Justia Tax Law Opinion Summaries

In 1997 plaintiff held a 25% stake in a utility in the United Kingdom that was one of 32 U.K. companies subject to a one-time "windfall tax." After it paid that tax, plaintiff claimed a foreign tax credit on its U.S. tax return under I.R.C. 901. The windfall tax emerged from a backlash against the privatization of British utilities and transit operators. In concept, the windfall tax was a one-time 23% tax on the difference between each company’s "profit-making value" and the price for which the U.K. government had sold it. The public believed that the government had sold the companies too cheaply. In 2007, the IRS denied plaintiff's claim and issued a notice of deficiency. The Tax Court agreed that plaintiff was entitled to a foreign tax credit. The Third Circuit reversed, holding that the windfall tax does not qualify for a foreign tax credit. Whether a foreign tax qualifies requires analysis of the timing and the base of the foreign tax; a realization requirement, one of timing, ensures that the taxpayer has received income before being obligated to pay taxes on it.

The company overpaid income tax for certain years. The IRS either refunded the overpayments or applied the overpayments as credits to other tax years or to liabilities for other types of taxes before the company contested a notice of deficiency the IRS issued for the years to which the credits were applied. The company claimed that the IRS did not pay it enough overpayment interest on those overpayments. The Third Circuit vacated the Tax Court ruling that it had subject matter jurisdiction (26 U.S.C. 6512(b)(1) and (3)) over the claim. Interest owed to a taxpayer by the government, is not "a part of, or even related to, a taxpayer's tax liability" and is not "assimilated in treatment to the principal amount of a tax." The Tax Court erred in equating the question of interest with overpayment.

Defendants, online booking companies, acquire inventories of hotel rooms at negotiated rates (wholesale rate) and rent the rooms to consumers at higher retail rates; they charge consumers a separate amount for hotel taxes. Defendants pay the taxes to the hotels, which in turn remit it to the state taxing authority. Plaintiff brought a claim on behalf of a putative class of New Jersey municipalities, alleging that basing the tax on the wholesale rate, rather than the retail rate, is a form of tax evasion. The district court granted defendants' motion to dismiss for lack of subject matter jurisdiction on grounds of prudential standing ground, reasoning that the municipality was attempting to assert a legal right that was reserved to the Director of the Division of Taxation (aided by the Attorney General) to enforce municipal hotel occupancy taxes by determining the amount of tax due and then collecting the related revenue. The Third Circuit affirmed, reasoning that municipalities have authority to impose a local hotel tax under N.J. Stat. 40:48F, but enforcement is reserved to state officials.

The Township brought a putative class action on behalf of itself and similarly situated New Jersey municipalities, alleging that defendants, companies who operate hotel booking sites online, owe unpaid hotel occupancy taxes. Defendants calculate the tax owed based on the negotiated rate paid by a defendant (wholesale rate), not the higher rate charged consumers (retail rate). Defendants pay the tax to the hotel, which remits it to the state taxing authority.The district court dismissed on grounds of prudential standing, holding that state officials have the right to enforce the statutory tax scheme. The Third Circuit affirmed. The Township is not the proper plaintiff. Authority to adopt a hotel tax is granted municipalities by N.J. Stat. 40:48F-1, but administration and collection are left to state officials.

The company wished to use cash reserves from subsidiaries in Ireland for activities such as stock repurchase. Foreign income is not taxable in the U.S. when earned, but is taxed if invested in U.S. property, 26 U.S.C. 951-965, including debt obligations of U.S. companies. To obtain use of the funds, the company entered into a 20-year interest rate swap. The IRS notice then in effect provided that, upon sale of one "leg" of a swap, the lump sum exchanged for the right to receive revenues over the remaining life of the swap, should not be recognized as income all at once, but should be accounted for over the life of the swap. Parties are now required to treat all such payments as loans. In 2004, the IRS assessed deficiencies of $472,870,042, characterizing the transactions as immediately-taxable loans, not sales. The district court agreed. The Third Circuit affirmed. The former notice did not apply because the transactions were loans. The parties structured the transactions expecting to recover principal; involvement of a third-party bank did not preclude characterization as a loan. Disparate treatment is not ordinarily considered a defense to tax liability.

The taxpayer and her ex-husband maintained a joint account pending resolution of a support dispute. In May 2003 the IRS levied the funds because of the ex-husband's failure to turnover taxes withheld from his employees. The IRS did not notify the taxpayer and she did not learn of the levy until July 2004; she filed a claim for taxpayer assistance in August 2004, which was denied as untimely in January 2005. In March 2005, the taxpayer filed a petition for lien or levy with the tax court, which ultimately transferred the case. The district court dismissed. The Third Circuit vacated and remanded. Although her "wrongful levy" claims are not saved by the doctrine of equitable tolling, the taxpayer also raised a due process claim, based on lack of notice. Claims for damages are barred by sovereign immunity, but the taxpayer sought a procedural remedy, over which the district court did have jurisdiction (5 U.S.C. 702).