).

In finding that AB 51 was in fact preempted the court in Chamber of Commerce v. Bonta reviewed the history of AB 51. The court found that California has fought the Supreme Court over the FAA for decades, and that AB 51 was a continuation of that battle. The California Legislature attempted to avoid FAA preemption in the drafting of AB 51. The court in Chamber remarked that the attempt at avoiding preemption “[R]esulted in the oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.” According to the Supreme Court, the FAA effectively made arbitration agreements a protected class amongst its contractual peers—therefore states cannot discriminate against them. Indeed, Chamber reads like a civil rights case with searches through legislative history indicating hostility toward a protected class and how that protected class is affected by the statute’s burdens, whether on the law’s face or as applied. Finally, the court in Chamber concluded: “Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”

A federal appellate opinion usually ends a case—but not always. In addition to appealing to the Supreme Court, the defeated party may petition the court to vacate its opinion and try again in a rehearing. Chamber was a rehearing that superseded its 2021 opinion that nullified only the enforcement mechanism of AB 51. The dissenter of the 2021 opinion (Judge Ikuta) became the majority author of the 2023 opinion, and the majority author of the 2021 opinion (Judge Lucero) became the dissenter of the 2023 opinion. Thereby reversing the result of the original case decided two years ago, and reinstating the previously struck down AB 51.

Chamber held that technicalities do not defend a state’s attempts to frustrate a federal statute. Or rather, it would if it stands without another rehearing by a panel, a rehearing that may come in the form of an en banc hearing (with all 29 judges), or the Supreme Court’s writ of certiorari for this 3-year-old case.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

Last autumn’s elections will increase the sales and use tax by an average of 0.78 percentage points for over 1.75 million people across over thirty municipalities, termed “districts” by the California Department of Tax and Fee Administration (CDTFA) which administers the sales and use tax. These changes will become effective on April 1, 2023. One can determine the applicable rate increase by their address through an online tool provided by the CDTFA and will be updated with the new tax rates when they become effective.

California’s sales and use tax usually has seven components, and the CDTFA offers a guide explaining how the funds for each are used. Six of these components are set by the state, 5 through the Revenue and Taxation Code, and 1 through Article XIII of the state constitution. These components create a statewide minimum tax rate of 7.25%. The 7th component may be established by districts through local elections and is known as the “district tax.” Such elections arise through a petition (an initiative) or an ordinance passed by the district government and then decided by the district’s voters (a referendum). An initiative requires only a simple majority, but a referendum requires a two-thirds majority vote. The maximum district tax for most municipalities is two percentage points as judged per county. If a city levies a 1% district tax, the county can only levy a 1% district tax within that city’s limits. The Legislature has granted exceptions to the 2% rule for certain large districts, resulting in rates as high as 10.75% for Alameda County, for example.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.