In 1997, the United Kingdom imposed a one-time “windfall tax” on 32 U. K. companies privatized between 1984 and 1996 by the Conservative government. The companies had been sold to private parties through an initial sale of shares, known as “flotation.” Many of the companies became more efficient and earned substantial profits in the process. PPL, part owner of a privatized company, claimed a credit for its share of the bill in its 1997 federal income-tax return, relying on IRC section 901(b)(1), which states that any “income, war profits, and excess profits taxes” paid overseas are creditable against U. S. income taxes. Treasury Regulation 1.901–2(a)(1) states that a foreign tax is creditable if its “predominant character” “is that of an income tax in the U. S. sense.” The IRS rejected PPL’s claim, but the Tax Court held that the U. K. windfall tax was creditable. The Third Circuit reversed. A unanimous Supreme Court reversed, holding that the U. K. tax is creditable under section 901. Creditability depends on whether the tax, if enacted in the U. S., would be an income, war profits, or excess profits tax. A tax’s predominant character is that of an income tax “[i]f ... the foreign tax is likely to reach net gain in the normal circumstances in which it applies.” The windfall tax’s predominant character is that of an excess profits tax, a category of income tax in the U. S. sense. The Labour government’s conception of “profit-making value” as a backward¬-looking analysis of historic profits is not a typical valuation method; it is a tax on realized net income disguised as a tax on the difference between two values, one of which is a fictitious value calculated using an imputed price-to-earnings ratio. The windfall tax is economically equivalent to the difference between the profits each company actually earned and the amount the Labour government believed it should have earned given its flotation value. For most companies, the substantive effect was a 51.71 percent tax on all profits above a threshold, “a classic excess profits tax.” View "PPL Corp. v. Comm'r of Internal Revenue" on Justia Law

This case arose when petitioners filed for Chapter 12 bankruptcy and then sold their farm. Under Chapter 12 of the Bankruptcy Code, farmer debtors could treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities. 11 U.S.C. 1222(a). The Court held that federal income tax liability resulting from petitioners' post-petition farm sale was not "incurred by the estate" under 11 U.S.C. 503(b) of the Bankruptcy Code and thus was neither collectible nor dischargeable in the Chapter 12 plan. Therefore, the Court affirmed the judgment of the Ninth Circuit.View "Hall v. United States" on Justia Law

Ordinarily, the Government must assess a deficiency against a taxpayer within "3 years after the return was filed." 26 U.S.C. 6501(a). The 3-year period was extended to 6 years, however, when a taxpayer "omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return." Section 6501(e)(1)(A). At issue was whether this latter provision applied when the taxpayer overstated his basis in property that he has sold, thereby understating the gain that he received from the sale. Following Colony, Inc. v. Commissioner, the Court held that the provision did not apply to an overstatement of basis. Therefore, the 6-year period did not apply. Accordingly, the Court affirmed the judgment of the Fourth Circuit.View "United States v. Home Concrete & Supply, LLC" on Justia Law

Petitioners, natives and citizens of Japan who have been lawful permanent residents of the United States since 1984, appealed a removal order after husband pleaded guilty to one count of willfully making and subscribing a false tax return in violation of 26 U.S.C. 7206(1) and wife pleaded guilty to one count of aiding and assisting in the preparation of a false tax return in violation of 26 U.S.C. 7206(2). At issue was whether aliens who commit certain federal tax crimes were subject to deportation as aliens who have been convicted of an aggravated felony. The Court held that violations of section 7206(1) and (2) were crimes "involv[ing] fraud or deceit" under 8 U.S.C. 1101(a)(43)(M)(i) and were therefore aggravated felonies as that term was defined in the Immigration and Nationality Act, 8 U.S.C. 1101 et seq., when the loss to the Government exceeded $10,000. Because petitioners were subject to deportation as aliens who have been convicted of aggravated felonies, the Court affirmed the judgment of the Court of Appeals.View "Kawashima v. Holder" on Justia Law

Respondents filed a complaint against AT&T Mobility LLC ("AT&T"), which was later consolidated with a putative class action, alleging that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free. AT&T moved to compel arbitration under the terms of its contract with respondents and respondents opposed the motion contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The district court denied AT&T's motion in light of Discover Bank v. Superior Court and the Ninth Circuit affirmed. At issue was whether the Federal Arbitration Act ("FAA"), 9 U.S.C. 2, prohibited states from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures. The Court held that, because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," quoting Hines v. Davidowitz, California's Discover Bank rule was preempted by the FAA. Therefore, the Court reversed the Ninth Circuit's ruling and remanded for further proceedings consistent with the opinion.View "AT&T Mobility LLC v. Concepcion" on Justia Law

The Internal Revenue Service (IRS) issued summonses to four individuals, seeking information and records relevant to the tax obligations of Dynamo, 26 U.S.C.7602. When they failed to comply, the IRS brought an enforcement action. The individuals challenged the IRS’s motives in issuing the summonses and sought to question the responsible agents. The district court denied the request and ordered the summonses enforced. The Eleventh Circuit reversed, holding that refusal to allow questioning of the agents was an abuse of discretion. A unanimous Supreme Court vacated and remanded. A taxpayer has a right to examine IRS officials regarding reasons for issuing a summons when the taxpayer points to specific facts or circumstances plausibly raising an inference of bad faith. The proceedings at issue are “summary in nature,” and the only relevant question is whether the summons was issued in good faith. Prior cases support a requirement that a summons objector offer not just naked allegations, but some credible evidence to support a claim of improper motive. Circumstantial evidence can suffice; a fleshed out case is not required. The objector need only present a plausible basis for the charge. The Eleventh Circuit erroneously applied a categorical rule demanding the examination of IRS agents without assessing the plausibility of the claims. View "United States v. Clarke" on Justia Law

Defendant Kevin Hartshorn appealed a district court's issuance of an injunction against him, arguing the court erred in concluding he promoted an abusive tax shelter in violation of 26 U.S.C. 6700. Defendant organized and was appointed head minister of the Church of Compassionate Service in 2004. At that time, the church had approximately fifty active ministers. To become a minister, an individual is required to take a vow of obedience and a vow of poverty. Upon taking the vow of poverty, ministers transferred title to all of their property to the church. They also assigned to the church all income that was earned as part of their normal employment, either endorsing their employment checks in favor of the church or directing their employers to deposit their earnings directly into various church accounts. According to internal church documents, 90% of the money ministers earned and assigned to the church was "available for local ministry funding." Defendant testified that the church’s "policy [of trying] to make 90 percent available to fund ministries for their compassionate service projects [is] not tied to how much money they make." However, ministers who were deposed in the course of this litigation indicated that it was their understanding they would “get back 90 percent of whatever funds [they] generate[d] for the church.” Ministers deposed for the litigation had not filed tax returns for numerous years though the income they earned at their jobs outside the church was taxable income. The district court agreed with the government that Defendant was promoting abusive tax shelters through his church, and particularly through his representations that individuals who took vows of poverty and obedience and became ministers of his church would not be required to pay taxes on income they earned and assigned to the church. The court accordingly granted summary judgment in favor of the government and issued an injunction prohibiting Defendant from promoting or selling "the use of church-based tax-fraud schemes." On appeal, Defendant argued that the Tenth Circuit should reverse the district court’s summary judgment decision because: (1) Defendant’s statements regarding the tax benefits for vow-of-poverty ministers were correct; and (2) if any of his statements were false or fraudulent, he did not know or have reason to know of this fact. The Tenth Circuit agreed with the district court that Defendant’s representations to the ministers regarding the tax consequences of becoming a minister of the church were false or fraudulent. With respect to reversal of summary judgment because of statements Defendant made to the ministers, the Tenth Circuit found none of his arguments persuasive: "the test for injunctive relief under [26 U.S.C. 7408] is satisfied if the defendant had reason to know his statements were false or fraudulent, regardless of what he actually knew or believed. And we conclude that, whether or not Defendant actually knew his purported interpretation of federal tax law was incorrect, 'a reasonable person in [his] subjective position would have discovered' the falsity of his representations." View "United States v. Hartshorn" on Justia Law

Between 2008 and 2011, Viacom Inc. paid three senior executives more than $100 million in bonus or incentive compensation. Compensation exceeding $1 million paid by a corporation to senior executives is not normally deductible under federal tax law, but a corporate taxpayer may deduct an executive’s otherwise nondeductible compensation over $1 million if an independent committee its board of directors approves the compensation on the basis of objective performance standards and the compensation is “approved by a majority of the vote in a separate shareholder vote” before being paid. In 2007, a majority of Viacom’s voting shareholders approved such a plan. Shareholder Freedman sued, claiming that Viacom’s Board failed to comply with the terms of the Plan and that, instead of using quantitative performance measures, the Board partially based its awards on qualitative, subjective factors, destroying the basis for their tax deductibility. Freedman claimed that this caused the Board to award executives more than $36 million of excess compensation. The plan was reauthorized in 2012. The district court dismissed. The Third Circuit affirmed. With respect to his derivative claim, Freedman did not make a pre-suit demand to the Board or present sufficient allegations explaining why a demand would have been futile. With respect to his direct claim regarding participation by stockholders without voting rights, federal law does not confer voting rights on shareholders not otherwise authorized to vote or affect Delaware law permit ting corporations to issue shares without voting rights. View "Freedman v. Redstone" on Justia Law

The government appealed the district court's Final Judgment which rejected the government's efforts to tax Burnett Ranches as a "farming syndicate" tax shelter per I.R.C. 464. The court agreed with the district court that an otherwise qualified individual who has participated in management of the farming operation for not less than five years comes within the Active Participation Exception in section 464(c)(2)(A), irrespective of the fact that the legal title of such individual's attributable interest happens to be held in the name of her wholly owned S corp. rather than in her own name. Accordingly, the court affirmed the district court's lift of the stay of its earlier ruling and made final judgment in favor of Burnett Ranches. View "Burnett Ranches, Ltd. v. United States" on Justia Law

Petitioners appealed the judgment of the Tax Court rendered pursuant to I.R.C. 7483. The court affirmed the Tax Court's judgment sustaining the Commissioner's determination that petitioners had an income tax deficiency and an accuracy-related addition to tax for 2007 as the result of unreported income and disallowed deductions for charitable contributions. View "Gunkle, et al. v. CIR" on Justia Law