Justia Tax Law Opinion Summaries

The case concerns a dispute over the tax characterization of a $191 million payment made in 2002 to the Charles G. Berwind Trust (DB Trust) following a complex series of corporate transactions and litigation. The Berwind Corporation, a closely held coal mining business, was owned through family trusts. In 1999, a short-form merger under Pennsylvania law resulted in the DB Trust’s shares in Berwind Pharmaceutical Services, Inc. (BPSI) being extinguished, with the DB Trust entitled to payment for its shares. The DB Trust challenged the validity of the merger and the valuation of its shares through federal and state litigation, ultimately leading to a settlement in 2002, where BPSI paid the DB Trust $191 million.After the settlement, a tax dispute arose regarding whether a portion of the settlement payment should be treated as interest (taxed as ordinary income) or as capital gains. The Internal Revenue Service (IRS) determined that part of the payment represented unstated interest under Section 483 of the Internal Revenue Code, which applies to deferred payments under contracts for the sale of property. The DB Trust petitioned the United States Tax Court for redetermination, arguing that the payment was made under the 2002 Settlement Agreement, not the 1999 Merger Agreement, and thus should be taxed entirely as capital gains.The United States Tax Court found that the sale of the DB Trust’s shares occurred in 1999 under the Merger Agreement, which constituted a contract for the sale of property. The court held that the 2002 payment was made “under” the 1999 Merger Agreement, triggering Section 483 and requiring a portion of the payment to be treated as interest. The DB Trust appealed.The United States Court of Appeals for the Third Circuit affirmed the Tax Court’s decision. The Third Circuit held that Section 483 applied because the payment was made under a contract for the sale of property, and the Merger Agreement served as the basis for the payment obligation. Thus, the interest portion of the payment is taxable as ordinary income. View "Charles G. Berwind Trust v. Commissioner of Internal Revenue" on Justia Law

The case concerns a taxpayer, Stephanie Murrin, who underpaid her federal income taxes from 1993 to 1999. The underpayment resulted from her tax preparer, Duane Howell, making false or fraudulent entries on her tax returns with the intent to evade tax. Murrin herself did not cause these false entries and did not have any intent to evade tax. More than twenty years later, in 2019, the Internal Revenue Service (IRS) issued a notice of deficiency to Murrin for the underpaid taxes from those years. Murrin did not dispute the amount of tax owed, the accuracy-related penalty, or the interest, but argued that the IRS was barred from assessing the tax by the three-year statute of limitations.The United States Tax Court reviewed the case after Murrin petitioned for a redetermination of the deficiency. The Tax Court held that the exception to the statute of limitations in Internal Revenue Code § 6501(c)(1) applied because the false or fraudulent returns were prepared with the intent to evade tax, even though that intent was held by the preparer and not by Murrin herself. The Tax Court concluded that the IRS’s notice of deficiency was not barred by the statute of limitations, and Murrin appealed.The United States Court of Appeals for the Third Circuit reviewed the Tax Court’s interpretation of § 6501(c)(1) de novo. The Third Circuit held that the statute does not require the taxpayer herself to have the intent to evade tax; rather, the exception to the statute of limitations applies if anyone—such as a tax preparer—prepares a false or fraudulent return with the intent to evade tax. The court affirmed the judgment of the Tax Court, holding that taxpayer intent is not required for the exception to apply. View "Murrin v. Commissioner of Internal Revenue" on Justia Law

A cheesesteak restaurant owner, Nicholas Lucidonio, was involved in a payroll tax fraud scheme at Tony Luke’s, where he avoided employment taxes by issuing paychecks for “on-the-books” wages, requiring employees to sign back their paychecks, and then paying them in cash for both “on-the-books” and “off-the-books” wages. This led to the filing of false employer tax returns that underreported wages and underpaid employment taxes. Employees, aware of the scheme, received Form W-2s listing only “on-the-books” wages, resulting in underreported income on their personal tax returns. The conspiracy spanned ten years and involved systemic underreporting of wages for 30 to 40 employees at any given time.Lucidonio pleaded guilty to one count of conspiracy to defraud the IRS (Klein conspiracy) under 18 U.S.C. § 371. He did not appeal his conviction but challenged his sentence, specifically the application of a United States Sentencing Guideline that increased his offense level by two points. The enhancement applies when conduct is intended to encourage others to violate internal revenue laws or impede the IRS’s collection of revenue. Lucidonio argued that the enhancement was misapplied because it required explicit direction to others to violate the IRS Code, which he claimed did not occur, and that his employees were co-conspirators, not additional persons encouraged to violate the law.The United States Court of Appeals for the Third Circuit reviewed the case. The court disagreed with Lucidonio’s interpretation that the enhancement required explicit direction. However, it found that the government failed to prove by a preponderance of the evidence that Lucidonio encouraged anyone other than co-conspirators, as the employees were aware of and participated in the scheme. Consequently, the court vacated the sentence and remanded the case for resentencing without the enhancement. View "United States v. Lucidonio" on Justia Law

Deadline for petition to Tax Court is jurisdictional and cannot be waived for equitable reasons. When spouses file a joint tax return, each is jointly and severally liable for the tax due, 26 U.S.C. 6013(d); the IRS may grant relief where it would be “inequitable to hold the individual liable.” Rubel and her ex-husband filed joint income tax returns, 2005-2008. They had an unpaid tax liability for each year. In 2015, Rubel sought relief under the innocent spouse relief provisions. On January 4, 2016, the IRS denied relief for tax years 2006-2008. On January 13, the IRS sent a denial for 2005. The determinations stated that Rubel could appeal to the Tax Court within 90 days; Rubel needed to file a petition by April 4 for the 2006-2008 tax years and by April 12 for 2005. Rubel submitted additional information to the IRS. In a March 3 letter, the IRS stated that it “still propose[d] to deny relief” and, incorrectly, “Your time to petition … will end on Apr. 19.” Rubel mailed a petition on April 19. The Third Circuit affirmed the Tax Court’s dismissal. The deadline set forth in 26 U.S.C. 6015(e)(1)(A), is jurisdictional and cannot be altered, regardless of the equities of the case. View "Rubel v. Commissioner Internal Revenue" on Justia Law

District court has authority to consider whether tax debtor’s property should be subject to a forced sale. Cardaci owned Holly Construction. In 2000-2001, the business floundered; Cardaci used $49,600 in taxes withheld from his employees’ wages to pay suppliers and wages, including his $20,000 salary, rather than payroll taxes. Cardaci, now 58, has not had a regular income since 2009 and has medical problems. Beverly Cardaci, 62, earns $62,000 a year as a teacher. The Cardacis bought their Cape May County home in 1978; two adult children live with them part-time, without paying rent. The district court determined that the house has a fair market value of $150,500. It has no mortgage. The government sought to force its sale, to use half of the proceeds to pay Cardaci’s tax liability, with the remainder for Beverly. The court considered various equitable factors, declined to force the sale, fixed an imputed monthly rental value of $1,500 and ordered Cardaci to pay half of that to the IRS each month. Cardaci defaulted on his monthly payment obligation and failed to provide required proof of homeowner’s insurance. The Third Circuit remanded for recalculation of the factors weighing for and against a sale and for recalculation of the Cardacis’ respective interests in the property. View "United States v. Cardaci" on Justia Law

IRS Form 1040, filed after the IRS made an assessment of the taxpayer’s liability, did not constitute “returns” for purposes of determining the dischargeability in bankruptcy of tax debts under 11 U.S.C. 523(a)(1)(B). Giacchi filed his tax returns on time for the years 2000, 2001, and 2002 years after they were due and after the IRS had assessed a liability against him. In 2010, Giacchi filed for Chapter 7 bankruptcy; in 2012 he filed a Chapter 13 petition and brought an adversary proceeding seeking a judgment that his tax liability for the years in question had been discharged in the Chapter 7 proceeding. The district court and Third Circuit affirmed the bankruptcy court’s order denying the discharge. The tax debt was nondischargeable under 11 U.S.C. 523(a)(1)(B) because Giacchi had failed to file tax returns for 2000, 2001, and 2002, and Giacchi’s belatedly filed documents were not “returns” within the meaning of section 523(a)(1)(B) and other applicable law. View "Giacchi v. United States" on Justia Law

Pennsylvania statute, prohibiting payment of fire insurance proceeds to named insured when there are delinquent property taxes, is not limited to situations where the named insured is also responsible for those taxes. Conneaut Lake Park, in Crawford County, included a historic venue, “the Beach Club,” owned by the Trustees. Restoration operated the Club under contract with the Trustees. Restoration insured the Club against fire loss through Erie. When the Club was destroyed by fire, Restoration submitted a claim. In accordance with 40 Pa. Stat 638, Erie required Restoration to obtain a statement of whether back taxes were owed on the property. The statement showed $478,260.75 in delinquent taxes, dating back to 1996, before Restoration’s contract, and owed on the entire 55.33-acre parcel, not just the single acre that included the Club. Erie notified Restoration that it would transfer to the taxing authorities $478,260.75 of the $611,000 insurance proceeds. Erie’s interpleader action was transferred after the Trustees filed for bankruptcy. Restoration argued that Section 638 applied only to situations where the owner of the property is insured and where the tax liabilities are the financial responsibility of the owner. The Third Circuit reinstated the bankruptcy court holding, rejecting Restoration’s argument. The statute does not include any qualifications. When Restoration insured the Club, its rights to any insurance proceeds were subject to the claim of the taxing authorities. Without a legally cognizable property interest, Restoration has no cognizable takings claim. View "In re: Trustees of Conneaut Lake Park, Inc." on Justia Law

After the Polskys attempted to claim the child tax credit for the 2010 and 2011 tax years, the IRS issued a notice disallowing the credit because their daughter was older than 17. They submitted amended returns, specifically requesting that the IRS review whether their permanently disabled daughter qualified for the tax credit. According to the Polskys, the IRS refused to rule on the amended returns because they were substantially the same as the original returns. The Tax Court dismissed their petition because the IRS had not issued a notice of deficiency. In 2014, the Polskys, pro se, filed in the district court, alleging that the IRS erroneously disallowed the credit and violated their due process rights by preventing them from challenging the disallowance in Tax Court. The district court dismissed, holding that the credit is unavailable when the child has attained age 17 and that the Polskys failed to state a due process claim. The Third Circuit affirmed, rejecting an argument that that the tax credit’s definition of “qualifying child,” 26 U.S.C. 24, which has an age cap, incorporates section 152(c), which has no age cap for a person who is permanently disabled and that the second definition of “qualifying child” overrides the age cap in the tax credit. View "Polsky v. United States" on Justia Law

To stimulate economic development, Jersey City, New Jersey offers tax exemptions and abatements to private developers of projects in certain designated areas. Those tax benefits are conditioned on the developers’ entry into agreements with labor unions that bind the developers to specified labor practices. Employers and a trade group challenged that law, alleging that it is preempted by the National Labor Relations Act (NLRA) and Employee Retirement Income Security Act (ERISA) and barred by the dormant Commerce Clause of the U.S. Constitution. The district court dismissed the complaint, concluding that Jersey City acts as a market participant, not a regulator, when it enforces the law, so that NLRA, ERISA, and dormant Commerce Clause claims were not cognizable. The Third Circuit reversed, holding that Jersey City was acting as a regulator in this context. The city lacks a proprietary interest in Tax Abated Projects. The Supreme Court has recognized a government’s proprietary interest in a project when it “owns and manages property” subject to the project or it hires, pays, and directs contractors to complete the project; when it provides funding for the project; or when it purchases or sells goods or services. This case fits none of these categories. View "Assoc. Builders & Contractors, Inc. v. City of Jersey City" on Justia Law

Nichols is a resident, property owner, and taxpayer in the City of Rehoboth Beach, Delaware. Rehoboth Beach held a special election, open to residents of more than six months, for approval of a $52.5 million bond issue to finance an ocean outfall project. The resolution passed. Nichols voted in the election. She then filed suit challenging the election and the resultant issuance of bonds. The district court, reasoning that Nichols was not contesting the expenditure of tax funds, but the legality of the Special Election; found that Nichols, having voted, lacked standing; and dismissed. The Third Circuit affirmed, stating that because Nichols failed to show an illegal use of municipal taxpayer funds, she cannot establish standing on municipal taxpayer grounds. The court rejected her claims of municipal taxpayer standing on the basis of two expenditures by Rehoboth Beach: the funds required to hold the special election and the funds used to purchase an advertisement in a local newspaper. View "Nichols v. City of Rehoboth Beach" on Justia Law