Justia Tax Law Opinion Summaries

Fitzgerald Truck Parts & Sales, LLC built and sold highway tractors by installing old engines and transmissions from salvage yards into new tractor kits. The IRS assessed unpaid excise taxes, penalties, and interest totaling $268 million, arguing that Fitzgerald's sales were subject to a 12% excise tax under 26 U.S.C. §§ 4051(a)(1) and 4052(a)(1). Fitzgerald claimed an exemption under 26 U.S.C. § 4052(f)(1), which provides a safe harbor if the cost of repairs or modifications does not exceed 75% of the retail price of a comparable new tractor. Fitzgerald won before a jury, and the government appealed.The United States District Court for the Middle District of Tennessee ruled in favor of Fitzgerald, rejecting the government's arguments that Fitzgerald's operations did not qualify for the safe harbor and that the tractors were not taxable when new under 26 U.S.C. § 4052(f)(2). The government then appealed to the United States Court of Appeals for the Sixth Circuit.The Sixth Circuit agreed with Fitzgerald that § 4052(f)(1) poses a bright-line, 75% test without any further qualitative inquiry, meaning Fitzgerald's vehicles constructed with used engines and transmissions could qualify for the safe harbor. However, the court found that § 4052(f)(2) forecloses this exemption for tractors that never triggered the excise tax when they were new. The court noted that Fitzgerald had not met its burden of proving that the tractors were taxable when new, as evidence suggested that some vehicles were first sold in tax-exempt transactions to entities abroad or state or local governments.The Sixth Circuit reversed the district court's judgment and remanded the case for further proceedings to determine whether each refurbished tractor, when new, incurred the excise tax under § 4051. View "Fitzgerald Truck Parts & Sales LLC v. United States" on Justia Law

Lonnie Hubbard, a pharmacist, was convicted of operating an illegal "pill mill" and sentenced to 30 years in prison. The government confiscated his assets, including over $400,000 from his individual retirement account (IRA), as part of the criminal forfeiture. The IRS later claimed that this seizure constituted taxable income for Hubbard, resulting in a tax deficiency notice for over $180,000 in taxes and penalties.The United States Tax Court agreed with the IRS, ruling that the transfer of the IRA funds to the IRS was a taxable event for Hubbard. The court held that the funds qualified as Hubbard's income because they discharged an obligation he owed. Consequently, the court ordered Hubbard to pay the taxes and penalties.The United States Court of Appeals for the Sixth Circuit reviewed the case and reversed the Tax Court's decision. The Sixth Circuit held that the forfeiture order granted the IRS ownership of the IRA, meaning the IRS, not Hubbard, was the payee or distributee of the funds. The court concluded that the withdrawal of the IRA funds by the IRS did not constitute taxable income for Hubbard, as he no longer owned or controlled the IRA at the time of the withdrawal. The court emphasized that the tax code requires the payee or distributee of withdrawn IRA funds to pay the taxes, and in this case, the IRS was the payee or distributee. Therefore, Hubbard was not liable for the taxes on the forfeited IRA funds. The court reversed the Tax Court's decision and remanded the case for further proceedings consistent with its opinion. View "Hubbard v. Commissioner of Internal Revenue" on Justia Law

Owners, having relied on an external audit, did not “willfully” fail to pay trust fund taxes.Four investors bought Eagle Trim, which produced automobile interior-trim parts. Byrne (president) and Kus (CEO) were responsible for Eagle’s income tax returns, but Fuller, as controller, had wide discretion over financial activities. Eventually, Byrne signed Eagle's bankruptcy petition. Eagle liquidated. The IRS assessed against Byrne and Kus $855,668.35 in penalties under 26 U.S.C. 6672 for Eagle’s outstanding trust-fund tax (taxes withheld from employees’ wages) liability. Byrne paid $1,000 and then unsuccessfully sought a refund and an abatement of the penalty and of the entire assessment. Byrne filed suit. On remand, the district court found that Byrne and Kus willfully failed to pay and were liable under section 6672. The Sixth Circuit vacated. Byrne and Kus did not have actual knowledge that the taxes were not being paid until after a Forbearance Agreement was executed with a creditor. The issue of recklessness was a “close call,” but the men directed their independent accounting firm to instruct Fuller on how to timely deposit trust-fund taxes, added an assistant controller to help Fuller in his duties, created a new management spot to review Fuller’s financial management, and relied on a professional clean audit report. View "Byrne v. United States" on Justia Law

The Internal Revenue Service classified Ballard, a securities broker, as a non-filer in 2008 and investigated. Ballard lied about his income, hid money in family members’ bank accounts, and filed then dismissed several Chapter 13 bankruptcy petitions, attempting to avoid paying $848,798 in taxes arising from his income between 2000 and 2008. He eventually pled guilty to violating 26 U.S.C. 7212(a), which prohibits “corruptly . . . obstruct[ing] or imped[ing] . . . administration of [the tax laws].” Ballard urged the court to use the U.S.S.G. for obstruction of justice. The district court rejected Ballard’s argument that he never intended to evade paying his taxes but was merely delaying the payments and used the tax evasion guideline to calculate a higher offense level and an increase in the sentencing range from eight–14 months to 24–30 months. Ballard was sentenced to 18 months’ incarceration. The Sixth Circuit affirmed. What matters in the choice between guidelines sections is which section is more precisely tailored to reflect offense characteristics—like tax evasion and tax loss—and which section covers a more closely related group of crimes. What Ballard did, and what the government charged, was a lie to the tax collector about his earnings. View "United States v. Ballard" on Justia Law

Bratt filed for Chapter 13 bankruptcy, proposing to pay overdue taxes to Nashville, which held a $5,136 over-secured lien on Bratt’s real property. Under 11 U.S.C. 511(a), the interest rate for tax claims should “enable a creditor to receive the present value of the allowed amount of a tax claim” and be “determined under applicable nonbankruptcy law.” The Code does not allow assessment of post-petition penalties. Tennessee Code 67-5-2010 set an interest rate of 12% per year for overdue taxes, with a 6% per year penalty. A Tennessee bankruptcy court held that only the post-petition interest and not the penalty portion could be collected for over-secured claims in bankruptcy proceedings. In response, the Tennessee legislature added subsection (d): For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to this section constitutes the assessment of interest. Bratt argued that the amendment should not apply. Tennessee admitted that the 18% rate exceeded what was required to maintain the tax claim's present value. The bankruptcy court held that subsection (d) violated the Supremacy Clause. The Bankruptcy Appellate Panel affirmed that 12% was the appropriate interest rate, reasoning that subsection (d) is not a “nonbankruptcy law” and is not applicable for determining the interest rate under section 511(a). The Sixth Circuit affirmed, adopting the BAP’s reasoning. View "Tennessee v. Corrin" on Justia Law

After receiving notices of federal tax lien and of intent to levy, the taxpayers requested that the IRS hold a Collection Due Process hearing. The IRS took five months to process the request. At the hearing, the presiding agent refused to discuss multiple issues. The taxpayers were still dissatisfied after a second hearing before a different agent and sued the government for the agents’ alleged misbehavior under 26 U.S.C. 7433. They also requested a temporary restraining order against further tax-collection efforts. The district court dismissed, finding that the challenged activity did not fall within the scope of section 7433, and the Tax AntiInjunction Act, 26 U.S.C. 7431(a) precluded a restraining order. The Sixth Circuit affirmed. The government has not consented to being sued in this case, so the district court lacked jurisdiction. A person may sue the federal government for damages under 26 U.S.C. 7433 “[i]f, in connection with any collection of Federal tax with respect to [the] taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of” the tax code or any regulation promulgated thereunder. This suit falls outside this waiver of sovereign immunity because the challenged conduct did not occur in connection with tax collection. View "Agility Network Services, Inc. v. United States" on Justia Law

Tax attorneys advised the family to use a “domestic international sales corporation” (DISC) to transfer money from their family-owned company to Roth Individual Retirement Accounts. DISCs incentivize companies to export goods by deferring and lowering taxes on export income. An exporter avoids corporate income tax by paying the DISC “commissions” of up to 4% of gross receipts or 50% of net income from qualified exports. The DISC pays no tax on commission income up to $10,000,000, 26 U.S.C. 991, 995(b)(1)(E), and may hold onto the money indefinitely, though its shareholders must pay annual interest on their shares of deferred tax liability. Money and other assets may exit the DISC as dividends, taxable at the qualified dividend rate, which is lower than the corporate income rate that otherwise would apply to the export revenue. The IRS acknowledged that the family complied with the law, but reasoned that the effect of the transactions was to evade the Roth IRA contribution limits and applied the “substance-over-form doctrine” to recharacterize the transactions as dividends followed by excess Roth IRA contributions. The Tax Court affirmed. The Sixth Circuit reversed, stating: If the government can undo transactions that the terms of the Code expressly authorize, it’s fair to ask what the point of making these terms accessible to the taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. View "Summa Holdings, Inc. v. Commisioner of Internal Revenue" on Justia Law

Plaintiffs each owned real property in Van Buren County, Michigan in but failed to pay property taxes for 2011. In 2012, the properties became subject to forfeiture and foreclosure. In 2014, the circuit court issued a foreclosure judgment; title to the properties passed in fee simple absolute to the county. Months later, the county sold the properties at an auction. The minimum bid for each of the properties was calculated by totaling “[a]ll delinquent taxes, interest, penalties, and fees due on the property” plus the “expenses of administering the sale, including all preparations for the sale.” Wayside Church’s former property had a minimum bid of $16,750, but sold for $206,000. The minimum bid for the Stahl property was $25,000; the property sold for $68,750. The Hodgens property required a minimum bid of $5,900, but sold for $47,750. Plaintiffs sought return of the surplus funds, citing 42 U.S.C. 1983, and alleging that they had a cognizable property interest in their foreclosed properties and in the surplus proceeds generated by the sales, so that Defendants were required to pay just compensation under the Fifth Amendment. The Sixth Circuit vacated dismissal for failure to state a claim and remanded for dismissal for lack of subject matter jurisdiction. the district court erred in finding that the claims were not barred by the Tax Injunction Act, 28 U.S.C. 1341, and the doctrine of comity. View "Wayside Church v. Van Buren County" on Justia Law

Detroit Medical Center consists of several not-for-profit hospitals incorporated under Michigan law. The Center overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code, “corporations” receive lower interest rates on such refunds (the federal short-term interest rate plus as little as 0.5%) than other taxpayers (the federal short-term interest rate plus 3%), 26 U.S.C. 6621(a)(1). The IRS rejected the Center’s claim that, as a not-for-profit corporation, it should not be treated as a corporation and should be eligible for the higher interest rate, increasing its refund by $9.1 million. The district court and Sixth Circuit affirmed, reasoning that a nonprofit entity incorporated under state law amounts to a corporation, and that the Code contains no indication to the contrary. View "United States v. Detroit Medical Center" on Justia Law

The IRS conducted a criminal investigation into businesses owned by Rogers and his associates and subsequently seized millions of dollars. Forfeiture actions settled by an agreement executed in August, 2012. Rogers released his right to bring future claims “related to and/or in connection with or arising out of” the forfeiture actions. In November 2012, Rogers requested records under the Freedom of Information Act (FOIA) 5 U.S.C. 552. The IRS denied the request. In 2013, Rogers filed suit. In November 2014, the IRS moved for summary judgment, arguing that the release affirmatively waived Rogers’ right to bring his FOIA action. Rogers argued that the IRS forfeited its right to rely on the release by not pleading it as an affirmative defense; the IRS should be estopped from asserting the affirmative defense; and the release did not apply because the FOIA claim was not related to the forfeiture actions. The court granted the IRS summary judgment, finding the release’s language broad enough to encompass Rogers’ FOIA action. The Sixth Circuit affirmed While the IRS could have been more diligent in raising its defense, the court did not abuse its discretion by permitting the IRS to raise it in a summary judgment motion. View "Rogers v. Internal Revenue Serv." on Justia Law