Articles Posted in U.S. 6th Circuit Court of Appeals

by
In 1993, Dr. Dargie was a student at the UT College of Medicine. In 1994, Middle Tennessee Medical Center agreed to pay Dargie’s tuition, fees, and other reasonable expenses for attending UT. After graduation and completion of his residency, Dargie was required to repay MTMC’s grant by either working as a doctor in the medically underserved community of Murfreesboro for four years or repaying two times the uncredited amount of all conditional award payments he received. MTMC paid UT $73,000 on Dargie’s behalf. After completing his medical training in 2001, Dargie chose to practice in Germantown, near Memphis. In 2002, Dargie repaid $121,440.02. In 2005, the Dargies filed an amended tax return for 2002, claiming they had “inadvertently omitted an ordinary and necessary business expense” on their Schedule C for the $121,440 repayment. The IRS disallowed the deduction under I.R.C. 162. The Dargies sued. The district court granted summary judgment to the government, finding that the repayment was a personal expense and, regardless, no deduction would be allowed under I.R.C. 265(a)(1) because the amount was allocable to income the Dargies had received tax-free. The Sixth Circuit affirmed, finding the repayment a personal expense. View "Dargie v. United States" on Justia Law

by
In 2011 Rizzo filed a voluntary petition for personal Chapter 7 bankruptcy and received a general discharge. Despite his discharge, the Michigan Department of Treasury sent collection letters demanding that he pay $72,286.39 in delinquent Single Business Tax that had been assessed against a company, for which Rizzo had been an officer. Rizzo filed an adversary action, contending that his personal liability for the unpaid SBT had been discharged in bankruptcy. Treasury claimed that liability for the SBT deficiency is a nondischargeable “excise tax” debt under 11 U.S.C. 507(a)(8)(E). The bankruptcy court agreed and dismissed. The district court and Sixth Circuit affirmed, rejecting Rizzo’s argument that the debt was derivative, not primary, and therefore not an excise tax. Rizzo conceded that the unpaid SBT was an “excise tax” deficiency as to the company and did not dispute that he was personally liable for the company’s unpaid tax under state law. Michigan law simply confers derivative liability upon Rizzo for precisely the same excise tax deficiency that was assessed against the company. View "Rizzo v. MI Dep't of Treasury" on Justia Law

by
In 2009, Debtor had received an IRS Notice of Deficiency for tax year 2004, claiming additional taxes of $143,445.00, plus penalties of $28,689.00. Debtor filed a voluntary Chapter 7 petition in 2011. In 2011, Debtor received a Notice of Deficiency for tax years 2007 and 2008 claiming that $138,907.00 in additional taxes for 2007, plus penalties of $27,781.40, and an additional $109,648.00 in taxes for 2008, plus penalties of $21,929.60. Debtor challenged the notices. The Tax Court dismissed with respect to the notices for 2007-2008 because of the automatic stay. Post-petition, the Debtor received a $86,512.32 tax refund, based on his 2005 tax return. The Trustee claimed the refund, but Debtor returned the check to the IRS. The Trustee sought turnover of the refund; Debtor objected. The IRS tendered a check for $32,555.15 to Debtor, relating to 2005 taxes, which was received by the Trustee. Debtor sought a determination of tax liability pursuant to 11 U.S.C. 505(a)(1) and turnover of funds if the IRS’s claim was disallowed. The bankruptcy court held that the IRS’s claim of $226,142.85, pertaining to 2004 taxes, was nondischargeable and that the tax refund check for $86,512.32, which erroneously issued to the Debtor, was not property of the estate. The Sixth Circuit Bankruptcy Appellate Panel reversed as to priority and nondischargeability, because the lower court did not address the limitations period. View "In re: Winter" on Justia Law

by
Broz started a cellular telephone business by organizing a wholly owned S corporation, RFB, in 1991 and purchasing an FCC license to operate a cellular network in Northern Michigan. Broz expanded by organizing additional entities. Alpine and limited liability companies that are taxed as partnerships, were formed to hold and lease FCC licenses. Alpine never operated on-air networks. For the years at issue, Broz deducted: flow-through losses of Alpine on his personal income taxes, on the grounds that he had debt basis in, and was “at risk” with respect to, Alpine; interest, depreciation, startup costs, and other business expenses of the Alpine entities; and the amortization cost of the FCC licenses held by the Alpine entities. The IRS Commissioner determined a deficiency of $18 million in Broz’s income tax filings for the tax years at issue, finding that Broz had insufficient debt basis in Alpine o claim flow-through losses, that Broz was not at risk with respect to investments in the Alpine entities, that the Alpine entities were not entitled to interest, depreciation, startup expense, and other business-related deductions because they were not engaged in an active trade or business. The Tax Court and the Sixth Circuit affirmed. View "Broz v. Comm'r of Internal Revenue" on Justia Law

by
In 1990 Plummer, a recognized expert in horse-breeding and the tax consequences of related investments, created the Mare Lease Program to enable investors to participate in his horse-breeding business and take advantage of tax code provision classification of horse-breeding investments as farming expenses, with a five-year net operating loss carryback period instead of the typical two years, 26 U.S.C. 172(b)(1)(G). Plummer’s investors would lease a mare, which would be paired with a stallion, and investors could sell resulting foals, deducting the amount of the initial investment while realizing the gain from owning a thoroughbred foal. If they kept foals for at least two years, the sale qualified for the long-term capital gains tax rate, 26 U.S.C. 1231(b)(3)(A). Between 2001 and 2005, the Program generated more than $600 million. Law and accounting firms hired by defendants purportedly vetted the Program. Plummer and other defendants began funneling Program funds into an oil-and-gas lease scheme. It was later discovered that the Program’s assets were substantially overvalued or nonexistent. Investors sued under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1962(c), also alleging fraud and breach of contract. The district court granted summary judgment and awarded $49.4 million with prejudgment interest of $15.6 million. The Sixth Circuit affirmed, stating that there was no genuine dispute over any material facts. View "West Hills Farms, LLC v. ClassicStar Farms, Inc." on Justia Law

by
The Michigan State Real Estate Transfer Tax, MICH.COMP.LAWS 207.521, and the County Real Estate Transfer Tax, section 207.501, impose a tax when a deed or other instrument of conveyance is recorded during the transfer of real property. The tax is imposed upon “the person who is the seller or grantor.” State and county plaintiffs sought to recover transfer taxes for real property transfers recorded by Fannie Mae, a corporation chartered by Congress to “establish secondary market facilities for residential mortgages,” in order to “provide stability in the secondary market for residential mortgages,” and “promote access to mortgage credit throughout the Nation,” 12 U.S.C. 1716; Freddie Mac, also a corporation chartered by Congress for substantially the same purposes; and the Federal Housing Finance Agency, an independent federal agency, created under the Housing and Economic Recovery Act of 2008, 12 U.S.C. 4617, which placed Fannie and Freddie into conservatorships, 12 U.S.C. 4617(a)(2). When Congress created defendants, it expressly exempted them from “all” state and local taxes except for taxes on real property. The district court entered summary judgment in favor of the plaintiffs, reasoning that “transfer taxes are excise taxes, not taxes on real property. The Sixth Circuit reversed. View "Genesee Cty, v. Fed. Hous. Fin. Agency" on Justia Law

by
Kerman founded Kenmark. By 2000 its annual sales of eyeglass frames approached $35 million. Kerman’s personal net worth topped $12.5 million. Kerman was Kenmark’s sole owner until 2000, when Kerman sold 27 percent of his stock for $6.1 million to Kenmark’s employee stock ownership plan, realizing a taxable gain of $5.4 million. Kerman consulted his financial advisor and pursued a “Custom Adjustable Rate Debt Structure,” tax-saving strategy. A British company (not subject to U.S. tax law) borrowed foreign currency from a foreign bank; the U.S. taxpayer would receive some of the borrowed currency, would agree to be jointly liable for the entire loan, and would exchange his portion of the foreign currency for dollars. A currency exchange is taxable. The taxpayer would claim that the currency’s basis was the full loan amount, not the small amount of currency actually purchased. Because of the inflated basis, the taxpayer would claim a loss. The dollars would be deposited in the same foreign bank with the balance of the foreign currency and be used to pay off the loan. The IRS disallowed the deduction and imposed a penalty, 26 U.S.C. 6662(e), 6662(h). The tax court and Sixth Circuit affirmed, finding that the transaction lacked economic substance and Kerman lacked good faith to believe that it did. View "Kerman v. Comm'r of Internal Revenue" on Justia Law

by
Abraitis brought a challenge to the reasonableness of an IRS jeopardy determination, 26 U.S.C. 7429 (b). The district court dismissed for lack of jurisdiction and failure to state a claim. The Sixth Circuit affirmed, based on the statutory requirement that the taxpayer seek administrative review within 30 days of receiving the notice of jeopardy levy. The court rejected his argument that various bad-faith actions by the IRS excuse his neglect and permitted judicial review. The exhaustion requirement is not jurisdictional, but is mandatory. View "Abraitis v. United States" on Justia Law

by
Having secured extensions, the Stockers filed their 2003 tax return in October 2004. In March 2007, the IRS settled an audit of an entity in which the Stockers had lost money. Flintoff, their tax preparer, determined that the Stockers had overpaid 2003 taxes by $64,058 and prepared an amended return, required to be filed within three years of October 15, 2004, 26 U.S.C. 6511(a). Stocker claims that he mailed it at the post office on October 15, but was unable to get date-stamped receipts, because of Flintoff’s failure to give him customer copies of certified mail receipts. Although simultaneous mailings were timely received, the IRS claims that it received the return on October 25; its records reflect that the envelope was postmarked October 19, but it did not retain the envelope. The return-receipt card, to be completed by the certified mail recipient, was left blank and returned to Flintoff, who unsuccessfully requested reconsideration of the refund claim. The district court dismissed. The Sixth Circuit affirmed, holding that the Stockers could not establish the jurisdictional prerequisite of a timely-filed return under any method recognized in the Internal Revenue Code or precedent for determining the date of delivery of a federal tax return. View "Stocker v. United States" on Justia Law

by
SEW operated 113 franchise Waffle House restaurants when it filed its Chapter 11 petition in 2008. From January, 2005, to the Petition Date, SEW did not pay federal income tax withholding, social security (FICA), or unemployment (FUTA) taxes or timely file returns. During four years before the Petition Date, the IRS assessed penalties of more than $1,500,000. SEW subsequently made payments that were applied to its tax obligations and also made undesignated prepetition payments that were applied in partial satisfaction of the assessed penalties. SEW later sought recovery of prepetition tax penalty payments of $637,652.07 or an offset against the tax amounts still owed. SEW alleged that payment of these penalties provided no value to SEW; that SEW did not receive reasonably equivalent value in exchange for the Penalty Payments; that at the time that of the payments, SEW was insolvent; and cited 11 U.S.C. 548 and 544. The government argued that dollar-for-dollar reduction in SEW’s antecedent tax-penalty liabilities constituted reasonably equivalent value. SEW did not allege that the penalty obligations were themselves avoidable. The Bankruptcy court dismissed SEW’s adversary petition for failure to state a clam. The Bankruptcy Appellate Panel and Sixth Circuit affirmed. View "SE Waffles, LLC v. U.S. Dep't of Treasury" on Justia Law