Justia Tax Law Opinion Summaries

In 2008, the Eastern District of Michigan ranked 79th of 90 judicial districts in successful completion of Chapter 13 bankruptcy cases. To improve the situation, the judges began entering orders in Chapter 13 plans that required the IRS to send tax refunds directly to the Chapter 13 trustees, not to the individuals as the Internal Revenue Code contemplates. 26 U.S.C. 6402(a). Chapter 13 plans repay creditors over three to five years, requiring the IRS to track debtors’ returns during several tax cycles. The burden became unmanageable when there were 4,966 affected returns in April 2009. The IRS obtained a declaratory judgment preventing the trustees from enforcing existing refund redirection provisions and a writ of mandamus prohibiting the bankruptcy court from including these provisions in future Chapter 13 plans. The Sixth Circuit remanded with instructions to dismiss, finding that the court lacked jurisdiction. The government sued the wrong parties, a group of bankruptcy trustees, but the harm it suffered flows from the bankruptcy court's orders. A judgment against the trustees will not eliminate the problem.

Taxpayer took business and individual tax deductions for the cost of "Loss of Income" insurance policies. The policies were back-dated, had a high premium to coverage ratio, were described as tax-savings products, and allowed taxpayer access to and control over the funds. A significant part of the premium was invested for later distribution to the policy holder. He was convicted of: subscribing a false tax return, 26 U.S.C. 7206(1); attempting to evade taxes, 26 U.S.C. 7201; and conspiracy to defraud the government, 18 U.S.C. 371. The Sixth Circuit affirmed, holding that the government presented sufficient evidence of the crimes. The court rejected a challenge to prior bad acts evidence and an argument that the government was required by the nature of the charges to forgo charging him under the general crime of conspiracy to defraud the U.S. The district court properly ordered payment of restitution for the personal income taxes of his co-conspirator.

From 2005 to 2008, debtor, the owner of Waffle House Ffranchises, periodically failed to make all federal income tax withholding, social security, and unemployment payments due to the IRS and to timely file returns. The IRS assessed penalties in excess of $1.5 million; debtor made payments of $637,000 toward the penalty. In 2009 a chapter 11 reorganization plan was confirmed; the business continued to operate until its assets were sold. In 2010 debtor sued the IRS under 11 U.S.C. 548, 550 and the Tennessee Uniform Fraudulent Transfer Act, Tenn. Code Ann. 66-3-301, asserting that the penalty payments provided no value to debtor and were made at a time when the debtor was incurring debt beyond its ability to pay. The bankruptcy court dismissed. The Sixth Circuit affirmed, noting that the payments resulted in a dollar-for-dollar reduction of debtor's undisputed tax debt. Payment of a fine or penalty is not an avoidable transfer, regardless of whether the penalty is a noncompensatory penalty.

Defendant, convicted under 18 U.S.C. 371 of conspiracy to defraud the United States while serving as in-house general counsel to the company involving the company's filing of false tax returns with the IRS. He was sentenced to 41 months of imprisonment, followed by three years of supervised release, and ordered to pay restitution to the IRS. The Sixth Circuit affirmed. The jury instructions adequately addressed the elements of conspiracy. There was no need for mention of the attorney-client privilege or of an attorney's potential obligation to report illegal activity. The government’s theory of liability was not dependent on whether defendant had an affirmative duty to inform, yet failed to do so; conviction did not turn on whether defendant's actions were governed by the attorney-client privilege. There was sufficient evidence to support the conviction.

The Chapter 7 debtors' federal tax return listed: withholding of $6,777; total tax liability of $2,934, a non-refundable child tax credit of $2,903, an additional child tax credit of $1,097, and a total federal tax refund of $8,542. The credit allows some taxpayers to claim a tax credit of $1,000 for each qualifying child. If the taxpayers have tax liability, the non-refundable portion is applied to satisfy the tax liability. If the taxpayer qualifies, a portion of the refundable amount of the credit, not used to offset tax liability, is sent as an income tax refund. The refundable portion, unlike the non-refundable portion, is treated as an overpayment. The bankruptcy court sustained the trustee's objection that the $2,903 credit was not exempt. The Sixth Circuit affirmed. Under 26 U.S.C. 24(a) and (d), the non-refundable portion of the credit is not property of the estate cannot be exempted as a payment under Ohio Rev. Code 2329.66(A)(9)(g). The entire tax refund of $8,542 is property of the estate from which the debtors may exempt $1,097 as the refundable portion of the credit.

During 10 years in a 12-year period the defendant, an Ohio physician, filed federal income tax returns that showed she owed taxes â but she failed to pay them. The United States brought an action for judgment and to foreclose on its tax liens on defendant's real property. Defendant argued that her Chapter 7 bankruptcy petition discharged her tax liabilities for some of the years preceding the filing. The district court disagreed and entered a $319,698 judgment in favor of the United States, finding that she had willfully attempted to evade paying taxes for those years, preventing discharge of the obligations through her bankruptcy filing. The Sixth Circuit reversed, holding that the government did not establish willfulness as required by 11 U.S.C. 523(a). There was no evidence that the defendant lived lavishly; the district court incorrectly applied the test applicable only to student loans and made assumptions about her ability to earn more money and her husband's failure to contribute.

The IRS auctioned the taxpayer's property for back taxes. Letters sent by the taxpayer, in an attempt to resolve or appeal the decision, were incorrectly addressed. The district court dismissed a suit for damages. The Sixth Circuit affirmed, but held that failure to exhaust administrative remedies (26 U.S.C. 7433)did not deprive the court of jurisdiction. What is mandatory is not necessarily jurisdictional; the context shows that the requirement is a limit on relief.