Kovacs received a bankruptcy discharge of her debts in 2001. weeks later, the IRS notified her that it had applied part of her 2000 tax refund to her outstanding tax debts from tax years 1990 to 1995. Kovacs’s attorneys and the IRS went back and forth about the status of those debts, with the IRS claiming that Kovacs still owed more than $150,000. In 2003 IRS Officer Mulcahy informed Kovacs that the 2000 refund would be applied against her non-discharged 1999 tax debt. Despite that statement, the IRS sent Kovacs two letters, erroneously stating that Kovacs still owed more than $13,000 for 1990–1995; those debts had been discharged. Her attorneys wrote a note clarifying the status of the discharged debt in correspondence about Kovacs’s non‐discharged 1999 tax debt. In 2005, Kovacs filed an administrative claim against the IRS, under 26 U.S.C. 7430(b)(1) as a predicate to a lawsuit for violation of 11 U.S.C. 524(a). When the IRS did not respond, Kovacs filed a complaint. The IRS admitted its fault but argued that the two-year statute of limitations barred the action. After a third remand, the district court upheld the bankruptcy court’s $3,750 award and declared that the award was premised on litigation costs, not actual damages. The Seventh Circuit affirmed. View "Kovacs v. United States" on Justia Law

If an owner of Illinois real estate does not timely pay county property taxes, the county may “sell” the property to a tax purchaser. The tax purchaser does not receive title to the property, but receives a “Certificate of Purchase” which can be used to obtain title if the delinquent taxpayer does not redeem his property within about two years. In this case, the property owner entered bankruptcy during the redemption period. The bankruptcy court held that, if there is still time to redeem, the tax purchaser’s interest is a secured claim that is treatable in bankruptcy and modifiable in a Chapter 13 plan. The district court and Seventh Circuit affirmed, first noting that the owner’s Chapter 13 plan was a success; because the tax purchaser’s interest was properly treated as a secured claim, the owner has satisfied the obligation, 11 U.S.C. 1327. Because Illinois courts call a Certificate of Purchase a lien or a species of personal property, the court rejected the purchaser’s argument that it was a future interest or an executory interest in real property. In effect, the tax sale procedure sells the county’s equitable remedy to the tax purchaser. View "Alexandrov v. LaMont" on Justia Law

The IRS advised Ford Motor that it had underpaid its taxes from 1983 until 1989. Ford remitted $875 million to stop the accrual of interest that Ford would otherwise owe once audits were completed and the amount of its underpayment was finally determined. Eventually it was determined that Ford had overpaid its taxes in the relevant years, entitling Ford to a return of the overpayment and. Ford argued that “the date of overpayment” for purposes of 26 U.S.C. 6611(a) was the date that it first remitted the deposits to the IRS. The IRS countered that the relevant date was the date that Ford requested that the IRS treat the remittances as payments of tax. The difference between the competing interpretations is worth some $445 million. The district court granted judgment on the pleadings in favor of the government. The Sixth Circuit affirmed, concluding that section 6611 is a waiver of sovereign immunity that must be strictly construed in favor of the government. The Supreme Court vacated and remanded, noting that the government was arguing, for the first time, that the only general waiver of sovereign immunity that encompasses Ford’s claim is the Tucker Act, 28 U. S. C. 1491(a). Although the government acquiesced in jurisdiction in the district court, the Tucker Act applies, jurisdiction over this case was proper only in the Court of Federal Claims. The Sixth Circuit should have the first opportunity to consider the argument. View "Ford Motor Co. v. United States" on Justia Law

Woods and McCombs participated in a tax shelter to generate paper losses to reduce their taxable income. They purchased currency-option spread packages consisting of a long option, for which they paid a premium, and a short option, which they sold and for which they collected a premium. Because the premium paid was largely offset by that received, the net cost of the packages was substantially less than the cost of the long option alone. Woods and McCombs contributed the spreads, plus cash, to partnerships, which used the cash to purchase stock and currency. In calculating their basis in the partnership interests, they considered only the long component of the spreads and disregarded the nearly offsetting short component. When the partnerships’ assets were disposed of for modest gains, they claimed huge losses. Although they had contributed $3.2 million in cash and spreads to the partnerships, they claimed losses of more than $45 million. The IRS sent notices, finding that the partnerships lacked “economic substance,” disallowing related losses, and concluding that the partners could not claim a basis greater than zero for their partnership interests and that tax underpayments would be subject to a 40-percent penalty for gross valuation misstatements. The district court held that the partnerships were properly disregarded as shams but that the penalty did not apply. The Fifth Circuit affirmed. The Supreme Court reversed, first holding that the district court had jurisdiction to make the determination. The Tax Equity and Fiscal Responsibility Act authorizes courts in partnership-level proceedings to provisionally determine the applicability of any penalty that could result from an adjustment to a partnership item, even though imposing the penalty requires a subsequent, partner-level proceeding. In the later proceeding, a partner may raise reasons why the penalty may not be imposed on him personally. However, the valuation-misstatement penalty applies in this case. Once the partnerships were deemed shams, no partner could legitimately claim a basis greater than zero. Any underpayment resulting from use of a non-zero basis would be attributable to a partner having claimed an adjusted basis that exceeded the correct amount. When an asset’s adjusted basis is zero, a valuation misstatement is automatically deemed gross. The valuation¬misstatement penalty encompasses misstatements that rest on both legal and factual errors, so it is applicable to misstatements that rest on use of a sham partnership. View "United States v. Woods" on Justia Law

Appellant Lebanon Valley Farmers Bank (LVFB) is a Pennsylvania chartered bank, and a subsidiary of Fulton Financial Corporation, which merged with Keystone Heritage Group, Inc. The merger made Fulton the parent company of Lebanon Valley National Bank, which merged with Farmers Bank as part of the transaction, thereby forming LVFB. Prior to the merger, both Farmers Bank and National Bank were "institutions" subject to the Shares Tax. For the 2002 tax year, LVFB filed a Bank Shares Tax return, which included National Bank's pre-merger value in its calculation of its six-year average share value, as required by the combination provision. However, in 2005, LVFB filed a petition with the Board of Appeals, seeking a refund of the portion of its 2002 tax payment attributable to National Bank’s pre-merger share value. It claimed disparate treatment because the combination provision was inapplicable when mergers involved out-of-state banks or banks less than six years old. The Commonwealth Court has held, under the plain language of the statute, the combination provision applied only to combinations of "institutions" (i.e., banks with Pennsylvania locations). The trial court held LVFB, as the survivor of the merger of two Pennsylvania banks, should have reported a taxable share value which averaged the combined share value of each constituent institution over the past six years and was, therefore, not entitled to a refund. However, the court ordered the Commonwealth "to provide meaningful retrospective relief" to cure LVFB’s non-uniform treatment. The Commonwealth Court affirmed the Board of Finance and Revenue's classification of the merged LVFB and the 2002 tax assessment. After careful review, the Supreme Court disagreed with the Commonwealth Court's decision and reversed for further proceedings. View "Lebanon Valley Farmers Bank v. Pennsylvania" on Justia Law

Appellants appealed the tax court's decision, holding that the period to assess taxes for tax year 1999 against Jack Gaughf and his wife remained open as of March 30, 2007, when the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) to Gaughf Properties, L.P. The court affirmed the tax court's holding that (1) the Gaughfs' tax liability came within the unidentified partner exception to the general three-year statute of limitations under I.R.C. section 6229(e) because the Gaughfs were not identified as indirect partners to Gaughf Properties, L.P. in its 1999 return and (2) information identifying them as indirect partners was not otherwise timely furnished to the Secretary of the Treasury so as to trigger the one-year limitation period in I.R.C. section 6229(e). View "Gaughf Properties, L.P. v. Commissioner, IRS" on Justia Law

Ottaviano, believing himself not bound by U.S. tax law, marketed his views to others through his company, Mid-Atlantic, which offered financial products he claimed would help others avoid taxation and have the government pay their debts. Ottoviano made many representations about himself and the financial products. Customers paid Mid-Atlantic $3,500 each ($5,000 if purchased jointly) to participate. After a trial at which he represented himself, Ottaviano was convicted of conspiracy to defraud the U.S. under 18 U.S.C. 371, eight counts of mail and wire fraud under 18 U.S.C. 1341 and 1343, money laundering under 18 U.S.C. 1957, and two counts of tax evasion under 26 U.S.C. 51. The Third Circuit affirmed, noting overwhelming evidence of guilt and rejecting arguments that the district court denied him a fair trial in violation of his Fifth Amendment right to due process of law when it cross-examined him and violated his Sixth Amendment right to represent himself when it ordered him to leave the courtroom during a discussion about a letter he sent to the Treasury Secretary. View "United States v. Ottaviano" on Justia Law

Debtor appealed the bankruptcy court's order sustaining the trustee's objection to debtor's claimed exemption. Debtor had filed a petition for relief under Chapter 13 of the Bankruptcy Code and had claimed exempt, as a public assistance benefit under MO.REV.STAT. 513.430.1(10)(a), the portion of her 2012 federal income tax refund that was attributable to a child tax credit allowed under 26 U.S.C. 24. The court affirmed the bankruptcy court's order sustaining the trustee's objection to debtor's claimed exemption, concluding that the refundable portion of the child tax credit was not a public assistance benefit within the meaning of the statute and could not be claimed exempt under the statute. View "Hardy v. Fink" on Justia Law

The Seventh Circuit considered appeals by Illinois and Illinois counties and a Wisconsin county of district court holdings that those governmental bodies cannot levy a tax on sales of real property by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Although both are now private corporations, the relevant statutes provide that they are “exempt from all taxation now or hereafter imposed by any State … or local taxing authority, except that any real property of the corporation shall be subject to State … or local taxation to the same extent as other real property,” 12 U.S.C. 1723a(c)(2), 12 U.S.C. 1452(e). The Seventh Circuit affirmed. A transfer tax is not a tax on realty. After 2008 Fannie Mae owned an immense inventory of defaulted and overvalued subprime mortgages and is under conservatorship by the Federal Housing Finance Agency. The states essentially requested the court to “pierce the veil,” in recognition of the fact that if the tax is paid, it will be paid from assets or income of Fannie Mae or Freddie Mac, but their conservator is the United States, and the assets and income are those of entities charged with a federal duty. View "Milwaukee Cnty v. Fed. Nat'l Mortg. Ass'n" on Justia Law

Petitioners Scott and Audrey Blum appealed a Tax Court decision upholding the actions of the Commissioner of the Internal Revenue Service (IRS) invalidating a financial transaction as lacking economic substance and imposing two accuracy-related penalties for underpayment of taxes. "The intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it cannot make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages, and the Tax Court was right to uphold the Commissioner’s actions." View "Blum, et al v. CIR" on Justia Law