It is always difficult to get the Supreme Court to review a case, but this seems especially true for tax cases. The recent court term just ended proved to be no exception. Of several cases practitioners were hoping that the court would accept, only one received a grant of certiorari in the closing days of the term.It is the decisions for which the court grants certiorari where the fight, and the hope, goes on. It is, however, in the cases with respect to which certiorari is denied where taxpayers must finally face the facts or explore other remedies.


The case in which the Supreme Court granted certiorari was William L. Rudkin Testamentary Trust, on appeal from the Second Circuit. The case involves the issue of whether investment advice fees incurred by a testamentary trust are fully deductible in calculating adjusted gross income, or subject to the 2 percent floor that applies to investment advice fees incurred by individuals.

The Second Circuit held that the 2 percent floor did apply, because Code Section 67(e)(1) exempts from the 2 percent floor only those costs that could not have been incurred if the property were held by an individual. Since the Second Circuit position was unfavorable to the taxpayer, the grant of certiorari gives hope to practitioners that this decision may be reversed.


In a case that many practitioners thought the Supreme Court would take, the court denied certiorari in Lanco Inc. v. Director, New Jersey Division of Taxation. The New Jersey Supreme Court ruled that New Jersey may apply its corporation business tax to income from the licensing of intangibles in the state, notwithstanding the taxpayer's lack of physical presence in the state. The New Jersey court interpreted the Supreme Court's decisions requiring physical presence, most recently in Quill in 1992, as being limited to sales and use taxes.

Similarly, the Supreme Court denied certiorari in the case of MBNA American Bank, on appeal from the West Virginia Supreme Court of Appeals. The West Virginia court held that a state could impose corporate net income and business franchise taxes to income from licensing intangibles in West Virginia, in spite of the lack of physical presence. Again the court sought to limit Quill to sales and use taxes.

One is never certain whether the Supreme Court is saying that it agrees with the decisions of the lower courts, or simply that it is not ready to take on this issue at this time. Still, it will certainly encourage states to ignore Quill beyond the sales and use tax context. With this lack of success in going to the court with these cases, the business community is likely to next turn to Congress to seek business activity tax nexus legislation.


In a case on appeal from the California Court of Appeal, the Supreme Court denied certiorari in the case of Macy's Department Stores Inc. v. City and County of San Francisco. The California Supreme Court had also denied a review in the case, involving whether the taxpayer was entitled to a full refund for a tax ruled to be unconstitutional, or only a refund of the amount necessary to eliminate its discriminatory effect. The trial court had ruled the taxpayer was entitled to a full refund, and the Court of Appeal reversed.

This decision leaves taxpayers subject to states enacting unconstitutional taxes with no risk to the states other than having to return ill-gotten gains. Some states - Alabama, for example - have even refused to give retroactive refunds to taxpayers where tax statutes were determined to be unconstitutional. With states seeing no downside to discriminatory tax statutes, taxpayers will likely see a continuing trend toward aggressive state taxation and an increase in tax litigation.


The Supreme Court denied certiorari in the case of L. Segal, arising out of the Eleventh Circuit Court of Appeals, which had ruled that an individual's complaint against an Internal Revenue Service employee for refusal to hold an appeals hearing or to explain why there was no entitlement to an appeal was barred by the doctrine of sovereign immunity.

The Supreme Court also denied certiorari in the case of L. Baxter, arising out of the Seventh Circuit Court of Appeals, in which a CPA argued that the sentence imposed for pleading guilty to obstruction and impeding the administration of the tax laws was unreasonable.


Although not a Supreme Court case, another recent decision worthy of note, decided July 3, 2007, is the rehearing of the case of Murphy v. IRS from the D.C. Circuit Court of Appeals. Reversing its earlier controversial decision that Code Sec. 104(a)(2) was unconstitutional to the extent that it sought to tax recoveries for non-physical personal injuries, the court held that the award received was not on account of personal physical injuries, and that Congress has the power to tax compensatory damages for non-physical injuries.

Many had thought that the rehearing would still support Mrs. Murphy, but on grounds that did not address the constitutional issue - e.g., that the recovery was for personal physical injuries, as might have been supported from some of the evidence. In this result, however, the constitutional issue is eliminated, but Mrs. Murphy is left subject to tax.


Getting certiorari granted in one tax case at the end of the term is, looking back through history, not a bad batting average. Still, many tax practitioners were probably hoping that, if one case was accepted for certiorari, it would be a different one from Rudkin Testamentary Trust. Cases such as Lanco and Macy's had much more money at stake for taxpayers. Still, with the Supreme Court, one must be grateful for whatever one gets, and the hope of reversing the 2 percent rule in the trust context is better than nothing.

Still, it would have been nice to have a reading from the court on the limits of Quill and taxpayers' entitlement to full refunds on unconstitutional taxes. Earlier in the year, the court also granted certiorari in a significant case out of Kentucky, Davis, involving the issue of whether taxing only out-of-state bonds is discriminatory. That might make it a better than average year overall.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a Wolters Kluwer business.

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