The U.S. Code is divided by broad subjects into 53 titles. Title 26 is the Internal Revenue Code, commonly referred to as the tax code.
The tax code is unique among all codes. The other 51 codes stand as they were written, one code is reserved and 50 of these codes are stable. The tax code is the exception. No other code is continually interpreted by government agencies (IRS) or court cases. Only the tax code. The tax code is unique in this respect. It’s a living, breathing body of law continually reinterpreted administratively and by the courts.
To a lesser extent, state tax codes are subject to the same phenomena.
That is not a bad thing. The constantly changing nature of tax codes opens the door for strategists like me to legally keep your taxes under control. But predatory practices sometimes make temporary advances. But so far, they have always been stopped.
Even if a tax professional would learn the entire 77,000 page to the tax code, in a year there would be so many subtle changes, they wouldn’t recognize it. That means everybody has to be very careful how they deal with federal & state tax authorities.
Predatory taxation happens from time to time. Here is an example of how the Supreme Court responds. Our republic is safe.
Every tax authority, at one time or another, takes a predatory stance. When that happens, people without hundreds of thousands of dollars to fight a hostile and predatory stance can be destroyed. This happens more than it should.
Personal animus for clients or professionals defending their clients causes predatory behavior more than you might expect. The IRS took a dislike to one of my clients for some unknown reason. I didn’t even let him talk to the IRS. Never-the-less, they disallowed a $100,000 deduction and wouldn’t back off. We pushed the issue all the way to the courthouse steps before the IRS relented. Finally, outside the tax court doors, ten minutes before the case was to be heard, the IRS attorney relented. Had it been the revenue agent, that never would have happened.
Our strategy was to drop the case rather than spend hundreds of thousands of dollars fighting to save $100,000 in tax. That’s the position predatory taxation puts you in. And believe me, every IRS revenue agent knows all about how the game is played.
Our only defense against that treatment, is the Supreme Court.
As far as I can tell, revenue agents aren’t subject to disciplinary action for being overly aggressive with taxpayers. They may claim they are, but I’ll never believe them. Your only recourse is court, and most taxpayers can’t afford that option.
A recent decision on predatory taxation reassures us the Supreme Court has our backs against predatory taxation.
States can be predatory just like the IRS. In my mind, the state of California is the most predatory. It is so bad that the CA tax authorities have been losing cases in the CA Supreme Court over CA’s attempt to push more & more into interstate taxation. This particular Supreme Court case does not involve CA, but it does close a loophole that predatory states were using to push more into predatory areas.
Everyone should read the article to understand the predatory nature of tax authorities when they are not kept reined in by close observation and regulation. Predatory taxing authorities are very powerful and very scary.
Here’s the link to Forbes. The Forbes article is well written, interesting and even brings Roman law into play as the originators of the NEXUS issue that interstate taxation is based on. As it turns out, NEXUS is a Roman word. Subsequent quotes are from the Forbes article.
“Typically, a state government will enact a statute that identifies who it will tax and what it will tax. When it comes to taxation of trusts, there are several moving parts. There is the person who created the trust. There is the beneficiary. There are the assets and income of the trust. And, there is the trustee. Each might be located in a different state. It would seem that four different jurisdictions are licking their chops for tax revenues. This is where “nexus” comes into play.’
There were several long standing Supreme Court rules the states were ignoring. I’m not going to repeat them here, but you can read the article. I am going to continue quoting from the article below.
“In spite of these long-standing rules — upon which there is about 150 years of US Supreme Court rulings — some states attempt to tax without sufficient NEXUS. Unless a taxpayer protests and asserts there is not sufficient NEXUS, the state gets away with it. And, often, the dollar amount in play is too little to fight for. But, occasionally, there is enough money in play and the taxpayer victim fights. (I use the harsh term “victim” because these states offend our cultural sense of fairness and equity when they pull this stuff in light of the US Supreme Court’s long standing position.)”
“In recent years, taxpayers who have asserted a lack of nexus and due process have won . . . with their own states’ supreme courts overturning the states’ offending statutes. But, this has occurred one state at a time. What taxpayers and tax planners have wanted was a newer US Supreme Court ruling that left no doubt . . . involving a state that had a ridiculously weak case . . . to finally put the issue to rest. North Carolina gave it to us.”
“And this is where predatory states got involved. Generally, trusts the taxes that were levied against trusts using inappropriate methods violating state NEXUS rules did not involve enough money to justify bringing expensive suits. And even when the tax justified a lawsuit, the case was brought in state court. So while this issue was working it’s way through state courts, other states were still being taxed in a predatory manner. ”
Finally two cases found their way into the Supreme Court and the issue was decisively decided unanimously. Sotomayer wrote the unanimous opinion.