The Supreme Court Finds An Income Tax Statute Unconstitutional – Pollock v. Farmers Loan and Trust Co. 158 U.S. 601 (1895)
The 16th Amendment to the United States Constitution, ratified in 1913, provides as follows: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration.” Why the reference to “apportionment”? Why the reference to a census? To answer these questions, it is necessary to turn to one of the most forgotten of forgotten Supreme Court cases, Pollock v. Farmers Loan and Trust Co. 158 U.S. 601 (1895). The case was forgotten because it was rendered moot by the passage of the 16th Amendment. Few today remember that the Supreme Court invalidated an income tax statute passed by Congress in the 1890s.
Until eclipsed by the Great Depression of the early 1930s, the Panic of 1893 was regarded as the greatest economic downturn in American history. Prompted by bankers, bondholders, and other financial interests, the nation’s currency had been on the gold standard for 20 years. This contributed to deflationary pressures that pushed the prices of farm products below farmers’ costs[1]. A wave of farm bankruptcies and foreclosures was followed by widespread unemployment and wage cuts for urban workers, prompting strikes to protest the wage cuts.
The Panic of 1893, like the Stock Market Crash of 1929, was ushered in by a period in which the nation’s wealth was concentrated in the hands of fewer and fewer people. In a 2017 installment of the PBS series The American Experience, titled “The Gilded Age,” the narration discussed the 1890 Census, which revealed that there were approximately 12 million families in America, of whom 4,000 held as much wealth as the combined wealth of approximately 11.6 million other families.
During the 1890s, as had been the case at almost all previous times in American history, the federal government derived most of its revenue from tariffs and excise taxes. In January 1894, a young Congressman from Nebraska named William Jennings Bryan joined a growing contingent that questioned the wisdom of financing the government with an indirect tax on basic goods.[2] Bryan and others reasoned that most people spent most of their income on necessities and that the sellers of many of these necessities passed on the costs of tariffs imposed on those goods to consumers who bought them. It followed that those who spent all or most of their income on living expenses (most Americans) paid taxes on a larger portion of their income than the wealthy, who spent only a fraction of their income on living expenses and were not subject to any tax on their income. It followed that an income tax would be a fairer way to distribute the cost of supporting the federal government. This idea had great appeal in this era of concentrated wealth. Hence, in 1894, Congress passed the first peacetime income tax.[3] Some monied interests saw this law as the first step on the road to socialism and the confiscation of most of their wealth. Hence, the challenge that brought the Pollock case before the Court.
The Court’s majority found that Congress could not tax income from land or money invested in financial assets. This decision rested on some brief and perhaps confusing language in the Constitution. Article I § 2 ¶ 3 says, “Representatives and direct taxes shall be apportioned among the several States which may be included within this Union according to their respective numbers.”[4] Article I §8 ¶1 gives Congress the power “To lay and collect taxes duties, imposts, and excises…to be uniform throughout the United States.”
From these provisions came the distinction between direct taxes, which must be apportioned among the States according to the population as determined by the Census, and indirect ones, such as tariffs, which must be uniform throughout the country. Thus, the crucial question for the Court in Pollock was what constitutes a direct tax.
There was no disagreement among the Justices that an income tax did not lend itself to apportionment among the States according to population. A head tax, a “capitation” in which each individual paid the same amount, was the archetype of a direct tax apportioned according to population. Because some States had aggregate incomes that were greater per capita than others, ensuring that an income tax was apportioned equally among the States on a per capita basis presented some obvious problems. From this reality, the majority, as expressed in Chief Justice Melville Fuller’s opinion, drew a very different conclusion from those of four Justices, who wrote separate dissenting opinions. Most notable among the dissents was that of Justice John Marshall Harlan, which was more in tune with the sentiments of Main Street than of Wall Street.[5]
The majority found that a tax on income derived from rents or earnings from securities or other investments was a direct tax that could not be imposed without violating the apportionment mandate of Article I §2 ¶3 and was, therefore, unconstitutional.
In his dissent, Harlan cited precedents going back to George Washington’s day as authority for his view that direct taxes within the meaning of the Constitution were limited to head taxes and taxes on land. He noted the terrible contortions that would be necessary to apportion a tax on the income from land and other invested personal assets among the States according to population.[6] He concluded that the Framers could not have intended to include such taxes as direct ones within the meaning of Article I §2 ¶3. Pollock, Id. at 652.
What is most notable about Harlan’s dissent is that he eloquently expressed the sentiments that led Congress to pass the 1894 income tax legislation in the first place. Although the majority found that all the provisions of the income tax statute were tainted by the unconstitutional tax on the profits of land and invested capital, the opinion theoretically held open the possibility of taxes on salaries.[7] Thus, in his dissent, Harlan protested that “The practical effect of the decision to-day is to give to certain kinds of property a position of favoritism” Id at 685.
“In the large cities or financial centers of the country there are persons deriving enormous incomes from the renting of houses that have been erected not to be occupied by the owner, but for the sole purpose of being rented. Near by are other persons, trusts, combinations, and corporations, possessing vast quantities of personal property, including bonds and stocks of railroad, telegraph, mining, telephone, banking, coal, oil, gas, and sugar-refining corporations, from which millions upon millions of income are regularly derived. In the same neighborhood are others who own neither real estate, nor invested personal property, nor bonds, nor stocks of any kind, and whose entire income arises from the skill and industry displayed by them in particular callings, trades, or professions, or from the labor of their hands, or the use of their brains. And it is now the law, as this day declared, that …congress cannot tax the personal property of the country, nor the income arising either from real estate or from invested personal property…while it may compel the merchant, the artisan, the workman, the artist, the author, the lawyer, the physician, even the minister of the Gospel, no one of whom happens to own real estate, invested personal property, stock, or bonds, to contribute directly from their respective earnings, gains, and profits, and under the rule of uniformity or equality, for the support of the government.” Id at 672-673.
Harlan’s dissent makes nearly the same point made by William Jennings Bryan in a portion of his famous “Cross of Gold” speech at the Democratic National Convention in Chicago in 1896.[8] In this portion of the speech, Bryan addressed his remarks to the monied interests who supported the gold standard and opposed bimetallism.
“When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our interests by your action….The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant in New York. The farmer who goes forth in the morning and toils all day, begins in spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets on the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world.” [Commager (ed) Documents Of American History, P. 174]
The Main Street v. Wall Street theme was present in both Harlan’s dissent in Pollock and Bryan’s Cross of Gold speech.
It is undoubtedly a good thing that our Constitution cannot be amended easily. Only overwhelming sentiment in favor can secure the two-thirds majorities in both houses of Congress and ratification by the legislatures of three-fourths of the States necessary for an amendment. It took until 1913, 18 years after the Pollock decision, for the 16th Amendment to be passed. However, public support for financing the federal government with an income tax rather than tariffs was likely already building at the time of the decision.
By 1913, what became known as the Progressive Era was in full swing. Woodrow Wilson, of the Progressive wing of the Democratic Party, was President. Theodore Roosevelt of the Progressive wing of the Republican Party had been president from 1901 to 1908. The 17th Amendment, which provides for the direct election of members of the U.S. Senate, another Progressive reform, was also passed in 1913. The Federal Trade Commission, the Interstate Commerce Commission, the Federal Reserve System, and the Clayton Anti-Trust Act were all part of this era of reform. By 1913, Charles Evans Hughes and Oliver Wendell Holmes, two Justices sympathetic to Progressive reforms, were already on the Supreme Court; another Justice with these sympathies, Louis Brandeis, would follow in 1916. With the 16th Amendment in place, Congress passed the Revenue Act of 1913, which simultaneously implemented the income tax and lowered tariffs. [Link & McCormick, Progressivism, James, The Supreme Court In American Life, Chambers, The Tyranny Of Change, and McGerr, A Fierce Discontent].
The Pollock decision was moot, but the sentiments expressed in Harlan’s dissent had prevailed and made a lasting impact on law and public policy.
[1] The underlying cause of the problem was a long-term downward trend in grain prices. This trend was a result of the worldwide expansion of railroads, which opened new land for cultivation, facilitated access to markets, and reduced transportation costs. The decreasing prices they received for their products made the debts American farmers had incurred in earlier years relatively more burdensome. Many farmers viewed the monetization of silver, known as “bimetallism,” as a remedy to the deflationary pressure squeezing them. [Blum, et. al. The National Experience (3rd ed.), PP. 475-476; Parkes, The American Experience, P. 298; Foner, Give Me Liberty, P. 631; Schieber et. al., American Economic History (9th edition), PP. 213-214.; Goodwyn, The Populist Moment, P. 12; Brands, American Colossus, P. 487]
[2] Canellos, The Great Dissenter, P. 108.
[3]. A special emergency income tax existed during the Civil War, which was not continued after the War’s end.
[4] What followed, although not relevant here, was the language embodying the infamous Three-Fifths Compromise.
[5] See generally, Canellos, supra Chapter 14, and Urofsky, Dissent and the Supreme Court at PP. 126-128.
[6] Such as imposing a higher rate on States with lower aggregate incomes from these sources so that the amount paid per capita was equal.
[7] This possibility would require the tax on salaries to be categorized as an indirect tax within the meaning of Article I §8 ¶1, or the contortions needed to apportion it equally among the States according to population would also apply to it.
[8] This speech is considered one of American history’s greatest speeches. Bryan was 36 years old and not one of the leading contenders for the Party’s nomination for President at the time. The speech electrified the Convention. There was pandemonium on the floor and in the galleries. Bryan was carried around the hall on the shoulders of elated delegates for 25 minutes and instantly vaulted over all the other candidates to become the Party’s nominee. The language quoted above was merely part of the build-up to the dramatic final words of the speech, “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.” [See H.W. Brands, American Colossus, PP. 547-548; Lears, Rebirth of a Nation, PP. 186-187; Cashman, America in the Gilded Age, PP. 332-334, and Wikipedia Article “Cross of Gold Speech” accessed 3/25/25.]
And Just Like That Another Restructuring Plan Is Sanctioned with HMRC Supporting (UK)
The Outside Clinic restructuring plan (RP) was sanctioned last week with HMRC voting in favour of it. In a similar vein to Enzen (see our earlier blog) HMRC initially indicated that it was not inclined to support the plan, but, after negotiating a higher return following the convening hearing, it voted in favour of it. A somewhat different outcome in circumstance where HMRC had (prior to the company proposing a plan) instructed its solicitors to present a winding up petition after attempts to agree a time to pay agreement had failed.
HMRC’s engagement and support is welcome (as it is on any restructuring), but the outcome in both this case, and Enzen, should not be taken as a green light that HMRC’s support is guaranteed – much will depend on the terms of the plan.
Under the terms of the Outside Clinic RP as originally proposed, HMRC would have received a dividend of 5p in the £ in respect of its secondary preferential claims of c£1.45m, compared to nil in the relevant alternative. HMRC would also have been treated the same as other unsecured creditors who also were to receive 5p in the £.
Following the convening hearing, HMRC flagged a number of concerns which the plan company had to address not least
Whether the “no worse off” test could be satisfied – with concern about the recoverability of receivables/book debts which (if the assumptions were wrong) could see a different return in the alternative (an argument we saw in opposition to the plan proposed by the Great Annual Savings company); and
HMRC’s treatment compared to other creditors (as noted above the plan originally proposed to treat HMRC in the same way as unsecured creditors)
HMRC’s improved position seems to have come about partly as a result of the plan company subsequently acknowledging that HMRC is an involuntary creditor and that it has a role to play as collector of taxes.
Perhaps more will come from the judgments on both this case and Enzen, but the key takeaways at the moment are that a plan company must (a) recognise that HMRC is an involuntary creditor and (b) its role in collecting taxes – something that reflects HMRC guidance too.
If HMRC’s status is recognised in a plan perhaps HMRC will support from the outset, especially so given HMRC’s new stated policy is “to participate as fully as possible in plans – which will include, when necessary and desirable, negotiating with plan companies on HMRC’s return under a restructuring plan”.
Hillsborough County, FL Sales Tax Increase June 1, 2025
The Florida Department of Revenue announced today that the temporary sales tax reduction in Hillsborough County, Florida will expire on May 31, 2025.
As outlined in our initial article, the 2024 legislature temporarily suspended the Hillsborough County surtaxes in order to return a portion of previously enacted and later ruled unconstitutional transportation surtax. That legislation resulted in a 1% reduction to the Hillsborough County surtaxes (6.5%).
Starting June 1, 2025, dealers of tangible personal property, admissions, and taxable services should collect a combined rate of 7.5%. For commercial rental periods occurring on or after June 1, 2025, dealers should collect a combined rate of 3.5%.
The TIP is available at the following website:
https://floridarevenue.com/taxes/tips/Documents/TIP_25A01-02.pdf
The length of the suspension is based on several factors, including the balance of the proceeds available for the suspension, which the Department has determined will last through May 31, 2025.
Louisiana Voters Overwhelmingly Reject Governor Landry’s Constitutional Amendments
On March 29, 2025, four constitutional amendments were on the ballot for Louisiana voters’ consideration. Constitutional Amendment No. 2, (CA No. 2) which passed the Louisiana legislature during the November 2024 special fiscal session as House Bill No. 7, included changes to personal income tax rates, governmental spending caps, education funding, and teacher pay raises. Also included were amendments to the Constitution that would allow local taxing authorities to exempt or reduce the assessment rate of parish property taxes on business inventory located in their parishes. However, despite strong support from the Governor and his administration, the voters of Louisiana rejected that amendment by over 60% of the ballots cast.
As CA No. 2 was an important component of the Governor’s modernization of Louisiana’s taxation system and would have provided the legislature with more flexibility in collecting and distributing revenue, it is likely that more work will have to be done during the upcoming regular fiscal session scheduled to begin on April 14 with a conclusion date of June 12.
One important component of CA No. 2 was the ability of local taxing jurisdictions to lower the assessment rate of business inventory or exempt it altogether. Under current law, local taxing jurisdictions do not have the authority to do either, and the legislature retains the sole authority to make those determinations. Because the legislature repealed the credit for property taxes paid on business inventory (the repeal of which was not tied to the passage of CA No. 2), that credit will still sunset with no apparent relief from the current local taxes levied on business inventory.
As noted above, with the upcoming fiscal session beginning soon, legislators have until the close of business on April 4 to file “general subject” bills that do not address fiscal matters. Legislators have until April 23 to file bills with a fiscal impact. It is highly likely that legislation will be proposed to address some of the issues that CA No. 2 would have amended.
As noted above, with the upcoming fiscal session beginning soon, legislators have until the close of business on April 4th to file “general subject” bills that do not address fiscal matters.
What are the Odds that FanDuelDraftKingsBet365 Can Save Tax-Exempt Bonds?
A document leaked earlier this year and attributed to the House Ways and Means Committee included the repeal of tax-exempt bonds[1] as a source of revenue to help defray the cost of extending the provisions of the Tax Cuts and Jobs Act that otherwise will expire at the end of 2025. Apoplexy ensued.
This consternation is fueled by the notion that Congress has the untrammeled authority to prevent states, and the political subdivisions thereof, from issuing obligations the interest on which is excluded from gross income for federal income tax purposes. This notion appears to ignore a line of precedent that culminated in making Bet365, DraftKings, FanDuel, et al. indistinguishably omnipresent.
Curious? Read on after the break.
The concern that Congress has the unfettered right to proscribe the issuance of all tax-exempt bonds emanates from the U.S. Supreme Court’s (the “Court”) decision in South Carolina v. Baker.[2] The Court held in that case that Congress violated neither the principles of intergovernmental tax immunity[3] nor the Tenth Amendment to the U.S. Constitution by enacting a prohibition against the issuance of tax-exempt bearer bonds.
The portion of the Court’s opinion pertaining to the Tenth Amendment cited Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), for the proposition that the political process establishes the limitations under the Tenth Amendment on Congressional authority to regulate the activities of the states and their political subdivisions. Under this formulation of Tenth Amendment jurisprudence, the courts do not define spheres of Congressional conduct that pass or fail constitutional muster. The Court concluded that the political process functioned properly in this instance and did not fail to afford adequate protection under the Tenth Amendment to South Carolina.
The Court also rejected the contention that Congress had, in violation of the Tenth Amendment, commandeered the South Carolina legislature by prohibiting the issuance of tax-exempt bearer bonds and questioned whether the concept of anti-commandeering originally contained in FERC v. Mississippi, 456 U.S. 742 (1982), survived the Court’s decision in Garcia.
Aside from the portion that dealt with the Tenth Amendment, Justice Antonin Scalia joined the opinion of the Court, and Chief Justice William Rehnquist concurred in the Court’s judgment but did not join the Court’s opinion. In the view of Justices Rehnquist and Scalia, the Court should have upheld the prohibition against the issuance of tax-exempt bearer bonds because it had a de minimis effect on state and local governments, which would have ended the analysis under the Tenth Amendment. They asserted that the Court’s opinion regarding the Tenth Amendment mischaracterized the holding of Garcia and unnecessarily cast doubt on whether the Tenth Amendment prohibits Congress from dictating orders to the states and their political subdivisions.
Justice Sandra Day O’Connor dissented and stated that “the Tenth Amendment and principles of federalism inherent in the Constitution prohibit Congress from taxing or threatening to tax the interest paid on state and municipal bonds.” In Justice O’Connor’s view, the prohibition against the issuance of tax-exempt bearer bonds intruded on state sovereignty in contravention of the Tenth Amendment and the structure of the Constitution. This incursion would have negative effects on state and local governmental budgets and activities – effects she said that would only metastasize as Congress enacted further restrictions on the issuance of tax-exempt obligations, including, potentially, the elimination of such obligations.[4]
Four years later, when confronted anew with an anti-commandeering question in New York v. United States,[5] the Court demonstrated that it was receptive to the argument that the protection of state prerogatives under the Tenth Amendment is not limited to the political process. The Court held that Congress cannot compel a state government to take title to radioactive waste or, alternatively, assume liability for such waste generated within the state’s borders, because the Tenth Amendment forbids the issuance of orders by the federal government to the various state governments to carry out regulatory schemes adopted by the federal government.
In her opinion for the Court in New York, Justice O’Connor developed the themes articulated in her dissent in Baker. Namely, the Tenth Amendment was ratified to ensure that the federal government adhered to the federalist structure devised by the Constitution, a structure that contrasted starkly with the Articles of Confederation that the Constitution replaced. Under the Articles of Confederation, the federal government had limited, if any, power to govern the citizens of the various states. Instead, the Articles of Confederation constrained the federal government to acting upon the state governments, and state governments were the sole sovereign with respect to their citizens. Under this constraint, the federal government could not tax the citizens; it could only issue requisitions to the state governments to raise funds.
The federal government at that time did not possess the wherewithal to enforce the dictates and requisitions it had imposed upon the states. As a result, the United States was hardly a cohesive whole. The Constitution was ratified to create a more robust federal government and, thus, a truly unified United States. Under the Constitution, the federal government may use the powers conferred upon it to directly govern the citizens. Justice O’Connor observed that the Tenth Amendment guarantees adherence to the Constitutional structure, because it prohibits the federal government from issuing orders, dictates, and requisitions to the state governments, as the federal government could do under the Articles of Confederation.
The Court applied the foregoing rationale to hold in Printz v. United States[6] that the Tenth Amendment precludes the federal government from commandeering state officials to carry out a federal regulatory program. The Court once again followed this rationale when it held in Murphy v. National Collegiate Athletic Association[7] that, where Congress had not prohibited sports gambling throughout the United States, the Tenth Amendment barred Congress from preventing a state legislature from enacting laws that permit sports gambling within the state. As a result of Murphy, 39 states now allow sports gambling, and the FanDuelDraftKingsBet365 Borg has relentlessly endeavored to assimilate us.
This durable line of Tenth Amendment precedent should give one pause before concluding that Congress can completely repeal the ability of state and local governments to issue tax-exempt bonds. As noted above, a complete repeal of tax-exempt bonds is projected to generate $364 billion in revenue to the federal government over a 10-year period. Under New York, Printz, and Murphy, Congress clearly cannot issue a requisition to the states seeking remittance of $364 billion to help finance a federal income tax cut. The elimination of tax-exempt bonds is the economic equivalent of such a requisition by the federal government to the states and their political subdivisions. State and local governments will be required to pay bondholders higher, taxable interest rates on debt obligations that they issue.[8] If the projections noted above are accurate, $364 billion of this increased interest paid by state and local governments will be remitted by the bondholders to the federal government.[9]
Does the Tenth Amendment allow the federal government to impose an indirect requisition on state and local governments that the federal government cannot issue directly? Does the legal incidence of the tax on the bondholders suffice to avoid the anti-commandeering principle developed by New York, Printz, and Murphy? If it does, would the Court distinguish its holding in Baker on the basis that prohibiting the issuance of tax-exempt bearer bonds has a trivial effect on state and local governmental sovereignty, while a full elimination has a much more profound effect? If Congress eliminates tax-exempt bonds, will one or more states invoke the right of original jurisdiction[10] to present these questions directly to the U.S. Supreme Court?
With all this on the table, it might be a bad bet to conclude that Congress can parlay the elimination of tax-exempt bonds into a revenue offset to help pay for a federal tax cut.
[1] The document scored the repeal of tax-exempt bonds as raising $250 billion over 10 years and the repeal of “private activity bonds” as generating $114 billion over the same timeframe. The reference in that document to “private activity bonds” means “qualified bonds” under Section 141(e) of the Internal Revenue Code of 1986, as amended. Qualified bonds are private activity bonds that would, absent legislative enactment by Congress, constitute taxable bonds. Some common examples of qualified bonds include qualified 501(c)(3) bonds (which are frequently issued to finance educational, healthcare, and housing facilities owned or operated by 501(c)(3) organizations), exempt facility airport bonds (which are issued to finance improvements to terminals and other airport facilities in which private parties, such as airlines, hold leasehold interests or other special legal entitlements), and exempt facility qualified residential rental project bonds. For ease, references to “tax-exempt bonds” in this post are to both tax-exempt governmental use bonds and tax-exempt qualified bonds.
[2] 485 U.S. 505 (1988).
[3] In so holding, the Court overruled Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895). The Court in Pollock espoused the doctrine of intergovernmental tax immunity to conclude that the federal government lacks the authority under the U.S. Constitution to tax the interest on obligations issued by state or local governments.
[4] Justice O’Connor was quite prescient.
[5] 505 U.S. 144 (1992).
[6] 521 U.S. 898 (1997).
[7] 584 U.S. 453 (2018).
[8] The Public Finance Network estimates that the repeal of tax-exempt bonds will raise borrowing costs for state and local governments by $823.92 billion between 2026 and 2035, which will result in a state and local tax increase of $6,555 per each American household.
[9] It should be noted that taxing the interest paid on state and local debt does not, as some claim, result in an economic charge imposed on the wealthy. As an initial matter, retirees and others of more modest means hold a significant amount of currently outstanding tax-exempt bonds, because they want to allocate a portion of their savings to a secure investment. Assuming arguendo that tax-exempt bondholders tend to be wealthier, they will be compensated for the tax in the form of increased interest rates. They will suffer no economic detriment because their after-tax return on taxable state and local bonds will equal the return available on tax-exempt bonds. State and local governments will, however, need to raise taxes or limit governmental services so that they can pay the higher interest rates demanded on taxable obligations. Less wealthy constituents will bear the brunt of this. The less wealthy tend to be the recipients of more governmental services than the wealthy. Moreover, the less wealthy devote a larger share of their income to the payment of sales tax (the form of taxation on which state and local governments increasingly rely) than is the case with wealthier constituents. Consumption taxes, such as sales taxes, are by their nature regressive, because the less wealthy spend a greater percentage of their income than do the wealthy, who can save a larger share of their income. These savings are not subjected to a consumption tax.
[10] U.S. Const. Art. III, Sec. 2.
California Bill Proposes Expanding False Claims Act to Include Tax-Related Claims
California lawmakers are considering Senate Bill 799 (SB 799), introduced by Sen. Ben Allen, which proposes amending the California False Claims Act (CFCA) to encompass tax-related claims under the Revenue and Taxation Code.
The CFCA currently encourages employees, contractors, or agents to report false or fraudulent claims made to the state or political subdivisions, offering protection against retaliation. Under the CFCA, civil actions may be initiated by the attorney general, local prosecuting authorities, or qui tam plaintiffs on behalf of the state or political subdivisions. The statute also permits treble damages and civil penalties.
At present, tax claims are excluded from the scope of the CFCA. SB 799 aims to amend the law by explicitly allowing tax-related false claims actions under the Revenue and Taxation Code, subject to the following conditions:
1. The damages pleaded in the action exceed $200,000. 2. The taxable income, gross receipts, or total sales of the individual or entity against whom the action is brought exceed $500,000 per taxable year.
Further, SB 799 would authorize the attorney general and prosecuting authorities to access confidential tax-related records necessary to investigate or prosecute suspected violations. This information would remain confidential, and unauthorized disclosure would be subject to existing legal penalties. The bill also seeks to broaden the definition of “prosecuting authority” to include counsel retained by a political subdivision to act on its behalf.
Historically, the federal government and most states have excluded tax claims from their False Claims Act statutes due to the complexity and ambiguity of tax laws, which can result in increased litigation and strain judicial resources. Experiences in states like New York and Illinois illustrate challenges associated with expanding false claims statutes to include tax claims. For instance, a telecommunications company settled a New York False Claims Act case involving alleged under collection of sales tax for over $300 million, with the whistleblower receiving more than $60 million. Such substantial incentives have led to the rise of specialized law firms targeting ambiguous sales tax collection obligations, contributing to heightened litigation.
If enacted, SB 799 would require California taxpayers to evaluate their exposure under the CFCA for any positions or claim taken on tax returns. Importantly, the CFCA has a statute of limitations of up to 10 years from the date of violation, significantly longer than the typical three- or four-year limitations period applicable to California tax matters. Taxpayers may also need to reassess past tax positions to address potential risks stemming from this extended limitations period.
Nebraska Considers Sales Tax on Candy and Soft Drinks
Earlier this year lawmakers in Nebraska proposed a bill (LB170) which would end the state’s sales tax exemption for soda and candy. Currently, all food and beverages except prepared foods and vending machine items are exempt from the sales tax.
The proposed bill defines candy as a “preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces” but excludes “any preparation that contains flour or that requires refrigeration” to avoid discouraging consumption of healthier snacks like granola and protein bars. (See Deep Dive: Nebraska Legislature committee to discuss ‘Sugar Tax’). Soft drinks are defined as “nonalcoholic beverages that contain natural or artificial sweeteners” but excludes “beverages that contain milk or milk products, soy, rice, or similar milk substitutes or that contain greater than fifty percent of vegetable or fruit juice by volume.”
The bill is intended to reduce the state’s budget deficit. It is opposed by affected industry including the Nebraska Beverage Association.
EU Platform on Sustainable Finance Focuses on Usefulness of Taxonomy in Response to European Commission Proposal
On the 26 March 2025, the EU Platform on Sustainable Finance (“Platform”) responded to the European Commission’s call for evidence on the draft delegated regulation amending the Taxonomy Delegated Acts[1] (the “Taxonomy”).
The Platform welcomes many of the proposed amendments and notes that several of the Platform’s recommendations from their February 2025 report on the simplification of Taxonomy reporting has been taken into consideration. However, despite this positivity, the Platform has also flagged some serious concerns with respect to the European Commission’s proposed changes to reduce the scope of Taxonomy reporting, as set out in its “Omnibus” proposals to streamline the Corporate Sustainability Reporting Directive (“CSRD”).
The Platform considers that reducing the scope of the current CSRD requirements not only results in the loss of specific Taxonomy data, but also reduces the effectiveness of the Taxonomy generally in the market. As a result, the Platform has proposed a number of updates in relation to the draft regulation, including:
introducing a regime for all companies to report partial Taxonomy-alignment;
clarifying the materiality threshold to ensure that it applies to cumulative exposure and not individual economic activities;
reporting for non-SME companies below the 1,000-employee threshold should be focused on the most essential standards (including Taxonomy-alignment); and
postponing trading books, fees and commission as key performance indicators for banks to 2027.
Additionally, the Platform has also recommended that additional guidance could be issued to support simplifying the Taxonomy’s implementation and process.
Finally, the Platform recommends some form of mechanism to be introduced to allow for responses to Taxonomy-related queries to be dealt with in real time.
[1] The regulation proposed by the Commission contains amendments the Taxonomy Disclosures Delegated Act ((EU) 2021/2178), the Taxonomy Climate Delegated Act ((EU) 2021/2139) and the Taxonomy Environmental Delegated Act ((EU) 2023/2486).
OFAC Final Rule Extends Recordkeeping Requirements to 10 Years
Highlights
U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) published a new final rule to extend recordkeeping requirements to 10 years, effective March 21, 2025
The new recordkeeping requirement is consistent with last year’s statute of limitations extension for most OFAC violations from five years to 10 years
OFAC affirmed that a conflict such as EU regulations mandating a shorter recordkeeping period would not excuse compliance
On April 24, 2024, former President Joe Biden signed into law the 21st Century Peace through Strength Act. Section 3111 of the Act extends the statute of limitations for civil and criminal violations of the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) from five years to 10 years. These two statutes govern most sanctions programs enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).
Pursuant to this executive order, OFAC issued a final rule on March 21, 2025, extending recordkeeping requirements for covered parties from five to 10 years. This final rule, which was effectively immediately, followed an interim final rule published by OFAC in September 2024 soliciting public comment.
The newly extended recordkeeping requirements apply to all companies and persons engaging in transactions and holding blocked property subject to OFAC oversight. Such persons are required to keep a full and accurate record of transactions and blocked property and to ensure that these records are available for examination for at least 10 years.
OFAC also made clear that a conflict in law would not excuse compliance with these requirements. The final rule specifically addresses a scenario in which the 10-year recordkeeping period may conflict with the European Union’s regulations on anti-money laundering and counterterrorism financing that mandate deletion of records after five years. In such a scenario, OFAC points to its prior guidance that said although it would consider a conflict of law on a case-by-case basis when determining the appropriate administrative action or penalty, full compliance with OFAC requirements is still expected.
Takeaways
This rule is the most recent example of the U.S. government’s increasing use of sanctions in recent years in support of its foreign policy and national security objectives. Companies may experience higher costs related to compliance with this rule, especially as standard business record retention periods are usually shorter. Additionally, companies should consider updating training, compliance programs, and due diligence checklists to reflect the extended recordkeeping period.
Rule 506(c) Unchained? The SEC Loosens Requirements for Advertising in Private Capital Raises
On 12 March 2025, the US Securities and Exchange Commission (SEC) staff issued a no-action letter that provides private fund sponsors with a concrete, streamlined approach to relying on Rule 506(c),1 based on minimum investment amounts and investor representations. This guidance has the potential to unlock Rule 506(c)’s advantages for private fund sponsors more than a decade after its passage.
Background on Rule 506(c)
Implemented in 2013 pursuant to the Jumpstart Our Business Startups Act, Rule 506(c) provides an alternative to the traditional prohibition on general solicitation in private offerings. Specifically, Rule 506(c) permits issuers to engage in general solicitation and advertising when selling securities, provided they take “reasonable steps” to verify that all purchasers are accredited investors. While enacted in order to give issuers the opportunity to increase their fundraising abilities through marketing to a public audience, Rule 506(c) has been only sparingly used over the last decade. This past November, SEC Commissioner Hester Peirce commented that issuers had “raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.”2
The “reasonable steps” verification requirement has presented operational challenges for many issuers. Prior methods qualifying as “reasonable steps” included reviewing tax returns, bank statements, or obtaining verification letters from professionals such as lawyers or accountants. Because of the additional administrative burdens imposed by these verification methods, Rule 506(c) has not been widely utilized, despite its potential to access a much wider audience for capital raising.
The Alternative Verification Method
The no-action letter provides a far less labor-intensive approach to satisfying Rule 506(c)’s verification requirements by streamlining the process issuers must follow to verify an investor’s accredited investor status. Specifically, the SEC mandates that an issuer relying on the no-action letter:
Impose minimum investment amounts of US$200,000 for individuals and US$1 million for legal entities;3
Receive written, self-certified representations from an investor that they are an accredited investor and that their investment is not financed by a third party for the specific purpose of making the particular investment;4 and
Have no actual knowledge of facts contrary to the two above bullets.
This test for determining whether an issuer has taken reasonable steps to verify accredited investor status is objective and depends on the specific facts and circumstances of each investor and transaction.
Practical Considerations for Private Fund Sponsors and Other Issuers
What are the practical implications for private fund sponsors now that the SEC has loosened the verification restrictions? Will private fund sponsors now jump into the fray and begin to advertise on social media, at sporting events, and elsewhere? There remain a number of considerations notwithstanding the less burdensome verification process. The SEC’s no-action letter addressed only this aspect of using Rule 506(c). The Marketing Rule (defined below), antifraud provisions, and other provisions of the Investment Advisers Act of 1940 the (Advisers Act) of course remain in full force and effect. Private fund sponsors considering an offering under Rule 506(c) will need to not only comply with the Advisers Act’s requirements, but be prepared to do so in front of a much wider investor and regulator audience.
Private fund sponsors considering Rule 506(c) offerings should note several additional considerations:
Update Policies and Procedures
Managers should adopt policies and procedures to accommodate Rule 506(c) offerings.
Marketing Rule
Registered investment advisers must continue to consider Rule 206(4)-15 under the Advisers Act the (Marketing Rule) when marketing their funds. While advisers may widely distribute marketing materials, such materials must comply with the Marketing Rule. For example, under the Marketing Rule, advisers are generally prohibited from including hypothetical performance, such as performance targets and projected returns, in advertisements to the general public.6
Switching Exemptions
Managers that want to change to a Rule 506(c) offering should file an updated Form D with the SEC and review offering materials for any necessary updates (e.g., remove representations regarding no general solicitation from subscription agreements and other documents).
What Is Next for Private Fund Sponsors and Rule 506(c)?
The easing of the investor verification process under Rule 506(c) will undoubtedly renew interest in pursuing this alternative path to capital raising. It is no secret that the fundraising environment over the last several years has been challenging, particularly for mid-market and emerging manager sponsors. For those managers, there are good reasons to explore general solicitation under Rule 506(c), bearing in mind the need to comply with the SEC’s recent guidance on verification and the requirements of the Advisers Act. Time will tell whether the SEC’s no-action letter will actually open the floodgates of advertising for private fund sponsors. Watch this space for further insights as the industry’s approach to using Rule 506(c) unfolds.
Footnotes
1 17 C.F.R. § 230.506(c) (1933).
2 https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-sbcfac-111324
3 For an entity investor accredited solely through its beneficial owners, the minimum investment amount is US$1 million, or US$200,000 for each beneficial owner if the entity has fewer than five natural person owners.
4 These representations must be made for each beneficial owner for entities that are accredited solely through the accredited investor status of each beneficial owner.
5 17 C.F.R. § 275.206(4)-1 (●).
6 The Marketing Rule requires that investment advisers only present hypothetical performance to audiences if it is relevant to their likely financial situation and investment objectives, limiting an adviser’s ability to include such performance in advertisements to the public. In the Marketing Rule’s adopting release, the SEC specifically noted that advisers “generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation.” Investment Adviser Marketing, Release No. IA-5653, SEC Dec. 22, 2020 effective May 4, 2021, at 220.
No APA Review of Commission Refusal to Issue Sua Sponte Show Cause Order
The US Court of Appeals for the Federal Circuit dismissed an appeal challenging a US International Trade Commission decision that upheld an administrative law judge’s (ALJ) order, ruling that such an order was within the Commission’s discretion and unreviewable. Realtek Semiconductor Corp. v. International Trade Commission, Case No. 23-1095 (Fed. Cir. Mar. 18, 2025) (Moore, C.J.; Reyna, Taranto, JJ.)
DivX filed a complaint at the Commission against Realtek alleging a violation of § 1337 of the Tarriff Act. DivX later withdrew the complaint. Realtek subsequently filed a motion for sanctions against DivX, alleging certain misconduct. The ALJ denied the motion on procedural grounds. Realtek subsequently petitioned for Commission review, asking the Commission to exercise its authority to issue a sua sponte order requiring DivX to show cause explaining why it had not engaged in sanctionable conduct. The Commission decided not to review and adopted the ALJ’s order without comment.
Realtek appealed, contending that the Commission violated the Administrative Procedure Act (APA) by not issuing a sua sponte show cause order. The Commission argued that Realtek’s appeal should be dismissed, contending that the issue raised was unreviewable.
The Federal Circuit agreed with the Commission, stating that under § 701(a)(2) of the APA, decisions made by an agency are unreviewable by the Court when they are entrusted to the agency’s discretion by law. The Court explained that the sua sponte issuance of a show cause order is a decision that “may be, not must be,” entered by the ALJ or on the Commission’s initiative. Therefore, the decision not to act sua sponte is a decision that remains wholly within the agency’s discretion.
The Federal Circuit rejected Realtek’s argument that the Commission’s refusal to act was reviewable because the Commission failed to provide reasoning, and that Commission review would have allowed the Court to determine if there were “illegal shenanigans” in exercising discretion. However, the case cited by Realtek involved the review of “shenanigans” that fell within the Court’s reviewable categories, not one related to the Commission’s refusal to issue a show cause order sua sponte. The Court found no support for Realtek’s claim that discretionary agency actions under § 701(a)(2) become reviewable under the APA simply because the agency fails to provide its reasoning.
GeTtin’ SALTy Episode 49 | Conformity—Policy or Politics? [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay dives into the complex and timely topic of tax conformity with two state tax guests, Shail Shah, Greenberg Traurig shareholder based in San Francisco, and Jeff Newgard, President and CEO of Peak Policy. The discussion centers on the challenges and implications of how states align—or don’t align—with the federal Internal Revenue Code (IRC).
Key topics include:
Oregon’s Proposed Shift to Static Conformity
California’s Static Conformity Challenges
Administrative and Compliance Impacts
Broader Implications for Tax Policy
Future Outlook
In a lighthearted conclusion, Nikki, Shail, and Jeff reveal which Muppet or Sesame Street character best represents their tax policy personas!
This episode is a must-listen for anyone navigating the intricacies of state and local tax policy, offering a deep dive into conformity issues and their broader implications for taxpayers and state governments alike.