The Supreme Court has granted the Attorney General’s request to allow the Department of Internal Revenue (DOR) to collect capital gains tax before a final ruling on the case. . According to the court action released today:

“The Court unanimously voted in favor of the following result: Therefore this is the ORDER: The order of suspension of the order issued by the High Court pending the review is approved. The lower court order is stayed pending the Court’s decision on this matter. DATED at Olympia, Washington on November 30, 2022.

On March 1, a judge appointed by Inslee ruled that the capital gains tax was “declared unconstitutional and void, therefore, void and cannot be used by law.”

In other news, according to the Congressional Liaison for the IRS, Washington taxpayers may not be allowed to deduct state capital gains taxes on their federal tax returns. This is due to the fact that the government plays by calling the income tax an “excise tax”. From an IRS source:

“I spoke with internal sources and looked at RCW 82.87.040 which reads that the capital gains tax is classified as an ‘income tax’ and not an ‘income tax.’ Pursuant to PUB 17, the prescribed state tax is not deductible. So my preliminary answer is no, but the IRS cannot interpret state taxes as income taxes and allow them to be deducted from the federal return.

We are awaiting state law on the definition of local taxes. Because capital gains tax is defined as an ‘Excise Tax’ under the RCW, we will treat this tax as an ‘Excise Tax’ under the federal deduction rules. If the RCW called it ‘Income Tax’ we would classify it as a federal return.

The IRS is very clear, however, about what exactly constitutes a corporate income tax:

This will answer your question about the tax treatment of capital gains. Are you asking whether the corporate income tax is considered an income tax or an income tax? It is income tax. Generally, income is treated as income under the tax code and is taxed as such. “

Continuing this investigation, a former IRS attorney had this to say about the state’s income tax argument:

“Washington State is mistaken in thinking that because there is a transfer of property involved, it provides a basis for the imposition of an excise tax. I simply don’t see why this case is considered controversial. That is, I do not see a valid argument for saying that the tax on profits is not an income tax, and for that reason it can be subject to income tax. I am a little surprised as to why the State of Washington believes it has a reasonable chance of prevailing in this case. “

If the state supreme court ultimately upholds the capital gains tax, Washington will lose the competitive advantage we have with no income tax, according to the State Department of Commerce announced. Meanwhile, Washington may also face the disadvantage of being the only state with a capital gains tax where taxpayers are not allowed to deduct the tax on their federal tax returns. taxes. All other states that have an income tax clearly recognize that it is an income tax.

The Supreme Court will hear oral arguments on the capital gains tax on January 26, 2023.

Updated on 12/5

My interview with Brandi Kruse about the latest income tax developments.

Additional Information
Taxpayers oppose efforts to collect capital gains tax ahead of Supreme Court decision
Former IRS attorney “struck” by argument of Washington capital gains tax
UW tax law professor on new income tax: “Will be found unconstitutional”
Income tax introduction – who said that?

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