December 7, 2018

State and Local Tax this week

The December 7 edition of the Illinois Register did not contain any rulemakings by the Illinois Department of Revenue or the Illinois Department of Commerce and Economic Opportunity.

Court cases

State of Illinois, ex rel. Stephen B. Diamond, P.C. v. SR/Ecom, Inc.; et al.  In this case, the appellate court for the First District ruled that Mr. Diamond, the relator/counsel in a successful case under the False Claims Act, may not collect attrorney's fees for representing himself.

The court rejected Diamonds arguments that the recent Illinois Supreme Court decision in State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow , Inc., 2018 IL 122487 did not bar its petition for attorney's fees because the holding of the Supreme Court should apply only prospectively, and the parties' settlement agreement expressly barred later court rulings from applying to it.  

The court concluded that Diamond failed to overcome the legal presumption that appellate court opinions apply both retroactively and prospectively and, contrary to Diamond's reading, nothing in the settlement agreement precludes denying the fee petition.

Tax Tribunal 

No new decisions were issued this week by the Tribunal.  Three of the  new cases filed with the Tribunal may be of interest. 

Sugar Camp Energy LLC v. Illinois Department of Revenue  This case is protest of a notice of tax liability and deals with the calculation of interest when the former Manufacturer's Purchase Credit is applied to an eligible purchase, and whether certain purchases were correctly designated as sales tax exempt under the exemption for coal and aggregate exploration, mining, off-highway hauling, processing, maintenance and reclamation equipment.  

The petition also contains a request for abatement of penalties and interest for reasonable cause.  The taxpayer contends that they exercised ordinary business care and prudence based upon the results of a prior audit.

The taxpayer is represented by David Kupiec of Illinois Chamber of Commerce Tax Institute member law firm Kupiec and Martin LLC.

Belvedere Holdings LP v. Illinois Department of Revenue.  This case is another income tax case dealing with the scope of the subtraction under IITA Section 203(d)(2)(H) for payments to partners as compensation for services rendered by the partners.  

According to the petition, the partnership is a proprietary trading group which trades commodities and securities.  The partnership had 34 limited partners.  On audit, the Department disallowed the deduction for compensation paid for services rendered by the Partners.

The taxpayer challenges the Department's disallowance explaining that the investment trading and management services performed by the partners is the type of activity envisioned by the deduction.  It was further explained that the partners are not passive investors, but rather are active in the daily activities of the partnership.

The partnership is represented by Jordan Goodman of Tax Institute member law firm Horwood Marcus & Berk. 

Specialty Care RX, LLC v. Illinois Department of Revenue  This case is a challenge to a sales tax assessment on prescription drugs.  The petition is a bit sparse, but from the information in the petition I surmise that upon audit, the Illinois Department of Revenue took the position that prescription drugs purchased through Medicare and Medicaid managed care plans are not exempt from sales tax as sales to a governmental body.  The Illinois Department of Revenue has taken the position that such sales are not direct sales to the government and, therefore, are not exempt.

The petitioner does not challenge the Department's position on this issue.  In my personal opinion, it is not completely clear that the Department's position is correct, but without a full understanding of the facts, I wouldn't wish to second guess the petitioner's determination.

The petitioner seeks to have taxes abated based on "erroneous advice" it received from the Department of Revenue.  From the petition, it appears that the basis of this assertion is that when the petitioner began operating in Chicago it "contacted" the Illinois Department of Revenue and the petitioner was directed to "legal guidance" published on the Department's website.  Apparently, that "legal guidance" was a general information letter.

The petitioner cites Section 205.20 of the Department's rules, which is a quote from the Taxpayer Bill of Rights, for the proposition the tax and penalties should be abated.  Section 4 of the Taxpayer Bill of Rights provides in pertinent part that the Department has the power to "abate taxes and penalties assessed based upon erroneous written information or advice given by the Department."

It appears that the petitioner's abatement argument is based on reliance on a general information letter, ST 16-0031 GIL in contending that it received erroneous advice. This general information letter, as do all general information letters issued by the Department, states "[a] GIL is not  a statement of Department policy and is not binding on the Department."  

In addition, Section 1200.120(c) of the Department's rules on letter rulings provides specifically that " [i]nformation letters are not binding on the Department, may not be relied upon by taxpayers in taking positions with reference to tax issues and create no rights for taxpayers under the Taxpayers' Bill of Rights Act."

Publications

The Illinois General Assembly's bi-partisan Commission on Government Forecasting and Accountability issued it Monthly Briefing for the Month Ended:   November 2018.

On Thursday, the Governor issued a notice that taxpayers  may request waivers of penalties and interest on state taxes if they cannot file their returns or make payments on time due to the severe weather and tornadoes in parts of Christian County on December 1.  Here is a link to the Governor's  announcement.  

The Illinois Department of Revenue also  announced that any taxpayer with a tax due date on December 5 would be given an extra day until December 6 because of the closure of federal agencies on December 5 as a day of remembrance for former President George H.W. Bush.