By: Janira Beltrán-Sellés, Esq. & Yaritza Portalatín-Méndez, Esq., CPA
In Demeter International, Inc. v. Secretario de Hacienda, 2018 TSPR 21, our Supreme Court, at the beginning of its opinion, states that the Secretary of Treasury has the power to formalize agreements for the payment of taxes, but only for tax periods that have been previously assessed or audited. If read in isolation, it would seem like the Puerto Rico Supreme Court is issuing a new norm regarding tax closing agreements, banning the Secretary of Treasury from formalizing this type of agreements on any year that has not been object of assessment or investigation.
However, the decision cites United States federal interpretations of Section 7121 (United States Internal Revenue Code Section on closing agreements) as useful for the correct interpretation of the case at hand. It cited doctrine under which the IRS is able to formalize agreements for any past or future tax periods, for transactions that have not yet been consummated (thus impossible to audit or assess).
The Court then interpreted the agreement using general contract law, treating the agreement as a judicial transaction contract which may not, according to the Court, be interpreted as including matters totally foreign and different from the controversy that gave rise to the judicial transaction. The agreement, signed in 2012, stated it would close all tax years of Demeter International, Inc., including 1996 through 2003. Therefore, the Court decided to circumscribe the agreement to the tax years that originated the litigation (1996-2003), instead of applying it to all periods up to the signature of the same.
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This publication is a summary of the recently enacted case law referred to herein and is not intended to substitute legal advice. We encourage you to contact us or your tax advisor if you have any questions or need assistance regarding any of the matters presented herein. An attorney-client relationship with Pellot-González, P.S.C. cannot be formed by reading or responding to this memorandum. Such a relationship may be formed only by express agreement with Pellot-González, P.S.C.
On June 30, 2016, a Financial Oversight and Management Board has been assigned to Puerto Rico by the United States Federal Government with the enactment of Public Law 114-187 (“Puerto Rico Oversight, Management, and Economic Stability Act”). This Oversight Board has ample powers over actions that may be taken by the Puerto Rico Government in pursuit of economic development, such as, new incentives laws or new tax decrees.
