For the first time since enactment of the False Claims Correction Act of 2020, the office of the DC Attorney General (AG) has used its new tax enforcement powers to pursue alleged personal income tax shortfalls. The development brings the constitutional issue of Washington, DC’s legal residency law to the forefront, issuing a stark warning to companies that support the personal tax obligations of key employees and directors.
The press quickly and widely covered DC’s lawsuit against MicroStrategy co-founder, executive chairman and former CEO Michael Thaler for alleged personal income tax evasion, which was made public this week. Alleging that he falsely claimed to be a Virginia or Florida resident (rather than DC) since at least 2012.
The case was first sealed by the parties under DC’s False Claims Act in April 2021. This is less than a month after the False Claims Correction Act came into effect. Using the new tax authority, DC AG’s office filed a complaint last week to intervene (which will now take over the litigation). Interestingly, when DC AG’s office took over the case, MicroStrategy added MicroStrategy as a defendant, based on the theory Thaler conspired to help him evade DC’s personal income tax. . Under DC’s False Claims Act, if a court rules in his DC AG office’s favor, both Saylor and MicroStrategy could be held liable for damages three times as high as him.
Issues with the DC “Lawful Resident” Test
Determining where an individual is resident for state and local tax purposes generally requires fact-based analysis, but the case against Thaler is based on DC’s own (and likely unconstitutional) statutory It also has to do with residential standards. DC law is fundamentally different from legal residency standards in other states. Most states only tax individuals who have an in-state address as a resident, but some states also have a “legal resident” test to classify individuals as taxable residents. In most states, you are classified as a legal resident if: When (2) spend more than a certain number of days (usually 183 days) in the jurisdiction;
DC truncates this criterion and classifies a person as a legal resident if he/she only maintains a personal residence in DC for more than 183 days. therefore, number We need the actual abundance of individuals in DC. The problems created by this proprietary standard are obvious. Someone can (as many wealthy people do) maintain his residence for 183 days in multiple jurisdictions. The plain language of the law therefore violates the Commerce Clause of the US Constitution because it violates the internal consistency test. Under this test, under the hypothetical situation that all jurisdictions have the same law as the one being challenged, if more than 100% of her tax base is taxable, that law is unconstitutional. Now, if every state has a statutory residency test that applies to a person who has a place of residence for her 183 days or more in its jurisdiction, then every state in which a person owns a place of residence must 100% of her income can be taxed. In theory, an individual residing in five different states would be taxed on her 500% of her income by those states. This is a clear unconstitutional result.
The only way to preserve the constitutionality of DC’s statutory residency law is to make the definition of “permanent residence” more restrictive so that even if a person resides in more than one state, the Only one is considered a permanent location. of residence. In fact, at least one of her judicial decision-makers in DC specifically narrows statutory interpretations to meet constitutional requirements. However, the DC Act does not provide such a limitation, and it is not clear how the revised standard would differ from more traditional address analysis, even if a more restrictive interpretation were applied. Eliminates the need for a separate legal residency standard within the district. provide the definition and clarity of limitations necessary to ensure compliance.
DC Matters Filing False Claims Lawsuit Against Listed Company Related To Employee Personal Income Tax Liability
The DC AG office’s decision to add a listed company as a defendant in a personal income tax lawsuit should be of concern to all businesses operating in DC. Employees—especially high-compensation employees with complex compensation packages or business location requirements. Such companies also have withholding obligations that require adjustments regarding residency determinations to comply with state and local tax laws.
By joining MicroStrategy as a co-defendant in Thaler’s lawsuit, the company is reviewing previous advice provided to employees and reviewing potential risks that may arise related to compliance with state and local tax withholding obligations. You have to consider the risks. Jurisdictions like DC that contain tax matters within the scope of false claiming practices increase the risk to employers (and possibly outside advisors). Companies should carefully document their due diligence on these matters, including the possibility of consulting outside counsel on the application of relevant withholding tax laws and documenting how the company complied with the guidance provided. should consider converting.
Practice notes: The case may raise many questions of first impressions of the district regarding the appropriateness of expanding the False Claims Act to include tax issues. For a more robust discussion of the issues raised by such expansions, see our previous articles on legislative expansion efforts in DC, California, and New York. Thaler’s lawsuit sparked significant media voyeurism, but it’s also an important lawsuit. Because of the constitutional issues around DC’s legal residency laws and the risks businesses may inadvertently take in the growing number of jurisdictions with false claim practices (including triple damages! ) is highlighted. Applies to tax matters when providing guidance to employees on personal income tax compliance.
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