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DC Council Expands False Claims Act to Tax Claims

by Stephen P. Kranz, Diann Smith and Eric D. Carstens | Dec 1, 2020 | District of Columbia, False Claims Act, Nationwide Importance

The DC Council has passed an amended bill (the False Claims Amendment Act of 2020, B23-0035) that beginning as early as January 2021 will allow tax-related false claims to be raised against large taxpayers for up to 10 years of prior tax periods! This troubling legislation creates a real and imminent possibility of prior tax periods that are closed for assessment under the DC tax law pursuant to DC Code § 47-4301 being reopened by the DC attorney general and/or a private qui tam plaintiff.

While the introduced bill passed a first reading of the Committee of the Whole on Tuesday, November 17, 2020, by a vote of 8-5, the second reading (as amended) passed by a vote of 12-1 (a veto-proof supermajority) on December 1, 2020. The amended bill (as approved by the DC Council) will be sent to Mayor Muriel Bowser for consideration. If the mayor does not veto the bill or if her veto is overridden, the legislation will be assigned an Act number and sent to Congress for a 30-day review period before becoming effective as law. While extremely rare, Congress has an opportunity to reject the DC Council’s Act by passing a joint resolution, which must be signed by the president of the United States to prevent the Act from becoming law. Assuming this doesn’t happen, the Act will become law after the expiration of the 30-day Congressional review period. Assuming the Mayor quickly approves the legislation and Congress does not seek a joint resolution disapproving the Act, the legislation passed by the DC Council could take effect as early as next month!

As amended, the False Claims Amendment Act of 2020 passed by the DC Council will:

Remove the taxation bar that exists as part of current law (see DC Code § 2-381.02(d)) and replace it with explicit authorization allowing by the DC attorney general and private qui tam plaintiffs to pursue taxpayers for claims, records or statements made pursuant to Title 47 that refer or relate to taxation when “the District taxable income, District sales or District revenue of the person against who the action is being brought equals or exceeds $1 million for any taxable year subject to any action brought pursuant to this subsection, and the damages pleaded in the action total $350,000 or more.”
Require that the DC attorney general “consult with the District’s chief financial officer about the complaint” when tax-related claims are filed by a qui tam
Prohibits a claim by a qui tam plaintiff “based on allegations or transactions relating to taxation and that are the subject of an existing investigation, audit, examination, ruling, agreement or administrative or enforcement activity by the District’s chief financial officer.”
Not require the District’s chief financial officer “to produce tax information, or other information from which tax information can be inferred, if the production thereof would be a violation of federal law.”
Increase the maximum statutory reward for informants under the Taxation [...]

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False Claims Act Tax Expansion Bill Advanced by DC Council

by Stephen P. Kranz, Diann Smith and Eric D. Carstens | Nov 17, 2020 | District of Columbia, False Claims Act, Illinois, Nationwide Importance, New York

The DC Council has once again advanced a bill (the False Claims Amendment Act, B23-0035) that would allow tax-related false claims against large taxpayers! The bill passed a first reading of the Committee of the Whole on Tuesday, November 17, 2020, by a vote of 8-5. The bill is sponsored by Councilmember Mary Cheh, who introduced identical bills over the past few legislative sessions that ultimately were not passed. The troubling bill is now eligible for a second (and final) reading at the next legislative meeting on Tuesday, December 1, 2020.

As introduced, the bill would amend the existing false claims statute in the District of Columbia to expressly authorize tax-related false claims actions against a person that “reported net income, sales, or revenue totaling $1 million or more in the tax filing to which the claim pertained, and the damages pleaded in the action total $350,000 or more.” If enacted, it would make the District one of only a few jurisdictions that allow tax-related false claims actions across the country.

Practice Note:

The advancement of this legislation by the DC Council is a very troubling development for taxpayers doing business in the District and threatens to subject them to the same nightmares (and the cottage industry of plaintiffs’ lawyers) that states like Illinois and New York have allowed over the past decade. Because the current false claims statute includes an express tax bar, this bill would represent a major policy departure in the District. See D.C. Code § 2-381.02(d) (stating that “[t]his section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 that refer or relate to taxation”). As we have seen in jurisdictions like New York and Illinois, opening the door to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving profit-motivated private parties and the state attorney general (AG) in tax enforcement decisions.

Because the statute of limitations for false claims is 10 years after the date on which the violation occurs, the typical tax statute of limitations for audit and enforcement may not protect taxpayers from false claims actions. See D.C. Code § 2-381.05(a). Treble damages would also be permitted against taxpayers for violations, meaning District taxpayers would be liable for three times the amount of any damages sustained by the District. See D.C. Code § 2-381.02(a). A private party who files a successful claim may receive between 15–25% of any recovery to the District if the District’s AG intervenes in the matter. If the private party successfully prosecutes the case on their own, they may receive between 25–30% of the amount recovered. This financial incentive encourages profit-motivated bounty hunters to develop theories of liability not established or approved by the agency responsible for tax administration. Allowing private parties to intervene in the administration, interpretation or enforcement of the tax law commandeers the authority of the tax agency, creates [...]

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New Market-Based Sourcing in DC: Major Compliance Date Problem Fixed… For Now

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Feb 5, 2015 | Allocation/Apportionment, District of Columbia, Income Tax, Massachusetts, Tax Base, UDITPA

The Problem

On September 23, 2014, the District of Columbia Council enacted market-based sourcing provisions for sales of intangibles and services as part of the 2015 Budget Support Act (BSA), as we previously discussed in more detail here. Most notably the BSA adopts a single sales factor formula for the DC franchise tax, which is applicable for tax years beginning after December 31, 2014. But the market-based sourcing provisions in the BSA did not align with the rest of the tax legislation. Specifically, the BSA market-based sourcing provisions were made applicable as of October 1, 2014—creating instant tax implications on 2014 returns. Absent a legislative fix, this seemingly minor discrepancy will trigger a giant compliance burden that will require a part-year calculation for both taxpayers and the Office of Tax and Revenue (OTR) before the 2014 franchise return deadline on March 15. For example, taxpayers filing based on the new BSA provisions, as originally enacted in September, will have to use the cost-of-performance approach for the first nine months of the 2014 tax year and the new market-based sourcing approach for the remaining three.

The Fix

Citing to the unintended compliance burden, the Council recently enacted emergency legislation to temporarily fix the unintended compliance burden. However they have not solved the problem going forward. On December 17, 2014, Finance and Revenue Committee Chairman Jack Evans introduced identical pieces of legislation that included both a temporary and emergency amendment to quickly fix on the problem (both pieces of legislation share the name “The Market-Based Sourcing Inter Alia Clarification Act of 2014”). These legislative amendments explicitly make the applicability of market-based sourcing provisions synonymous with the other provisions of the BSA, beginning for tax years after December 31, 2014. In DC, “emergency” legislation may be enacted without the typical 30-day congressional review period required of all other legislation, but is limited to an effective period of no longer than 90 days. Because the emergency market-based sourcing legislation was signed by Mayor Muriel Bowser on January 13, it will expire on April 13. Important to DC franchise taxpayers, this date is before the September 15 deadline for extended filers.

The second piece of legislation was introduced on a “temporary” basis. Unlike emergency legislation, temporary legislation simply bypasses assignment to a committee but must still undergo a second reading, mayoral review and the 30-day congressional review period. The review period is 30 days that Congress is in session (not 30 calendar days). Because the temporary Act is still awaiting Mayor Bowser’s approval at the moment, which is due by this Friday (February 6), it will not become effective until after the 2014 DC Franchise Tax regular filing deadline of March 15—even if it is approved by the Mayor and not subjected to a joint-resolution by Congress. Neither the House nor Senate is in session the week of February 15, which pushes the 30-day review period to roughly April 1 (assuming it is immediately submitted to Congress). However, once passed, [...]

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D.C. Bill Ostensibly Lowers Tax on Capital Gains from QHTC Investments… But How?

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Oct 9, 2014 | Allocation/Apportionment, District of Columbia, Income Tax, Nationwide Importance, Tax Base

On September 23, District of Columbia Council Chairman Mendelson introduced the Promoting Economic Growth and Job Creation Through Technology Act of 2014 (Bill 20-0945 , hereinafter the “Act”) at the request of Mayor Vincent Gray. This marks the second time that the Council has considered the introduced language; it was originally included as part of the Technology Sector Enhancement Act of 2012 (Bill 19-747), but was deleted prior to enactment. The Act would add a new provision to the D.C. Code (§ 47-1817.07a) to impose a lower tax rate on capital gains from the sale of an investment in a Qualified High Technology Company (QHTC) beginning in 2015. The rate would be 3 percent as compared with the current rate of 9.975 percent for business taxpayers. Notably the proposed provision is limited in scope and only applies when the following three elements are satisfied:

The investment was held by the investor for at least 24 continuous months;
The investment is in common or preferred stock or options of the QHTC Company; and
During the taxable year, the investor disposed or exchanged of some or all of his or her investment in the QHTC.

As introduced, the proposed tax is explicitly applied “notwithstanding” any provision of the income tax statutes.

Good Thought, Poor Drafting

The intent of this legislation is clear, but the practical application is not. As a threshold matter, the second element requires the investment to be “in common of preferred stock or options,” which by definition excludes partnerships and limited liability companies since only corporations can issue stock. On its face, the language of the bill appears to be limited to investments in a QHTC organized as a corporation, despite the fact that other entities are eligible for QHTC status under D.C. law. Therefore, limited partners and members investing in pass-through QHTC’s appear to fall outside the scope of the proposed legislation.

Second, by imposing a different rate on only a certain type of income and by taxing the gains notwithstanding any other provision of the income tax statute, the proposal fails to account for basic tax calculations necessary to arrive at taxable income in the District for a business taxpayer. For example, the allocation and apportionment provisions would seem to be negated both practically and legally. What part of a multistate taxpayer’s gain from a QHTC is subject to the 3 percent rate? Is it all of the gain; an apportioned part of the gain – and if so, based on whose apportionment percentage? What if the gain would have been categorized as non-business income and the taxpayer is a non-resident? The answer is certainly not obvious from the legislation. Similarly, how do a taxpayer’s losses, both in the current year and carried over, affect the amount of gain available to tax? Can all of the losses be used against other types of income first? Can the losses be used at all against the QHTC gain?

Third, how is a taxpayer [...]

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