Justia Tax Law Opinion Summaries

Determination of tax year for theft loss depends on multiple factors. The Adkinses invested in securities through a company that was actually operating a “pump and dump” scheme. At their 2000 peak, the Adkinses’ investments were valued at $3.6 million. In 2001, the value of their investments declined to $9,849. In 2002, the Adkinses, discovering the fraud, submitted a claim to the National Association of Securities Dealers. Their hearing was postponed pending federal indictments, which were handed down in 2004. While the charges were pending, in 2006, the Adkinses claimed a tax-year 2004 deduction for a $2,118,725 theft loss under 26 U.S.C. 165, with excess refund portions carried back over 2001– 2003. The IRS disallowed the Adkinses’ refund claims for all tax years but 2002. The Claims Court concluded that the Adkinses agreed, citing 26 C.F.R. 1.165-1(d)(3) because the Adkins had not shown that, in 2004, they could have “ascertained with reasonable certainty that they would not receive reimbursement of their losses.” The Federal Circuit vacated. Unless the plaintiff has chosen abandonment (or settlement or adjudication) as the factual predicate for their loss date, the existence of an ongoing lawsuit or arbitration is only one factor to be considered among many in determining the tax year for the loss. View "Adkins v. United States" on Justia Law

8x8 provides telephone services via Voice over Internet Protocol (VoIP). Customers use a digital terminal adapter, containing 8x8’s proprietary firmware and software. Customers’ calls are switched to traditional lines and circuits when necessary; 8x8 did not pay Federal Communications Excise Tax (FCET) to the traditional carriers, based on an “exemption certificate,” (I.R.C. 4253). Consistent with its subscription plan, 8x8 collected FCET from its customers and remitted FCET to the IRS. In 2005, courts held that section 4251 did not permit the IRS to tax telephone services that billed at a fixed per-minute, non-distance-sensitive rate. The IRS ceased collecting FCET on “amounts paid for time-only service,” stated that VoIP services were non-taxable, and established a process seeking a refund of FCET that had been exacted on nontaxable services, stating stated that a “collector” can request a refund if the collector either “establishes that it repaid the amount of the tax to the person from whom the tax was collected”; or “obtains the written consent of such person to the allowance of such credit or refund.” The IRS denied 8x8’s refund claim. The Claims Court concluded that 8x8 lacked standing and granted the government summary judgment. The Federal Circuit affirmed; 8x8 did not bear the economic burden of FCET, but sought to recover costs borne by its customers, contrary to the Code. The court rejected an argument that FCET was “treated as paid” during the transfer of services to traditional carriers. View "8x8, Inc. v. United States" on Justia Law

Non-Russian investors could not invest directly in Russian sovereign debt but could invest in derivative credit-linked notes (CLNs), sold by banks. When Russia defaulted on its sovereign debt in 1998, CLNs lost nearly all of their value. The Russian Central Bank imposed currency exchange limitations that prevented the ruble from being freely traded. Tiger's hedge funds had purchased CLNs for more than $230 million. After the collapse, Tiger needed cash to pay off investors but was unable to sell its CLNs. Zimmerman believed that she could make money by obtaining devalued Russian debt in anticipation of a recovery of the ruble. Bracebridge, in which Zimmerman was a partner, established RRF, a hedge fund. FFIP, another fund managed by Bracebridge contributed RRF's first assets. Tiger transferred CLNs to RRF in exchange for an RRF ownership interest. Tiger sold its RRF partnership shares to FFIP for a discount, although the value of the shares had increased. RRF filed its 2000 tax return, allocating a loss to FFIP. FFIP’s 2001 losses flowed through to Zimmerman. In 2005, the IRS audited the parties, disallowed the loss RRF claimed for the sale of the Tiger CLNs, and imposed a 40% penalty. RRF and Bracebridge sought readjustment of partnership items under the Tax Equity and Fiscal Responsibility Act, I.R.C. 6221–6233. The Claims Court held that the limitations period for assessing taxes against RRF’s indirect partners had expired as to some, but not all, indirect partners and upheld the disallowance of the losses and imposition of penalties. The Federal Circuit affirmed, holding that the losses claimed on Zimmerman’s 2001 tax return are “attributable to” the loss claimed in RRF’s 2000 tax return, the limitations period for which was suspended by the 2005 Final Partnership Administrative Adjustment. Tiger’s contributions to RRF were not valid partnership contributions. View "Russian Recovery Fund Limited v. United States" on Justia Law

In 2006, the IRS audited the Sandovals’ 2003-2005 tax returns. The Sandovals signed forms waiving their right to a notice of deficiency for the years 2003 and 2004, and consenting to extend the limitations period for the 2003 fiscal year through December 31, 2008. The Sandovals hired representation. On reconsideration, the IRS assessed deficiencies for 2003 and 2004 at $60,274 and $87,566. IRS agents continued to confer with the Sandovals’ representative to prepare amended returns. The Sandovals filed amended returns in 2008 for amounts they considered “substantially correct,” and requested abatements. They submitted checks and a letter from their representative stating that the checks should be applied to the Sandovals’ liability for 2003 and 2004, and that “any overpayment” should be contributed to other years’ outstanding amounts due. The IRS granted substantial abatements, such that the checks satisfied the Sandovals’ tax deficiencies from 2003 and 2004. In 2010, the Sandovals filed new amended returns for 2003 and 2004 seeking a full refund of funds remitted plus amounts applied as overpayments from other years, approximately $101,000. The IRS denied the claims. The Federal Circuit affirmed summary judgment for the IRS, rejecting arguments that the Sandovals withdrew consent to assessment without notice of deficiency and never received subsequent notice; the 2008 funds were applied after the three-year limitations period for assessment; or the 2008 funds were given as refundable deposits, not as tax payments. View "Sandoval-Lua v. United States" on Justia Law

In 1999-2001, Diversified sold tax avoidance strategies to 192 clients: Option Partnership Strategy and the Financial Derivatives Investment Strategy. Each involved transactions, exercised by an individual client, to yield an artificial tax loss or deduction. Each client contributed the initial investment and paid a fee. Diversified did not register the services as tax shelters under 26 U.S.C. 61111. In 2002, the IRS began an audit of Diversified, and, in 2013, issued notices assessing penalties of $24,868,451 for failure to register OPS and $17,241,032 for failure to register FDIS. According to the IRS, the Strategies qualified as tax shelters because the computed tax shelter ratio was greater than 2:1 and each was a “substantial investment” under section 6111(c)(4). Diversified paid the assessments with respect to two clients, then unsuccessfully sought a refund. The Claims Court held, and the Federal Circuit affirmed, that it lacked jurisdiction because Diversified did not comply with the full payment rule. The courts rejected an argument that the penalties were divisible. Section 6707(a) provides that “if a person . . . fails to register such tax shelter . . . such person shall pay a penalty with respect to such registration.” Liability for a section 6707 penalty arises from the single act of failing to register. View "Diversified Group, Inc. v. United States" on Justia Law

The Internal Revenue Service denied Wells Fargo’s claims for refunds based on interest-netting under 26 U.S.C. 6621(d) between interest on tax underpayments and interest on tax overpayments. Section 6621(d) reads: To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period. Absent an interest-netting provision , a taxpayer might make equivalent underpayments and overpayments yet owe the IRS interest because corporate taxpayers pay underpayment interest at a higher rate than the IRS pays overpayment interest. The Claims Court granted Wells Fargo partial summary judgment, finding that it satisfied the “same taxpayer” requirement, although the current embodiment of the company is the result of seven mergers. The companies involved in these mergers made tax underpayments and overpayments. The Federal Circuit identified three merger “situations” and concluded that two qualified for interest netting and one did not. The situations involved consideration of the whether the entities had separate identities at the time of the payments at issue and the amount of change in the entity’s identity as a result of the merger. View "Wells Fargo & Co. v. United States" on Justia Law

From 1997-2001, Nacchio served as Qwest's CEO. Based on 2001 stock trades, Nacchio reported a net gain of $44,632,464.38 on his return and paid $17,974,832 in taxes. In 2007, Nacchio was convicted of 19 counts of insider trading, 15 U.S.C. 78j, 78ff. Following a remand, the court resentenced Nacchio to serve 70 months in prison, pay a 19 million dollar fine, and forfeit the net proceeds, $44,632,464.38. Nacchio settled a concurrent SEC action, agreeing to disgorge $44,632,464. Nacchio’s criminal forfeiture satisfied his disgorgement obligation. The Justice Department notified participants in private securities class action litigation or SEC civil litigation concerning Qwest stock that they were eligible to receive a remission from Nacchio’s forfeiture. Nacchio sought an income tax credit of $17,974,832 for taxes paid on his trading profits. The IRS argued that his forfeiture was a nondeductible penalty or fine and that he was estopped from seeking tax relief because of his conviction. The Claims Court held that Nacchio could deduct his forfeiture payment under Internal Revenue Code 165, but not under I.R.C. 162 and was not collaterally estopped from pursuing special relief under I.R.C. 1341. The Federal Circuit reversed as to section 165;Nacchio failed to establish that his forfeiture was not a “fine or similar penalty.” Because establishing deductibility under another section of the code is a prerequisite to pursuing relief under section 1341, Nacchio cannot pursue a deduction under that section. View "Nacchio v. United States" on Justia Law

FICA tax includes social security tax and hospital insurance tax, 26 U.S.C. 3101(a)–(b). Balestra was a United Airlines pilot from 1979 until his 2004 retirement. He was eligible for life-long retirement benefits through a nonqualified deferred compensation plan that was a nonaccount balance plan, starting the day of his retirement. United withheld $4,199.22 in hospital insurance tax from Balestra in 2004 based on statutory tax rate applied to the present value of the deferred compensation that Balestra was to receive under the plan. United’s obligation to pay the benefits was eventually discharged in bankruptcy. United ceased paying Balestra’s benefits in 2010. Balestra actually received only $63,032.09 in benefits, although he paid hospital tax based on $289,601.18 in benefits, and sought a refund of $3,285.26—the amount of tax paid on compensation he will never receive. The IRS and Claims Court rejected the claim. The Federal Circuit affirmed. The term “amount deferred” is not defined by statute, but a Treasury regulation defines it in terms of deferred compensation’s “present value,” without consideration of an employer’s financial condition. While the regulation may seem unfair in a specific instance, in balancing the desire for simplicity against the ideal of ultimate comprehensiveness, the agency has a reasonable degree of discretion. View "Balestra v. United States" on Justia Law