Tax that DC?!?! FCA lawsuit over residency puts business intelligence firm in the crosshairs | McDermott Will & Emery

Tax that DC?!?!  FCA lawsuit over residency puts business intelligence firm in the crosshairs |  McDermott Will & Emery

For the first time in a year False Claims Amendment Act of 2020In Washington, the Washington attorney general’s office used its new taxation powers to go after an alleged shortfall in personal income tax. This development brings to the fore a long-standing constitutional problem with the capital’s legal residence law and offers a stark warning to companies helping key employees and executives with their personal tax obligations.

The press quickly and widely reported DC’s lawsuit against MicroStrategy co-founder, CEO and former CEO Michael Saylor for alleged evasion of DC’s personal income taxes, which was announced this week. The case alleges that Saylor erroneously claimed to have been a resident of Virginia or Florida (rather than the capital) since at least 2012.

The case was originally brought under seal by the relator under the DC’s False Claims Act in April 2021 — less than a month after the False Claims Amendment Act took effect. Using the new tax authority, the DC AG office filed a complaint last week for interference (taking over the case in the future). Interestingly, when DC AG took over the case, MicroStrategy added as defendant under the theory that the company conspired to help Saylor evade DC’s personal income taxes. Under DC’s False Claims Act, Saylor and MicroStrategy can each be liable for three times the damages if the court rules in favor of the DC AG office.

Issues with the DC . Legal Residency Exam

While determining one’s residence for state and local tax purposes generally requires extensive analysis of the facts, the case against Saylor also refers to the capital’s unique (and potentially unconstitutional) legal residence standard. D.C. law is fundamentally different from standards for legal residence in other states. Most states tax only individuals residing in the state, while some states also have a “lawful residence” test to classify individuals as tax residents. In most states, a person is classified as a legal resident if (i) they maintain a permanent place of residence in the jurisdiction And the (2) Spend more than a specified number of days (usually 183 days) in the jurisdiction.

DC cuts off this standard and classifies a person as a legal resident if they only hold a personal residence in DC for more than 183 days. thus, number The amount of actual attendance per person in the capital is required. The problem with this unique criterion should be obvious: a person (as many high net worth individuals often do) can hold a stay of 183 days in more than one jurisdiction. Thus, the plain language of the statute violates the Commerce Clause of the United States Constitution because it conflicts with the internal consistency test. Under this test, a law is unconstitutional if, in a hypothetical situation in which each jurisdiction has the same law being challenged, more than 100% of the tax base would be taxed. Here, if each state has a legal residence test that applies to anyone who has had a residence in the jurisdiction for more than 183 days, then every state in which a person owns a residence can tax 100% of that person’s income. In theory, an individual who resides in five different states would be taxed 500% of their income by those states – a clearly unconstitutional outcome.

The only way to preserve the constitutionality of the capital’s legal residence law is to have a more limited definition of “permanent place of residence” such that even if a person has residence in multiple states, only one of these residences is considered a permanent place of residence. In fact, at least one judicial decision-maker in Washington has narrowed the scope of the legal interpretation to comply with constitutional requirements. However, the capital law does not provide such a limitation, and even if a more limited interpretation is applied, it is not clear how the revised standard would differ from the traditional residence analysis, eliminating the need for a separate legal residence standard in the region. In sum, the current D.C. legal residence standard risks becoming invalid and the D.C. Board, or at least the D.C. Office of Taxes and Revenue, must provide the necessary restrictive definitions and clarity to ensure that it is constitutionally enforced.

Cases with DC that lead to a false claims lawsuit against a publicly traded company and relate to employee personal income tax liability

The decision of the DC AG office to add a publicly traded company as a defendant in a personal income tax case should be a concern for any business that has activities in Washington, DC. Employees – Especially for highly paid employees who have complex compensation packages or job site requirements. These companies also have withholding obligations that require coordination on residency decisions to comply with state and local tax laws.

The addition of MicroStrategy as a defendant in Saylor’s case should prompt companies to review advance advice they have given employees and consider potential risks that could arise regarding their compliance with state and local withholding obligations. In jurisdictions like DC that include tax matters within the jurisdiction of the False Claims Act, the risks to employers (and possibly outside advisors) are increased. Companies should carefully consider documenting their due diligence regarding these issues, including potential consultation with outside attorneys regarding the application of relevant withholding tax laws and documenting how the company complies with any guidance provided.

Practice note: This case is likely to raise several first impression issues in the region regarding the appropriateness of extending false claims law to tax issues. For a more robust discussion of the issues raised by this expansion, see our previous coverage of legislative expansion efforts in CapitalAnd the California And the New York. While the Saylor case has generated significant media dance, it is also an important case because it highlights the constitutional problem with DC’s legal residence law and the risks (including up to triple damages!) that companies may inadvertently assume in the growing number of jurisdictions with False Claims Act applicable to tax matters when they provide their employees with guidance addressing personal income tax compliance.

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