Justia Tax Law Opinion Summaries

Articles Posted in US Court of Appeals for the District of Columbia Circuit
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The case revolves around Alon Farhy, a U.S. permanent resident who failed to report his ownership of Belizean corporations to the Internal Revenue Service (IRS), violating Section 6038(a) of the Internal Revenue Code. Farhy acknowledged his violation and the resulting penalties of nearly $500,000 under Section 6038(b). However, he disputed the IRS's method of collecting the penalties, arguing that the IRS lacked statutory authority to assess and administratively collect Section 6038(b) penalties. Instead, he contended that the government must sue him in federal district court to collect what he owes under Section 6038(b).The Tax Court agreed with Farhy, concluding that the Code does not empower the IRS to assess and administratively collect Section 6038(b) penalties. The court held that the IRS could only collect Section 6038(b) penalties through a civil suit filed by the U.S. Department of Justice, not through the administrative collection methods that it had used for over forty years.The case was then brought before the United States Court of Appeals for the District of Columbia Circuit. The court disagreed with the Tax Court's interpretation. It held that the text, structure, and function of Section 6038 demonstrate that Congress authorized the assessment of penalties imposed under subsection (b). The court reversed the Tax Court's decision and remanded the case with instructions to enter a decision in favor of the Commissioner of Internal Revenue. View "Farhy v. Cmsnr. IRS" on Justia Law

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Johannes and Linda Lamprecht, Swiss citizens who lived in the United States in 2006 and 2007, underreported their taxable income by falsely claiming they had no foreign bank accounts. In reality, they had millions in a Swiss bank, UBS. The couple amended their tax returns for 2006 and 2007 in 2010, after the United States served a John Doe Summons on UBS in 2008, seeking information about unknown taxpayers who might have failed to report taxable income in UBS accounts. The amended returns reported taxable income in the previously undisclosed UBS accounts, increasing their tax liability by approximately $2.5 million. The couple paid these back taxes, but in 2014, the IRS informed them they would be penalized for their original inaccuracies, and in 2015, issued a formal “notice of deficiency” assessing about $500,000 in penalties.The Lamprechts challenged these penalties in the United States Tax Court, arguing that the IRS didn’t follow the tax code’s procedures when it first decided to penalize them, that they deserved protections for voluntarily fixing their own mistake before the IRS acted, and that the statute of limitations for assessing accuracy penalties had run on the two tax years. The tax court granted summary judgment to the IRS.The United States Court of Appeals for the District of Columbia Circuit affirmed the tax court's decision. The court found that the IRS had complied with the statutory requirement for a supervisor's written approval for the penalty assessment. The court also ruled that the Lamprechts' corrected returns did not protect them from penalties because they were filed after a John Doe Summons was issued. Lastly, the court held that the statute of limitations did not bar the assessment of penalties because the John Doe Summons extended the statute-of-limitations period. View "Lamprecht v. Cmsnr. IRS" on Justia Law

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The Affordable Care Act obligates large employers to provide their full-time employees with health insurance coverage meeting certain requirements. If an employer fails to provide coverage or provides noncomplying coverage, it is liable for an exaction under 26 U.S.C. Section 4980H. In 2019, the Internal Revenue Service sent two letters proposing exactions under Section 4980H to appellant Optimal Wireless, a wireless communications company. Optimal then filed an action against the IRS and the Department of Health and Human Services, claiming that the agencies had failed to satisfy certain procedural requirements before imposing the proposed exactions. Optimal sought a declaratory judgment and an injunction barring the IRS from collecting any money without complying with those procedures. The district court dismissed Optimal’s suit for lack of jurisdiction.   The DC Circuit affirmed. The court explained that the Anti-Injunction Act provides that, with certain exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” The court explained that because Congress repeatedly called the Section 4980H exaction a tax, Optimal’s suit is barred by the Anti-Injunction Act. The court further wrote that Congress’s use of the phrase “assessable payment” does not conflict with—or otherwise detract from the import of—its choice to label the Section 4980H exaction a “tax” in multiple provisions. The terms are not mutually exclusive. View "Optimal Wireless LLC v. IRS" on Justia Law

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Plaintiff injured himself on the job while working as a photojournalist for media corporation Turner Broadcasting Systems, Inc. In the following years, while he was unable to work, Turner paid him for his leave. Plaintiff claimed that because his injury was job-related, Turner paid him workers’ compensation, while Turner claims that it paid him according to a separate disability policy. This distinction has legal significance because income earned as workers’ compensation is non-taxable, while disability payments are taxed. Turner reported the compensation as part of Plaintiff’s taxable income on the W-2s it filed with the IRS. Plaintiff sued Turner under 26 U.S.C. Section 7434 for willfully filing fraudulent information returns on his behalf. The district court granted summary judgment for Turner.   The DC Circuit reversed. The court explained that under Section 7434, a plaintiff must show: (1) the defendant filed an information return on his or her behalf, (2) the return was false as to the amount paid, and (3) the defendant acted willfully and fraudulently. The parties agree that the W-2s qualify as information returns, and Plaintiff has raised a dispute of material fact as to the second and third elements. As to falsity, Plaintiff’s injury was job-related, and a reasonable jury could therefore conclude that the W-2s were inaccurate because they overstated his taxable income by including workers’ compensation. And as to scienter, several pieces of evidence including the language of Turner’s own policies as well as communications between the parties could lead a factfinder to conclude that Turner knew or should have known the actual nature of these payments. View "Martin Doherty v. Turner Broadcasting Systems, Inc." on Justia Law

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Appellant claimed the IRS owes him a whistleblower award under subsection 7623(b)(1), and he argued that the Treasury regulation on which the IRS relied to decide otherwise contravenes the text of the statute. Appellant submitted information to the IRS that he thought showed that a condominium development group evaded taxes through its treatment of golf-club-membership deposits. The IRS deemed the information Appellant submitted sufficiently specific and credible to warrant opening an examination but later concluded that the membership deposits were correctly reported. Through its own further investigation, however, the IRS discovered an unrelated problem. The IRS eventually ordered the development group to pay a large adjustment relating to its treatment of that debt, but it denied Lissack’s claim for a percentage of those proceeds. When Appellant sought a review of that decision, the Tax Court granted summary judgment to the IRS. Appellant appealed, and the IRS primarily argued that the Tax Court lacked jurisdiction to review its award denial.   The DC Circuit affirmed. The court held that the Tax Court had jurisdiction and that the challenged provisions of the rule are consistent with the tax whistleblower statute. The court wrote that the Tax Court correctly concluded that “the record provides more than enough evidence to confirm that petitioner is not eligible for a mandatory award” and ruled in favor of the IRS as a matter of law. The Tax Court credited information in the administrative record showing that “none of the adjustments had anything to do with the membership deposits issue.” View "Michael Lissack v. Cmsnr. IRS" on Justia Law

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Appellant sent information to the Whistleblower Office of the Internal Revenue Service that he believed showed a company was underpaying taxes by taking unjustified deductions and using improper pricing practices. Section 7623 of the Internal Revenue Code entitles whistleblowers to a percentage of the proceeds the IRS collects based on whistleblower information identifying underpayment of taxes or violations of internal revenue law. Appellant claimed he is entitled to a mandatory whistleblower award under Section 7623. The Whistleblower Office accordingly denied Appellant’s application for an award. The Tax Court entered summary judgment in favor of the IRS.   The DC Circuit affirmed. The court held that the Tax Court correctly granted summary judgment in favor of the IRS on Appellant’s challenge to the Whistleblower Office’s determination. The court wrote that Appellant admits that his submission “did not explicitly reference” the tax issues that led to adjustments, and the administrative record supports the revenue agent’s statements that those tax issues were not related to the issues Appellant identified. The record also shows substantial independent information gathering by the revenue agent. The Whistleblower Definitions Rule allows the IRS to treat a portion of an examination into unrelated tax issues as a separate administrative action, and Appellant does not show that the agency incorrectly applied that rule here. View "Luis Villa-Arce v. Cmsnr. IRS" on Justia Law

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The Internal Revenue Service assessed penalties pursuant to 26 U.S.C. Section 6700 against Appellant in connection with his promotion of a tax shelter scheme. Appellant filed a motion to recuse and disqualify all Tax Court judges on separation of powers grounds. The Tax Court denied the motion and granted summary judgment for the IRS, rejecting Appellant’s statute of limitations defenses. On appeal, Appellant contends that the presidential power to remove Tax Court judges violates the separation of powers and that assessment of Section 6700 penalties was time-barred by 26 U.S.C. Section 6501(a) or by 28 U.S.C. Section 2462.   The DC Circuit affirmed. The court explained that here Congress sought only to “ensure that there is no appearance of institutional bias” when the Tax Court adjudicates disputes between the IRS and taxpayers. Appellant has not demonstrated that congressional action has undermined the separation of powers analysis adopted in Kuretski. The court further held that Section 6501(a) is inapplicable to the assessment of Section 6700 penalties. Section 6700 penalties are assessed against individuals who represent, with reason to know such representation is false, that there will be a tax benefit for participating in or purchasing an interest in an arrangement the individual assisted in organizing. The conduct penalizable “does not pertain to any particular tax return or tax year.” Accordingly, the court held that Appellant’s separation of powers claim is barred under the analysis in Kuretski. View "John Crim v. Cmsnr. IRS" on Justia Law

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The Office of Professional Responsibility (“OPR”) investigates allegations of practitioner misconduct before the Internal Revenue Service (“IRS”). Appellant sued the IRS under the Freedom of Information Act (“FOIA”), seeking disclosure of documents relating to the OPR’s investigation of a misconduct report on him. The district court ruled that the four documents were protected from disclosure by FOIA Exemption 5’s deliberative process privilege and granted summary judgment to the IRS. Appellant contends that the withheld documents are nondeliberative and, therefore, unprotected by Exemption 5.   The DC Circuit affirmed in part the district court’s grant of summary judgment to the IRS and reversed in part as to the Marchetti Memo and the Kelly Memo. The court explained that withholding the contested documents, with the exception of the Kelly Memo and the unprotected portion of the Marchetti Memo, is consonant with Exemption 5’s purposes. At least some of the recommendations in the contested documents were not adopted in the OPR’s ultimate determination, so disclosure of the authors’ potentially mistaken recommendations might have a chilling effect on their willingness to make such recommendations. Further, the court wrote that insofar as the OPR’s ultimate determination departs from the course of action proposed by at least some of the contested documents or from their reasoning, the release of those predecisional documents might well mislead the public about the OPR’s view of Appellant’s conduct. View "Bradley Waterman v. IRS" on Justia Law

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Chairman of the Committee on Ways and Means (“the Chairman”) invoked Section 6103(f)(1) in a writing to the Commissioner of Internal Revenue (“the 2019 Request”). The Chairman requested the federal income tax returns of then-President Donald J. Trump and that of his related companies and organizations (collectively “the Trump Parties”). The Department of the Treasury responded that it did not intend to comply with the 2019 Request because it was not supported by a legitimate legislative purpose. Later the Treasury informed the district court and the Trump Parties that it intended to comply with the 2021 Request and provide the Committee with the requested materials. The Trump Parties alleged that Section 6103(f)(1) is facially unconstitutional and that compliance with the Request would be a violation of the First Amendment.The DC Circuit affirmed. The court explained that the 2021 Request seeks information that may inform the United States House of Representatives Committee on Ways and Means as to the efficacy of the Presidential Audit Program, and therefore, was made in furtherance of a subject upon which legislation could be had. Further, the Request did not violate the separation of powers principles under any of the potentially applicable tests primarily because the burden on the Executive Branch and the Trump Parties is relatively minor. Finally, Section 6103(f)(1) is not facially unconstitutional because there are many circumstances under which it can be validly applied, and Treasury’s decision to comply with the Request did not violate the Trump Parties’ First Amendment rights. View "Committee on Ways and Means, United States House of Representatives v. TREA" on Justia Law

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Congress enacted a tax credit to incentivize the production of refined coal, which releases fewer emissions than unrefined coal. AJG Coal, Inc. responded by forming Cross Refined Coal, LLC and recruiting two other investors in that enterprise. Limited-liability companies are taxed like partnerships, so the company’s tax liabilities and credits passed through to its member investors.The IRS asserted that Cross was not a bona fide partnership for tax purposes, in part because it could never have made a profit without the tax credit. The tax court disagreed. The DC Circuit affirmed the tax court’s decision holding that partnerships formed to conduct activity made profitable by tax credits engage in legitimate business activity for tax purposes. The court further concluded that all of Cross’s members shared in its profits and losses, and thus had a meaningful stake in its success or failure. View "Cross Refined Coal, LLC v. Cmsnr. IRS" on Justia Law