Justia Tax Law Opinion Summaries

Articles Posted in US Court of Appeals for the Federal Circuit
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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

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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

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Income earned by Americans typically is taxed in the U.S., regardless of where it is earned. European countries only tax income earned within their borders. To address possible “double taxation” the U.S. generally provides credits for taxes paid to foreign governments; European systems typically exempt from taxation income earned abroad. Congress, believing that the exemption method puts American companies at a trade disadvantage, has enacted various tax regimes, then received push-back from its European trading partners, who claimed each was an effective export subsidy. The 2000 ETI Act, intended to ease the burden of the tax revisions on domestic producers, was rejected in the World Trade Organization (WTO). Congress responded with the 2004 American Jobs Creation Act (AJCA), 118 Stat. 1418. Section 101 repeals the ETI provision that excluded extraterritorial income from taxation, effective for “transactions after December 31, 2004.” Section 101(d), provides: In the case of transactions during 2005 or 2006, the amount includible in gross income by reason of the amendments made by this section shall not exceed the applicable percentage of the amount which would have been so included but for this subsection. In 2005, WTO found that the ACJA improperly maintained prohibited ETI subsidies through transitional and grandfathering measures. Congress repealed section 101(f), effective for “taxable years beginning after” May 17, 2006. It did not repeal or revise section 101(d). Pursuant to a 2006 Agreement, DWA recognized qualifying extraterritorial income for 2006, invoked section 101(d), and excluded 60% from gross income. The IRS allowed the exclusion. DWA subsequently sought refunds for 2007-2009, claiming the section 101(d) exclusion. The Federal Circuit, disagreeing with the IRS and the Claims Court, held that section 101(d) unambiguously provides transitional relief for all extraterritorial income received from transactions entered into in 2005 and 2006, even income received in later years. View "DWA Holdings LLC v. United States" on Justia Law

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In returns for 1995, 1996, and 1997, Stephens a shareholder of SF, a subchapter S corporation, reported "passive activity" passthrough income and passive activity losses (deductible from passive activity income) and passive activity credits (claimed against taxes allocable to passive activities). The IRS audited SF’s returns and Stephens’s individual returns for 1995 and 1996; the 1997 return was audited separately. The IRS concluded that Stephens had materially participated in some SF activities, finalized its audit of the 1995 and 1996 returns, and, in 2009, sent Stephens a notice of deficiency, as proposed in 2003 and 2008. Stephens did not contest the notice but made payment and never filed a formal refund claim, allegedly believing he could carry over the disallowed passive activity losses to 1997. The IRS extended the deadline for a 1997 refund claim to 2008. In 2009, Stephens mailed an amended 1997 return, seeking to carry over the 1995 and 1996 passive activity losses. In 2011, Stephens asserted the mitigation provisions, which, in specified circumstances, “permit a taxpayer who has been required to pay inconsistent taxes to seek a refund” otherwise barred by section 7422(a) (requiring that a “claim for refund or credit has been duly filed”) or section 6511(a), specifying the limitations period for refund claims. The IRS proposed to disallow the Stephenses’ refund claim as untimely and rejected an equitable recoupment argument. The Federal Circuit affirmed the dismissal of the Stephenses suit, concluding that a timely refund claim was a “prerequisite for a refund suit.” View "Stephens v. United States" on Justia Law

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A 2004 IRS regulation excluded medical residents from the FICA tax student exception for services provided after April 1, 2005. In 2010, the IRS decided that residents could qualify for the exception for tax periods ending before April 1, 2005, such that “hospitals and [medical] residents who had filed protective refund claims for tax periods before April 1, 2005[,] would be able to obtain refunds of the FICA taxes.” Former residents sued, alleging that the Hospital had not filed protective refund claims 1995-2001. The Hospital and residents entered into a settlement: the Hospital agreed to pay the residents $6,632,000, stating that the payment “can be appropriately characterized as a refund for the amount of FICA taxes previously withheld.” The Hospital then sued the United States, alleging that Internal Revenue Code 3102(b) entitled it to indemnification for the settlement. The Claims Court dismissed, holding that section 3102(b) is not a money-mandating source of substantive law, as required for Tucker Act jurisdiction, 28 U.S.C. 1491(a)(1). The Federal Circuit reversed. Section 3102(b), which states “[e]very employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer,” is reasonably amenable to an interpretation that mandates the government to reimburse FICA taxes paid by an employer. View "New York and Presbyterian Hospital v. United States" on Justia Law