Tax News & Views Alligator Ate My Tariff Roundup

Trade Court Strikes Down Trump’s Global Tariffs - James Fanelli and Gavin Bade, Wall Street Journal:

A federal trade court ruled President Trump didn’t have the authority to impose sweeping tariffs on virtually every nation, voiding the levies that have sparked a global trade war and threatened to upend the world economy.

The decision on Wednesday from the Court of International Trade blocked one of the Trump administration’s most audacious assertions of executive power, under the International Emergency Economic Powers Act of 1977. Shortly after the decision was handed down, lawyers for the Trump administration notified the court they will appeal.

International Trade Court Strikes Down Trump's Tariffs - Lauren Berg, Law360 Tax Authority ($):

The three-judge panel, in a 49-page opinion, granted motions for summary judgment brought by a group of five small businesses and 12 states challenging Trump's slew of higher tariffs under the IEEPA, finding that the 1977 statute does not authorize the president to implement what are referred to as the "trafficking," "worldwide" and "retaliatory" tariffs.

"Because of the Constitution's express allocation of the tariff power to Congress ... we do not read IEEPA to delegate an unbounded tariff authority to the president," the opinion states. "We instead read IEEPA's provisions to impose meaningful limits on any such authority it confers."

Federal court strikes down Trump’s tariffs on countries around the world - Doug Palmer, Kyle Cheney and Josh Gerstein, Politico:

The court’s ruling also means that the government may have to pay back duties it has already collected. “Anybody that has had to pay tariffs so far will be able to get them refunded,” said Ilya Somin, a professor of law at George Mason University, who helped argue a case against the tariffs brought by several small businesses.

Goldman Says Trump Can Offset Tariff Ruling With Other Tools - Katia Dmitrieva and Chris Anstey, Bloomberg . "A court ruling that seeks to block President Donald Trump’s 'Liberation Day' tariffs represents only a temporary setback to his trade agenda and can be offset by other taxes, according to analysts at Goldman Sachs Group Inc.

Court tariffs bombshell should inspire trading partners to defy Trump - Alan Beattie, Financial Times. "The court ruling will at the very least create weeks or months of chaos and confusion as Trump’s administration flounders around trying to regain its tariff powers while the financial markets threaten to remind him of the folly of doing so."

We Won Our Tariff Case! - Ilya Somin, The Volokh Conspiracy:

All of Trump's tariffs adopted under the International Emergency Economic Powers Act of 1977 (IEEPA) are invalidated as beyond the scope of executive power, and their implementation blocked by a permanent injunction. In addition to striking down the "Liberation Day" tariffs challenged in our case (what the opinion refers to as the "Worldwide and Retaliatory Tariffs"), the court also ruled against the fentanyl-related tariffs imposed on Canada, Mexico, and China (which were challenged in the Oregon case; the court calls them the "Trafficking Tariffs").

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It is worth noting that the panel include judges appointed by both Republican and Democratic presidents, including one (Judge Reif) appointed by Trump, one appointed by Reagan (Judge Restani), and one by Obama (Judge Katzmann).

Happy Liberation from Tariffs Day - Phillip Magness, Independent Institute. "A lengthy appellate battle is likely in the months ahead, and will probably require a U.S. Supreme Court ruling before the IEEPA tariff menace is banished."

Tax Court Upholds Self-employment Tax on State Law Limited Partners

Soroban’s Limited Partners Fail Functional Test, Tax Court Rules - Kristen Parillo, Tax Notes ($):

The founding partners of a New York hedge fund organized as a state law limited partnership don’t qualify for the self-employment tax exclusion because they played “crucial and active” roles in the business, the Tax Court held.

Because a functional analysis showed that the partners’ roles “are not those of passive investors,” they can’t claim the limited partner exception to the Self-Employment Contributions Act (SECA) tax under section 1402(a)(13), Tax Court Judge Ronald L. Buch wrote in a May 28 memorandum opinion in Soroban Capital Partners LP v. Commissioner.

Tax Court Affirms $142M Earnings Boost On Co.'s Partners - Anna Scott Farrell, Law360 Tax Authority ($):

The ruling affirms an Internal Revenue Service determination to increase Soroban Capital Partners' net earnings from self-employment for tax year 2016 by $77.7 and for tax year 2017 by $63.9 million to account for partnership income the company had distributed to the three partners.

The IRS did not consider the recipients limited partners who automatically would get the exemption from self-employment income tax, despite Soroban Capital claiming it was a limited partnership under state law.

Soroban Hedge Fund Partners Subject to Self-Employment Taxes - John Woolley, Bloomberg ($):

IRC Section 1402(a)(13) excludes the distributive income share of “a limited partner, as such” from earnings subject to withholding under the Self-Employment Contributions Act. The Tax Court in 2023 ruled against Soroban to find that its so-called limited partners didn’t automatically qualify for the SECA exemption, but must instead actually be shown to function as passive investors.

Similarly situated investment firms pounced to challenge the Tax Court’s 2023 ruling. Houston consulting firm Sirius Solutions appealed its partners’ SECA liability to the US Court of Appeals for the Fifth Circuit and Denham Capital Management LP brought its own challenge to the First Circuit, both contesting the Tax Court’s “passive investor” criteria for earning the SECA tax break.

The appellate courts have yet to weigh in. Stay tuned.

Tax Bill Talk: Millionaire Taxes, Retaliatory Taxes

GOP rejects ‘millionaire tax’ pitch, advancing breaks for rich Americans - Jeff Stein, Washington Post:

House Republicans rejected a push by some allies of President Donald Trump to include tax hikes on the rich in sweeping legislation they passed last week — a decision that could carry repercussions into next year’s elections.

The legislation House Republicans approved last week extends tax cuts Trump signed into law in 2017, cutting rates across income groups, including large benefits for the Americans who pay the highest share of federal income tax — those in the top 5 percent of the income distribution. The measure excluded a “millionaire tax,” and other proposals to raise taxes on top earners pitched by Stephen K. Bannon, the president’s first-term chief strategist, and other allies of the president.

Tax News & Views International Weekly: Tweaking the Rates and Dials - Alex Parker, Eide Bailly:

The “One Big Beautiful Bill Act,” which just passed the House of Representatives, makes significant changes to the domestic tax system, but leaves the 2017 Tax Cuts and Jobs Act’s international framework largely in place.

There are some areas where it touches on international taxes, though. There’s a provision to retaliate against countries using the global minimum tax against U.S. companies, for instance. It also negates scheduled increases in the tax rates on global intangible low-taxed income and foreign-derived intangible income. Those two provisions—both of which are aimed at the income earned through valuable intellectual property or other intangible assets by U.S. companies, GILTI for offshore holdings and FDII for those held domestically—were set to increase in 2026.

4 Big Questions Raised By International Retaliatory Tax In GOP Bill - Dylan Moroses, Law360 Tax Authority ($):

Section 899 would raise U.S. tax rates paid by foreign companies or individuals by 5 percentage points initially and 5 percentage points annually, up to a maximum of 20 percentage points above the statutory rate, under the bill the House advanced in the early morning hours of May 22.

These rate hikes would apply to U.S. taxpayers from countries with a DST; a diverted profits tax, or DPT; or a UTPR. This effectively would include the European Union, Japan, South Korea and several other major economies.

Retaliatory Tax Plan Seen as Hurting Foreign Investment in US - Michael Rapoport, Bloomberg ($). "The retaliatory taxes, along with President Donald Trump’s recent imposition of harsh tariffs on other countries, also would damage the US’s long-standing reputation as a good place to invest and do business, said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office."

Bad Compliance Incentives

Information Sharing Deal Complicates Immigrant Return Filing - Lauren Loricchio, Tax Notes ($):

Rob, who is being identified with a nickname, has been filing his tax returns with an ITIN each year through a program that allows people who are ineligible for Social Security numbers to comply with their tax obligations. But this year he says he didn’t file his returns, fearing that the information on them might be used to deport him.

“Even though I wanted to comply with the law, I was too scared,” Rob said.

An information sharing agreement between the IRS and the Department of Homeland Security allowing the DHS to request address information from the IRS for purposes of immigration enforcement has sowed fear among immigrants, complicating return filing this year.

Trump Pardons Former Rep. Michael Grimm on Tax Fraud Conviction - Katie Lobosco, Tax Notes ($):

Former New York Rep. Michael Grimm, who resigned after pleading guilty to felony tax fraud in 2014, has been pardoned by President Trump, according to reports.

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“Former Congressman Grimm made a conscious decision to break the law and benefit personally by underreporting $900,000 in restaurant gross receipts and lowering payroll taxes through ‘off-the-book’ payments, then lying under oath to conceal his criminal activity,” said former IRS Criminal Investigation Chief Richard Weber in a statement at the time.

Blogs and Bits

Got a letter from the IRS? Take these steps. - Kay Bell, Don't Mess With Taxes. "Don't freak out. While the IRS sends written notices year-round, a lot of the mailings go out after the traditional tax filing season ends. The agency has had time to sort through this year’s final batch of returns and flag those that it thinks need added attention."

Sole Proprietor Can't Deduct the Value of His Time Spent on Developing Software - Parker Tax Pro Library. "The Tax Court held that the sole proprietor of an engineering firm was not entitled to (1) deduct the value of his time spent on developing software for his business, or (2) reduce the gross sales of his business by either the general discounts or the customer-specific allowances he gave to clients because those discounts were already incorporated in the lower sale prices that he charged those clients."

Foreign Gift Tax Rules for US Citizens Abroad - Kasia Strzelczyk, 1040 Abroad:

Foreign corporations and foreign partnerships are often used for asset protection and tax planning. If you receive a gift or bequest from these entities exceeding the threshold, you must file Form 3520.

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The IRS may impose a penalty of 5% per month for each month that Form 3520 is not filed, up to a maximum of 25% of the value of the gift.

Maryland Budget Passes with New Tax on Technology Services, Surtax on Capital Gains - Melissa Menter and Sandy Ng Jr, Eide Bailly. "The new 3% sales tax applies to business-to-business transactions, which will impact both sellers with Maryland-sourced sales and buyers using those services within the state."

Read Your Return

Rockford woman pleads guilty to preparing and filing false income tax returns - IRS (Defendant name omitted, emphasis added):

Defendant operated a tax preparation business called Sick Credit Repair Tax and Legal Services. Defendant represented herself as an income tax preparer and held herself out to clients as a person trained in and knowledgeable about the preparation and filing of federal income tax returns. Defendant did not have an IRS-issued Preparer Tax Identification Number to prepare federal income tax returns.

Defendant admitted in a plea agreement that in 2019 and 2020 she misrepresented taxpayers’ eligibility for education tax credits and deducted fictitious business expenses from their taxable income. Defendant fraudulently reduced the taxpayers’ tax liabilities and improperly qualified taxpayers for refund

The income tax return is a mysterious black box for taxpayers. It's easy to think that a preparer who comes up with amazing refunds is just super-skilled. They might just be making up numbers - and the clients end up holding the bag.

False business expenses and education credits are standard tools in the scam preparer toolkit. If you see a Schedule C and you don't own a business, or education credits without college expenses, find another preparer.

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Tax News & Views Alligator Ate My Tariff Roundup

Joe B. Kristan, CPA