Tennessee Court of Appeals Rules on City County Tax Dispute

The Tennessee Court of Appeals has ruled in a dispute between Bradley County and the City of Cleveland over a distribution of local option sales and use tax revenue. The Court held that the city is entitled to one year of the revenue increase but that the county will be entitled to the revenue for periods beginning after June 20, 2010.

Tennessee law generally provides for the allocation of the local sales tax revenue between city and county governments. Half of the revenue goes to education, but the non-education allocation can be varied by contract between the jurisidictions. In this case, such a contract was executed between the city and county in 1967. Several amendments followed in 1976 and 1982 which modified the statutory allocation provision. In the years that followed, the revenue increased, and the city and county also enacted subsequent rate increases, making the pot of money much more significant in recent years.

Due to budget constraints and locals looking for revenue in various places, the validity of the 1967 contract, as amended, became a disputed question between the parties. An earlier lawsuit was litigated in 2000 in which the Tennessee Court of Appeals upheld the 1967 Agreement in favor of the county. In the earlier lawsuit, the Court found a termination provision in the contract but concluded that the termination provision has not been satisfied.

The new case attempted to revisit some of the issues litigated in the earlier case while also attacking the allocation of revenue generated in the 2009-2010 fiscal year. The Tennessee Court of Appeals refused to entertain the city's challenges to the contracts, relying on the earlier-resolved dispute between the parties and concluding that the city could not relitigate those issues. Based on the city and the counties passage of an increase in local sales tax in 2009, the Court concluded that the city was entitled to the revenue from that year because the county did not pass the increase until the after the beginning of the fiscal year. While this consolation was nice, it was not the result for which the city was hoping.

Practice Pointer #1: The city will likely file a Rule 11 application with the Tennessee Supreme Court, so stay tuned on this issue to  see whether the Court of Appeals' ruling will stand. If the Supreme Court accepts the appeal, it will not be bound by the 2000 Court of Appeals ruling.

Practice Pointer #2: This ruling reiterated the point that was made in the first case that these cases depend on the terms of the contracts between the city and county. Cities and counties that are concerned about their allocation agreements should closely scrutinize these agreements to determine whether the validity of the contract could be called into question. Based on the amount of dollars at issue, this is likely worth considering.

The Court of Appeals Ruling can be found at: https://www.tba.org/sites/default/files/bradleycounty_103012.pdf

Twitter: @TNTAXLawyer

Tennessee Companies May Be Entitled to Refunds of FICA Withholding on Severance Payments

The Sixth Circuit Court of Appeals has held that payments made by a bankrupt retail corporation to its employees pursuant to pre- and post-bankruptcy severance programs were supplemental unemployment compensation benefits (SUB) that are not subject to the Federal Insurance Contributions Act (FICA).

The Court made a distinction between "wages" for federal income tax withholding and "wages" for FICA purposes. Because the SUB Payments were not "wages" for FICA purposes, the Court concluded that FICA was not due on the severance payments.

Although this 6th Circuit decision is appealable to the U.S. Supreme Court, the IRS has yet to indicate its intended course of action with respect to severance payments. Taxpayers that have paid FICA on severance payments should consider filing protective claims for refund. FICA tax refund claims must be filed by the later of:

• 3 years from the date Form 941 was filed, or
• 2 years from the date the tax reported on Form 941 was paid.

The unpublished opinion in In re Quality Stores, Inc., (6^th Cir. Sept. 10, 2012) can be found by clicking HERE.

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