Justia Tax Law Opinion Summaries

Articles Posted in US Court of Appeals for the Federal Circuit
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The Taxpayers, West Virginia non-stock, not-for-profit, 26 U.S.C. 501(c)(3) organizations, are generally exempt from federal income tax but are not exempt from taxes on “wages” from “employment” under the Federal Insurance Contributions Act (FICA). “Employment” under FICA has a broad definition but excepts service performed in the employ of a school by a student who is regularly enrolled and attending classes at the same school, 26 U.S.C. 3121(b)(10). In 2010, the IRS determined that medical residents fall within that exception, applied the determination retroactively, and issued tax refunds to the Taxpayers. The IRS paid interest on these tax refunds, applying the interest rate for corporations under 26 U.S.C. 6621(a)(1). If the IRS had used the interest rate for noncorporations, the Taxpayers would have received approximately $1.9 million in additional statutory interest. The Claims Court affirmed, reasoning that the Taxpayers are corporations under section 6621(a)(1) notwithstanding their nonprofit status. The Federal Circuit affirmed, agreeing with other circuits that an entity incorporated under state law is a corporation within the meaning of the Code. The Code addresses three basic types of corporations: nonprofit corporations covered by subchapter F; certain for-profit corporations covered by subchapter C; and certain for-profit corporations covered by subchapter S. In section 6621, Congress used the generic definition of “corporation,” which includes both for-profit and nonprofit entities. View "Charleston Area Medical Center, Inc. v. United States" on Justia Law

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Alternative Carbon claimed nearly $20 million in energy tax credits meant for taxpayers who sell alternative fuel mixtures under 26 U.S.C. 6426(e)(1). The Internal Revenue Service determined that Alternative Carbon should not have claimed these credits and demanded repayment, with interest and penalties. Alternative Carbon paid back the government, in part, and then filed a refund suit. The Claims Court decided that Alternative Carbon failed to establish that it properly claimed the credits or that it had reasonable cause to do so and granted the government summary judgment. The Federal Circuit affirmed. Although the product at issue, a feedstock/diesel mixture, was a “liquid fuel,” it was not “sold” by Alternative Carbon; the transaction was more of a transfer for disposal. Alternative Carbon cannot show it had reasonable cause for claiming the alternative fuel mixture credits. View "Alternative Carbon Resources, LLC v. United States" on Justia Law

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Section 515 of the Housing Act of 1949, 42 U.S.C. 1485, authorizes the Department of Agriculture, Farmers Home Administration to loan money to nonprofit entities to provide rental housing for elderly and low- and moderate-income individuals and families. Sonoma, a limited partnership contracted with the government to construct low-income housing in exchange for a $1,261,080 Section 515 loan. In 2010, Sonoma submitted a written request to prepay the balance of its loan. The government denied the request. Sonoma sued for breach of contract, including a claim for a “tax neutralization payment” to offset the negative tax consequences of a lumpsum damages award. The Claims Court awarded Sonoma expectancy damages of $4,223,328 and a tax gross-up award of $3,171,990. The Federal Circuit vacated. The Claims Court clearly erred in using the income from a single tax year to predict the future rates at which each partner would pay taxes. While the government’s breach created the circumstances that require consideration of future income and tax rates, Sonoma is not absolved of its burden of showing an income-tax disparity and justifying any adjustment. View "Sonoma Apartment Associates v. United States" on Justia Law

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In 2005, the Ginsburgs, through their corporation (Hawthorne), acquired Brooklyn property and applied to participate in the Brownfield Cleanup Program. The New York State Department of Environmental Conservation (DEC) approved their application and the parties entered into an Agreement. The development was completed in 2011, converting an old shoe factory into a residential rental building. In 2011, the Ginsburgs granted the state an environmental easement; DEC issued a certificate of completion. Hawthorne applied for a brownfield redevelopment tax credit of $6,583,835.10 for tax year 2011, with the Ginsburgs’ share equaling $4,975,595.00, In 2013, the state paid the Ginsburgs a refund of $1,903,951.00 attributable to the brownfield redevelopment tax credit. They did not report the payment as income on their 2013 federal income tax return, claiming that this payment constituted a nontaxable refund. The IRS determined the Ginsburgs owed an additional $690,628.46 in federal income tax, which they paid. The Federal Circuit affirmed the Claims Court, holding that the excess payment of the tax credit they had received from the state is federally taxable income and “does not qualify for any exclusion or exception from the federal definition of income.” The Ginsburgs freely chose to participate and take advantage of New York’s state tax credit program and have complete dominion and control over the payment because there is a legally adequate guarantee that they will be allowed to excess amount of the tax credit, barring actionable misconduct on their part. View "Ginsburg v. United States" on Justia Law

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Before selling their business, Page Printing, the Pettinatis followed the tax strategy suggested by their attorney and formed BASR, a general partnership. BASR assumed Treasury Note obligations, which increased its cost basis; each of the partners contributed all their Page shares to BASR in 1999. Two months later, BASR sold 100% of its Page stock for $6,898,245. When offset against its overstated cost basis, BASR realized a gain of only $263,934. The Pettinati partners reported their shares on their 1999 individual returns. In 2010, the IRS issued a final partnership administrative adjustment (FPAA), disallowing the tax benefits generated from BASR’s 1999 tax filing. Pettinati challenged the FPAA as untimely under I.R.C. 6501(a)’s three-year statute of limitations. BASR had “zero assets,” and had filed its last partnership return in 1999. BASR offered the government $1.00 to settle; the government refused. In 2013, the Claims Court granted BASR summary judgment. The Federal Circuit affirmed. In 2016, BASR sought litigation costs under 26 U.S.C. 7430(c)(4)(E). The Federal Circuit affirmed an award of $314,710.69, rejecting the government’s arguments: that BASR does not qualify for lcosts under section 7430(a) because a partnership is not a prevailing “party,” that BASR did not pay or incur costs because a partnership has no legal obligation, that the amount of individual tax liability was not “in issue” during the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership-level court proceeding, and that the qualified offer rule did not apply. View "BASR Partnership v. United States" on Justia Law

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Sihota worked for the IRS for over 25 years. A 2011 IRS audit determined that, in 2003, Sihota reported a loss based on her purported ownership of NKRS, which was actually owned by Sihota’s son. The parties reached a settlement: Sihota acknowledged she had “acted negligently … resulting in an underpayment of ... $5341.00.” Sihota paid the assessment and penalty. The IRS terminated her employment, stating that Sihota was charged with either violating 5 CFR 2635.809 or 26 U.S.C. 7804, which requires the IRS to terminate any employee who willfully understates their federal tax liability, “unless such understatement is due to reasonable cause and not willful neglect.” The Union invoked arbitration. A hearing was held four years after the IRS contacted the Union about scheduling. The arbitrator concluded that inclusion of the loss on her return was not willful neglect, reinstated Sihota’s employment, imposed a 10-day suspension, and held that Sihota was not entitled to back pay, citing laches and the scheduling delay. The Federal Circuit vacated and remanded, stating that it could not discern which charges were properly considered or would support the suspension. If the only charge before the arbitrator was under the statute, the arbitrator could not impose any penalty. While the Union’s delay is inexplicable and might have barred the claim if the IRS could show prejudice, after allowing Sihota’s claim to proceed, the arbitrator cannot rely on laches to reduce her back pay. View "Sihota v. Internal Revenue Service" on Justia Law

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Ford sued to recover interest payments that it alleges the government owes on Ford’s past tax overpayments. Ford can only recover this interest if it and its Foreign Sales Corporation subsidiary were the “same taxpayer” under 26 U.S.C. 6621(d) when Ford made its overpayment and the subsidiary made equal tax underpayments. The Claims Court granted the government summary judgment for the government after concluding that Ford and its subsidiary were not the same taxpayer. The Federal Circuit affirmed, explaining the interplay between the “interest netting” provision of 26 U.S.C. 6621(d) and the Foreign Sales Corporation (FSC) statute that incentivized U.S. company exports in 1984-2000. Treating FSCs and their parents as different taxpayers under section 6621(d) does not create any tension between section 6621(d) and the FSC statute. The FSC statute encouraged corporations to export through FSCs, even if section 6621(d) did not provide an additional interest netting benefit for that arrangement. View "Ford Motor Co. v. United States" on Justia Law

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Sunoco blends ethanol with gasoline to create alcohol fuel mixtures. Sunoco filed consolidated tax returns, 2004-2009, claiming the Mixture Credit under 26 U.S.C. 6426 as a credit against its gasoline excise tax liability for the years 2005-2008. In 2013, Sunoco changed its tax position by submitting both informal and formal claims with the IRS to recover over $300 million based on excise-tax expenses for the years 2005-2008, claiming that it erroneously reduced its gasoline excise tax by the amount of Mixture Credit it received, which had the effect of including the Mixture Credit in its gross income. In its view, Sunoco was entitled to deduct the full amount of the gasoline excise tax under section 4081— without regard to the Mixture Credit—and keep the Mixture Credit as tax-free income. In 2015, the IRS issued a statutory notice of disallowance denying Sunoco’s claims. Sunoco filed a refund suit. The Federal Circuit affirmed the Claims Court in upholding the disallowance. The alcohol fuel mixture credit must first be applied to reduce a taxpayer’s gasoline excise-tax liability, with any remaining credit amount treated as a tax-free payment. View "Sunoco, Inc. v. United States" on Justia Law

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The American Recovery and Reinvestment Act of 2009 provides a cash grant to entities that “place[] in service” certain renewable energy facilities. The amount is determined using the basis of the tangible personal property of the facility. Alta placed windfarm facilities into service and sought $703 million in grants. The government awarded $495 million. Alta filed suit, seeking an additional $206 million. The government counterclaimed, asserting that it had overpaid $59 million. The difference was attributable to the calculation of basis. The portion of the purchase prices attributable to grant-ineligible tangible property (real estate, transmission equipment, and buildings) must be deducted: Alta argued that the entire remainder can be allocated to grant-eligible tangible personal property, with none allocated to intangibles. The Claims Court found in favor of Alta, rejecting the government’s argument that basis must be calculated using the residual method of 26 U.S.C. 1060, which applies to the acquisition of a business. The court reasoned that no intangible goodwill or going concern value could have attached to the windfarms at the time of the transaction. The Federal Circuit vacated. The Alta purchase prices were well in excess of their development and construction costs (book value), and the transactions involved numerous related agreements, such as the leasebacks and grant-related indemnities. Goodwill and going concern value could have attached, so those assets constitute a “trade or business” within the meaning of section 1060; the transactions count as “applicable asset acquisitions.” View "Alta Wind v. United States" on Justia Law

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During the savings-and-loan crisis in the 1970s and 1980s, many “thrift” institutions failed. The Federal Savings and Loan Insurance Corporation, as insurer and regulator, encouraged healthy thrifts to take over failing ones in “supervisory mergers.” FSLIC provided incentives, including allowing acquiring thrifts to operate branches in states other than their home states and “RAP” rights. Regulations mandated that each thrift maintain a minimum capital of at least 3% of its liabilities, an obstacle for healthy thrifts acquiring failing ones. RAP permitted acquiring thrifts to use Generally Accepted Accounting Principles to treat failing thrifts’ excess liabilities as “supervisory goodwill,” which could be counted toward the acquiring thrifts’ minimum regulatory capital requirement and amortized over 40 years. Home Savings entered into supervisory mergers. Branching and RAP rights are considered intangible assets for tax purposes and are generally subject to abandonment loss and amortization deductions. In 2008, Home’s successor, WMI, sought a refund for tax years 1990, 1992, and 1993 based on the amortization of RAP rights and the abandonment of Missouri branching rights, proffering valuation testimony from its expert, Grabowski, about fair market value. The Ninth Circuit found WMI did “not prove[], to a reasonable degree of certainty, Home’s cost basis in the Branching and RAP rights.” WMI also filed suit in the Claims Court, seeking a refund for tax years 1991, 1994, 1995, and 1998, based on the amortization of RAP rights and the abandonment of Florida, Illinois, New York, and Ohio branching rights, with a valuation report from Grabowski. The Federal Circuit affirmed the Claims Court's rejection of the claims; Grabowski’s assumptions about the nature of RAP rights were inconsistent with market realities and, at times, unsupported. View "WMI Holdings Corp. v. United States" on Justia Law