PHILADELPHIA – The attorney for the owner of a Philadelphia real estate business said he and his client “are very dismayed” by a May ruling issued by a federal appeals court that held the man is not entitled to the tax liability protections afforded by the Servicemembers' Civil Relief Act (SCRA) to business owners while they are actively serving the U.S. military.
Earl Raynor, attorney for plaintiff Michael E. Davis, said his client will ask the U.S. Supreme Court to review the case.
The Third Circuit upheld the U.S. District Court for the Eastern District of Pennsylvania’s ruling that Davis was personally entitled to reduced interest and penalties for his personal tax liability under the act while performing his duty as a military policeman with the U.S. Army, but that those protections did not extend to Davis’ business, Global Sales Call Center LLC.
Specifically, the Third Circuit concluded that Davis was not personally liable for the business’ tax liability because it was incorporated.
“In our view, the Third Circuit’s ruling was a complete misinterpretation of the statute, which eviscerated Congress’ clear intention of shielding the economic interests of military personnel while they actively serve their country,” Raynor told the Pennsylvania Record.
“Davis was the sole proprietor for Global Sales, a mere shell business entity, and solely responsible for paying Global’s taxes and overhead.”
Raynor said the Third Circuit's ruling forces Davis to pay the full interest and penalties for Global’s tax liability and “effectively strips him of SCRA protections.”
“There was absolutely no language in the statute, which stated that LLCs did not fall under the ambit of SCRA business protections,” Raynor said. “The court’s ruling has sweeping public policy ramifications, because there are thousands of active duty service men and women that are small business owners, whose economic interests are jeopardized by the court’s ruling.”
Since the statute “was silent with respect to LLCs,” Raynor said the Third Circuit's ruling denies Davis his full protections under the SCRA and violates due process.
In its ruling, the Third Circuit said “It is an unfortunate twist of law and fate that Davis and his wife, in transferring their rental property to Global in order to protect their financial interests during Davis’s period of military service, unwittingly undermined existing safeguards of those interests.”
While acknowledging that safeguards to Davis’ company “runs counter to the SCRA’s ambition that servicemembers feel secure in their tax and legal affairs during their active duty deployments,” the court said “Davis received all the benefits that company with incorporation, and he cannot have his cake and eat it too.”
Absent an agreement by the Supreme Court to hear Davis’ case, Raynor said “another possible avenue would be petitioning Congress for amendment and clarification” of the SCRA.
In addition, Raynor said the city of Philadelphia “never seriously offered to settle the case and has pressed for the full amount” owed by Davis in connection with the business.
“The city’s unwillingness to respect Mr. Davis’ service to his country and press for the full payment of interest and penalties, which are frankly usurious in nature, is consistent with the overall push of the city to compensate for revenue shortfalls stemming from high unemployment and poverty through punitive foreclosures, seizures and regressive taxes,” Raynor said.