Justia Tax Law Opinion Summaries

The Tax Court upheld the IRS’ disallowance of losses claimed by various LLCs that had been created by a tax attorney as tax shelters and a 40 percent penalty for a “gross valuation misstatement,” 26 U.S.C. 6662(a). An LLC is generally treated as a partnership for tax purposes, so that its income and losses are deemed to flow through to the owners and are taxed to them rather than to the business. How much income or loss should be recognized on the owners’ tax returns is now determined by an audit of the business. The LLCs at issue were formed to reduce taxes by transferring the losses of a bankrupt Brazilian electronics retailer to create what is called a distressed asset/debt (DAD) tax shelter, based on a tax loophole closed by the American Jobs Creation Act of 2004, 26 U.S.C. 704(c) the year after creation of the tax shelters at issue. The Seventh Circuit affirmed, characterizing the LLCs as entities without economic substance, not recognized for federal tax law purposes. View "Superior Trading, LLC v. Comm'r of Internal Revenue" on Justia Law

The Tax Court found that in 2003 Rogers and his wife failed without justification to report $984,655 of taxable income attributable to income of PPI, an S corporation wholly owned by Rogers, and to a distribution that he had received from PPI. The Seventh Circuit affirmed, rejecting arguments that the disputed income had been held in trust for third parties and was not taxable to Rogers. View "Rogers v. Comm'r of Internal Revenue" on Justia Law

During the 1970s and 1980s, American Agri‐Corp organized several limited partnerships, for which the company served as general partner. American solicited high‐income individuals to serve as limited partners, investing in supposed agricultural ventures. According to the IRS, the actual purpose was to shelter the income of limited partners from taxation. Plaintiffs were each limited partners (or spouses) in at least one partnership that was audited by the IRS during the mid‐1980s. Several years later, the IRS concluded that the partnerships were, essentially, tax‐avoidance schemes .In 1990 and 1991, the IRS issued Final Partnership Administrative Adjusts for the partnerships and disallowed several listed farming expenses and other deductions for the 1984 or 1985 tax years. The Tax Court consolidated cases, held that the IRS action was not time‐barred, and determined that the partnerships had engaged in “transactions which lacked economic substance” that resulted in a substantial distortion of income and expense. The district court held that it lacked subject‐matter jurisdiction over the taxpayers’ claims that the assessments were untimely and improperly included penalty interest. The Seventh Circuit affirmed. The determinations at issue are attributable to partnership items over which courts lack subject‐matter jurisdiction. View "Acute Care Specialists II v. United States" on Justia Law

In 2009, a political blog and a Chicago television station began reporting that Illinois State Rep. Froehlich offered his constituents reductions in county property taxes in exchange for political favors. The reports highlighted Satkar Hospitality, reporting that it and its owners donated hotel rooms worth thousands of dollars to Froehlich’s campaign. Satkar Hospitality and Capra appealed their tax assessments for 2007 and 2008 and won reductions, but after the publicity about Rep. Froehlich, both were called back before the Board of Review for new hearings. They claim that in these second hearings, the Board inquired not into the value of their properties but into their relationships with Rep. Froehlich. The Board rescinded the reductions. Satkar and Capra sued the Board and individual members under 42 U.S.C. 1983. The district courts concluded that the individual defendants were entitled to absolute quasi‐judicial immunity and the Board itself is not. The Seventh Circuit affirmed, but also held that the damages claims against the Board cannot proceed. They are not cognizable in federal courts, which must abstain in suits for damages under 42 U.S.C. § 1983 challenging state and local tax collection, at least if an adequate state remedy is available. View "Satkar Hospitality, Inc. v. Rogers" on Justia Law

Simon is a CPA, a professor of accounting, and an entrepreneur “whose business dealings require a flowchart to unravel” and included managing three foreign companies. For tax years 2003 through 2006, the Simon family received approximately $1.8 million from those companies and spent approximately $1.7 million. Simon paid just $328 in income taxes for 2005, and claimed refunds for the other years, while pleading poverty to financial aid programs in order to gain need‐based scholarships for his children at private schools. Charged with filing false tax returns, 26 U.S.C. 7206(1) and 18 U.S.C. 2; failing to file reports related to foreign bank accounts, 31 U.S.C. 5314, 5322 and 18 U.S.C. 2; mail fraud, 18 U.S.C. 1341; and financial aid fraud, 20 U.S.C. 1097 and 18 U.S.C. 2, Simon sought to demonstrate that money received from the entities was loaned to him and was not taxable or constituted partnership distributions, not taxable because they did not exceed his basis in the partnership. The Seventh Circuit affirmed Simon’s convictions, rejecting challenges to evidentiary rulings and jury instructions. View "United States v. Simon" on Justia Law

In 2008, the taxpayers filed petitions for redetermination based on IRS notices of deficiency. The cases were consolidated for trial. With respect to Seven W, a calendar-year taxpayer, the Tax Court rejected a deficiency for calendar year 2000, but affirmed deficiencies for the years 2001 through 2003. With respect to Highland, a fiscal-year taxpayer, the court affirmed deficiencies for the fiscal years ending on April 30, 2003, and April 30, 2004. Although the opinions correctly identified the taxpayer with its respective tax liability, the decisions, entered in 2011, incorrectly stated that Seven W was responsible for deficiencies in fiscal years ending in April 2003, and April 2004, and that Highland was responsible for deficiencies for calendar years 2001 through 2003. The Commissioner discovered the error and sought to vacate the decisions. The Taxpayers did not object to correcting the errors, but did object to vacatur of the original decisions. The Tax Court vacated its decisions and entered new decisions correctly setting forth the respective deficiencies of Seven W and Highland. The Seventh Circuit vacated, with instructions to reinstate and correct the original decisions. Absent fraud that infected the Tax Court’s decision, the Tax Court cannot vacate a decision that has become final. View "Seven W. Enters., Inc. v. Comm'r of Internal Revenue" on Justia Law

Gray filed returns for tax years 2001 through 2004 after the IRS notified her in 2006 that it planned to assess her tax liability on its own. The IRS accepted Gray’s calculations, but imposed penalties for late filing and payment, 26 U.S.C. 6651. When Gray did not pay, the IRS filed liens. Gray timely requested a Collections Due Process hearing, 26 U.S.C. 6330, at which she unsuccessfully argued that penalties, liens, and levies should be eliminated. The IRS then mailed Gray “notices of determination” approving liens and levies. Gray sought review in Tax Court, waiting more than 30 days to file. The court concluded that it lacked jurisdiction because Gray’s petitions were untimely. The Seventh Circuit affirmed. The statute creates a 30-day time limit for appealing CDP determinations, 26 U.S.C. 6330(d)(1); no longer period applied to Gray’s cases. Gray then claimed that IRS employees engaged in wide-ranging wrongdoing in dealing with her and sought damages for unauthorized tax collection, 26 U.S.C. 7433. More than six months later, after the IRS moved to dismiss for failure to exhaust administrative remedies, Gray filed an administrative claim. The district court dismissed. The Seventh Circuit affirmed, stating that the exhaustion requirement is not actually jurisdictional, but is still mandatory. View "Gray v. United States" on Justia Law

Gray filed returns for tax years 2001 through 2004 after the IRS notified her in 2006 that it planned to assess her tax liability on its own. The IRS accepted Gray’s calculations, but imposed statutory penalties for late filing and late payment, 26 U.S.C. 6651. When Gray did not pay the taxes or penalties, the IRS filed liens. Gray timely requested a Collections Due Process hearing, 26 U.S.C. 6330, at which she unsuccessfully argued that her statutory penalties should be eliminated and the liens and levies withdrawn. After the hearing, the IRS mailed Gray “notices of determination” approving liens and levies to collect the delinquent taxes. Gray sought review in Tax Court, but waited more than 30 days to file her petitions. The court concluded that it lacked jurisdiction because Gray’s petitions were untimely. The Seventh Circuit affirmed, stating that the statute explicitly creates a 30-day time limit for appealing CDP determinations, 26 U.S.C. 6330(d)(1); no longer time limit applied to Gray’s cases. View "Gray v. Comm'r Internal Revenue" on Justia Law

Ryan failed to pay federal income taxes 2006-2010 and owed $136,898.93. In 2011, the IRS recorded a tax lien, 26 U.S.C. 6326. Ryan filed a voluntary Chapter 13 bankruptcy petition, 11 U.S.C. 1301. He had personal possessions worth $1,625. He admitted to the tax liabilities, and alleged that his residence had been sold for delinquent real estate taxes and that he did not own a bank account, vehicle, or retirement account. In an adversary proceeding, he alleged that the secured claim for 2009 taxes was limited $1,625 and that the remaining claim was unsecured, 11 U.S.C. 506(a), and void, 11 U.S.C. 506(d). The bankruptcy court held that section 506(d), as interpreted by the Supreme Court, did not allow Ryan to void, or “strip down” the lien. The Seventh Circuit affirmed. Section 506(d) provides: To the extent that a lien secures a claim that is not an allowed secured claim, such lien is void, unless such claim was disallowed only under section 502(b)(5) or 502(e) or such claim is not an allowed secured claim due only to failure to file a proof of such claim. “Allowed secured claim” in 506(d) is not defined by 506(a), but means a claim that is allowed under 502 and secured by a lien enforceable under state law. View "Ryan v. United States" on Justia Law

The 1987 Public Utilities Act, 220 ILCS 5/8-403.1, was intended to encourage development of power plants that convert solid waste to electricity. Local electric utilities were required to enter into 10-year agreements to purchase power from such plants designated as “qualified” by the Illinois Commerce Commission, at a rate exceeding that established by federal law. The state compensated electric utilities with a tax credit. A qualified facility was obliged to reimburse the state for tax credits its customers had claimed after it had repaid all of its capital costs for development and implementation. Many qualified facilities failed before they repaid their capital costs, so that Illinois never got its tax credit money back. The Act was amended in 2006, to establish a moratorium on new Qualified Facilities, provide additional grounds for disqualifying facilities from the subsidy, and expand the conditions that trigger a facility’s liability to repay electric utilities’ tax credits. The district court held that the amendment cannot be applied retroactively. The Seventh Circuit affirmed. The amendment does not clearly indicate that the new repayment conditions apply to monies received prior to the amendment and must be construed prospectively. View "Illinois v. Chiplease, Inc." on Justia Law