Articles Posted in U.S. 5th Circuit Court of Appeals

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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

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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

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The district court held that ICP had proven that defendants' allocation of Low Income Housing Tax Credits (LIHTC) in Dallas resulted in disparate impact on African-American residents under the Fair Housing Act (FHA), 42 U.S.C. 3604(a) and 3605(a). At issue was the correct legal standard to be applied to disparate impact claims under the FHA. The court adopted the HUD burden-shifting approach found in 24 C.F.R. 100.500 for claims of disparate impact under the FHA and remanded to the district court for application of this standard in the first instance. View "Inclusive Communities Project v. TX Dept. of Housing, et al." on Justia Law

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El Paso appealed the district court's grant of summary judgment to the IRS, denying El Paso's tax refund claim. El Paso contended that the IRS, in settling a tax dispute with El Paso involving a refund and set-off, failed to adhere to the assessment and collection procedures provided by the Internal Revenue Code when setting off El Paso's deficiency against its refunds. El Paso contended that this failure barred the IRS from collecting unpaid taxes from El Paso. The court concluded that it had jurisdiction over the suit where it was unwilling to apply the variance doctrine to deprive the taxpayer from asserting federal court jurisdiction over the suit for refund. On the merits, the court held that, where the IRS and a taxpayer enter into a closing agreement, which sets out the liabilities and overpayments of the taxpayer, the IRS could comply with the mitigation provisions of the Code by "assessing and collecting" any net deficiency from the years covered by the closing agreement, or by "refunding or crediting" any net overpayment for those years. This case involved "refunding" an overpayment and the Government refunded El Paso's net overpayment within one year of the execution of the Closing Agreement. The "refunding" thus occurred within the applicable statutory period of limitations as per the mitigation provisions. The IRS acted within its authority in applying El Paso's deficiencies to offset its overpayment. Accordingly, the court affirmed the judgment of the district court. View "El Paso CGP Co., et al. v. United States" on Justia Law

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BNSF filed suit seeking refunds of certain taxes that it, and its predecessor companies, paid under the Railroad Retirement Tax Act (RRTA), 26 U.S.C. 3201 et seq. The court concluded that, at least as applied to Non-Qualified Stock Options (NQSOs), the term "compensation", as used and defined by the RRTA, was inherently ambiguous; the IRS's definition was reasonable as applied to the NQSOs; although RRTA "compensation" may exclude certain in-kind benefits such as free rail passes that would otherwise be compensation under section 3121, the court concluded that NQSOs were properly included as "compensation" under the RRTA as interpreted by Treasury Regulation 31.3231(e)-1; the court's conclusion found firm support in the purpose, structure, and legislative history of the RRTA; and therefore, NQSOs were properly taxed as compensation under the RRTA. The court also concluded that, although the informal claims that BNSF filed for the employee tax paid on moving-expense benefits in 1996 and 1997 may satisfy the informal clams doctrine, it was undisputed that BNSF failed to perfect those claims prior to filing the present suit. Accordingly, BNSF's refund claims for those years must be dismissed. The court further concluded that a more reasonable interpretation of section 3231(e)(1)(iii) permitted exclusion of payments to employees for traveling expenses and bona fide and reasonable expenses related to travel, an interpretation harmonizing section 3231(e)(1)(iii) and section 3231(e)(5) as required by the specific-general canon and the rule against superfluities. Therefore, the court reversed and remanded for further proceedings. View "BNSF Railway Co. v. United States" on Justia Law

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The United States appealed the district court's holding in a Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. 6221-6234, proceeding that valuation misstatement and substantial understatement tax penalties were inapplicable to NPR. The court concluded that, in this partnership-level proceeding, (1) valuation misstatement penalties under section 6662(e) and (h) were applicable; (2) a substantial underpayment penalty under section 6662(d) was applicable because there was no substantial authority for the tax treatment of the transactions at issue; (3) NPR failed to carry its burden of establishing a reasonable-cause defense under section 6664; and (4) the Taxpayers' respective, individual reasonable-cause defenses under section 6664 were partner-level defenses that the district court did not have jurisdiction to consider. Accordingly, the court affirmed the district court's judgment regarding the finality of the notice of a Final Partnership Administrative Adjustment (FPAA); reversed regarding the valuation misstatement and substantial underpayment penalties; reversed regarding NPR's reasonable-cause defense; and vacated regarding Taxpayers' reasonable-cause defenses. View "NPR Investments, L.L.C. v. United States" on Justia Law

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Petitioners appealed the Tax Court's judgments upholding in part the deficiency asserted by the Commissioner related to research and development tax credits claimed by Farouk Systems, a company which petitioners were investors. The court concluded that the Tax Court did not abuse its discretion by limiting petitioners to the introduction of dozens of sample records of its laboratory tests as opposed to the over 4,500 pages that petitioners sought to admit where introduction of all the records would have resulted in needless delay, wasted time, and unnecessary cumulative evidence, which substantially outweighed the minimal probative value of the additional records; the court rejected petitioners' argument that the Tax Court's conclusion that they had not proven their case amounted to acceptance of a reversal of an unrecorded concession that the Commissioner would not "challenge the sufficiency of available documentary substantiation;" petitioners' argument that the Tax Court imposed an inappropriate "standard of exactitude" that required them to produce specific documentation was unsupported by the record; the Tax Court did not err in refusing to estimate the amount of credit due petitioners for the qualified services performed; the Tax Court's implicit inclusion that petitioners had not proven that Defendant Shami engaged in direct supervision was not clearly erroneous; the Tax Court did not clearly err in finding that petitioners had not proven whether Defendants Shami and McCall had engaged in qualified research and, if so, how much of their time was spent on such activities; petitioners waived their argument alleging that the Tax Court's findings was clearly erroneous because it ignored the fact that Shami was credited as an inventor on certain patents; and the Tax Court's failure to include the supply costs as proper qualified research expenses when calculating each petitioner's deficiency was clearly erroneous. Accordingly, the court affirmed in part, vacated in part, and remanded. View "Shami, et al. v. CIR" on Justia Law

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This tax refund suit is one among several arising from a series of limited partnerships managed by AMCOR in the 1980s. Taxpayers asserted that the IRS erroneously assessed additional taxes and interest against them in connection with their investments in various partnerships in the 1980s and sought refunds of the federal income taxes and penalty interest paid. The court held that the district court lacked jurisdiction over the statute of limitations claims. Concluding that the district court did have jurisdiction over the penalty claims, the court held that, under Weiner v. United States, the assessment penalty interest against taxpayers was erroneous as a matter of law. Accordingly, the court reversed the district court's grant of summary judgment for the government and rendered judgment for taxpayers on this issue. View "Irvine, et al. v. United States" on Justia Law

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Petitioner challenged the IRS's determination that the gross income petitioners reported in 2003 and 2004 based on their ownership of a controlled foreign corporation should have been taxed at the rate of petitioners' ordinary income rather than the lower tax rate they had claimed. At issue was whether amounts included in petitioners' gross income for 2003 and 2004 pursuant to 26 U.S.C. 951(a)(1)(B) and 956 (collectively, "section 951 inclusions") constituted qualified dividend income under 26 U.S.C. 1(h)(11). The court concluded that section 951 inclusions did not constitute actual dividends because actual dividends required a distribution by a corporation and receipt by a shareholder and these section 951 inclusions involved no distribution or change in ownership; Congress clearly did not intend to deem as dividends the section 951 inclusions at issue here; and petitioners' reliance on other non-binding sources were unavailing. Accordingly, the court affirmed the judgment of the tax court. View "Rodriguez, et al. v. Commissioner of Internal Revenue" on Justia Law

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This appeal arose from eleven notices of final partnership administrative adjustment (FPAAs) issued by the IRS with respect to three Limited Liability Companies (LLCs) treated as partnerships for tax purposes. The IRS claimed that the partnerships' transactions provided one partner with an illegal tax shelter to avoid taxes on his unrelated personal capital gain of the same approximate amount. The court affirmed the district court's determinations that (1) the FOCus transactions lacked economic substance and must be disregarded for tax purposes; (2) the negligence penalty was applicable and the partnerships were not entitled to the reasonable cause defense; and (3) the valuation misstatement penalty was inapplicable. The court vacated and rendered judgment for plaintiffs as to the remaining claims addressing the FPAAs premised on the government's alternative theory under Treasury Regulation 1.701-2 and the district court's approval of the alternative substantial understatement penalty. View "Nevada Partners Fund, et al. v. United States" on Justia Law