Articles Posted in U.S. Court of Appeals for the Third Circuit

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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

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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

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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

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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

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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

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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

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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

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Net Pay managed clients’ payrolls and handled their employment taxes pursuant to a “Payroll Services Agreement,” which required clients to provide their employee payroll information and gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. The Agreement established an independent contractor relationship between Net Pay and its clients. About three months before it filed its Chapter 7 petition, Net Pay transferred $32,297 on behalf of Altus; $5,338 on behalf of HealthCare Systems; $1,143 on behalf of Project Services; $352.84 for an unknown client; and $281.13 for another unknown client. The next day, Net Pay informed its clients that it was ceasing operations. The trustee for Net Pay sought to recover the five payments, arguing that they were avoidable preferential transfers, 11 U.S.C. 547(b). The district court concluded that four of the transfers were not subject to recovery, being below the minimum amount established by law ($5,850), and that distinct transfers may be aggregated only if “‘transactionally related’ to the same debt.” Because the IRS applied the entire $32,297 toward Altus’s trust fund tax obligations, the court held that the payment was not avoidable. The Third Circuit affirmed. Net Pay lacked an equitable interest in the Altus funds by operation of 26 U.S.C. 7501(a). View "In Re: Net Pay Solutions Inc" on Justia Law

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Giant Eagle, a chain of supermarkets, pharmacies, gas stations, and convenience stores, uses the accrual method of accounting. Its customer-loyalty “fuelperks!” program links customers’ rewards at the pump to prior grocery purchases; “discounts expire on the last day of the month, 3 months after they are earned.” On its 2006 and 2007 corporate income tax returns, Giant Eagle claimed a deduction for the discounts its customers had accumulated but, at year’s end, had not yet applied to fuel purchases. Giant Eagle computed the deduction by ascertaining the face value of the discounts, multiplying that by the historical redemption rate of discounts in their expiring month, and multiplying that product by the average number of gallons purchased in a discounted fuel sale. The IRS disallowed the deductions, which totaled $3,358,226 and $313,490. The Tax Court upheld the denial. The Third Circuit reversed. Accrual method taxpayers are expressly permitted to deduct expenses before they are paid, if “all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.” In the realm of recurring expenses, an anticipated liability may be deemed “incurred” even if the predicate costs are not themselves incurred during the year a deduction is claimed. View "Giant Eagle Inc v. Internal Revenue Serv." on Justia Law

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Davis and his wife purchased a Philadelphia rental property in 1997 1997. A longtime member of the U.S. Army Reserve, Davis was called to active duty in 2004. A few months later, the Davises transferred the property to Global LLC, owned and managed by Davis, to “insulate themselves from liability” because “his wife was unable to manage the property.” In 2009, Davis and Global asked the Philadelphia Department of Revenue to reduce Global’s property tax debt, citing the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. 3901, which limits interest imposed on a servicemember’s delinquent property taxes during active duty to a rate of six percent and forbids additional penalties. The Department denied this request, stating that the SCRA does not apply to a business owned by a servicemember and that Davis should file an abatement petition with the Philadelphia Tax Review Board. The Review Board denied that petition. Two years later the city initiated foreclosure proceedings; the state court entered judgment in the city’s favor. Davis and Global filed suit under 42 U.S.C. 1983. The Third Circuit affirmed dismissal. SCRA extends only to servicemembers; a corporation is not a “servicemember” under the statute. View "Davis v. City of Philadelphia" on Justia Law