Justia Tax Law Opinion Summaries

Articles Posted in US Court of Appeals for the Fifth Circuit
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Bittner non-willfully failed to report his interests in foreign bank accounts on annual FBAR forms, as required by the Bank Secrecy Act of 1970 (BSA), 31 U.S.C. 5314. The Act imposes no penalty for a non-willful violation if “such violation was due to reasonable cause.”The government assessed $2.72 million in civil penalties against him—$10,000 for each unreported account each year from 2007 to 2011. The district court found Bittner liable and denied his reasonable-cause defense but reduced the assessment to $50,000, holding that the $10,000 maximum penalty attaches to each failure to file an annual FBAR, not to each failure to report an account.The Fifth Circuit affirmed the denial of Bittner’s reasonable-cause defense. Bittner did not exercise ordinary business care and prudence in failing to fulfill his reporting obligations. In assessing reasonable cause, the most important factor is the extent of the taxpayer’s effort to assess his proper liability. The court reversed with respect to the application of the $10,000 penalty. Each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty. The penalty applies on a per-account, not a per-form, basis. View "United States v. Bittner" on Justia Law

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Mary and James Nelson, a married couple with daughters, formed Longspar limited partnership in 2008; each had a 0.5% general partner interest. The limited partners were Mary and trusts that had been established for their daughters. The Nelsons also formed a trust in 2008. Mary was the settlor, James was the trustee. James and the daughters were the beneficiaries. In 2008-2009, Mary transferred her Longspar limited partner interests to the trust in a gift (valued at $2,096,000.00) and then a sale for $20,000,000. An accountant valued a 1% Longspar limited partner interest at $341,000. The Nelsons used that value to convert the dollar values in the transfer agreements to percentages of limited partner interests—6.14% for the gift and 58.65% for the sale. Those percentages were then listed on Longspar’s records, included in Longspar’s amended partnership agreement, and listed on the Nelsons’ gift tax returns.The IRS audited the Nelsons’ tax returns. The Nelsons amended their records and reallocated previous distributions. The Commissioner issued Notices of Deficiency listing $611,708 in gift tax for 2008 and $6,123,168 for 2009. The Tax Court found that the proper valuation of a 1% Longspar limited partner interest was $411,235; the transfer documents' language was not a valid formula clause that could support reallocation; Mary had transferred the percentage of interests that the appraiser had determined to have the values stated in the transfer documents; those percentages were fixed once the appraisal was completed. The Fifth Circuit affirmed; the Nelsons each owed $87,942 in gift tax for 2008 and $920,340 for 2009. View "Nelson v. Commissioner of Internal Revenue" on Justia Law

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The Fifth Circuit affirmed in part and reversed in part the district court's grant of summary judgment in favor of the government in this tax refund action arising under the Internal Revenue Code. Taxpayers overpaid their reported 2010 tax liabilities by an amount sufficient to cover any later-determined deficiency for the 2010 tax year, and then elected on their 2010 tax return to credit the overpayment forward to their estimated 2011 tax liabilities. The IRS subsequently completed an audit of taxpayers' 2010 tax return and determined that their interest award in a prior lawsuit should have been reported as ordinary income taxable at the ordinary income rate.The court concluded that the interest award is properly classified and taxable as ordinary income. The court explained that the award portion of the judgment one of the taxpayers received was "in lieu of" what she might have earned on the fair value of her shares for the 13-year period between the merger and final judgment in the prior litigation. Therefore, the court concluded that it qualifies as ordinary income under the origin-of-the-claim doctrine. However, in the absence of clear statutory authority, the court applied the established use-of-money principle and concluded that the IRS improperly assessed underpayment interest against taxpayers from April 16, 2012 to April 15, 2017. The court remanded for the district court to enter a judgment for taxpayers as to their claim for refund of the $603,335.27 underpayment interest amount. View "Goldring v. United States" on Justia Law

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Petitioner filed a petition with the U.S. Tax Court challenging the IRS's deficiency determination and the imposition of an accuracy-related penalty. The Tax Court issued a decision upholding in part the IRS's deficiency determination and imposition of the accuracy-related penalty.After the Fifth Circuit found that collateral estoppel does not bar the Commissioner from litigating this issue, the court concluded that the Tax Court did not clearly err in finding that petitioner is not entitled to deduct his 2014 legal expenses under 26 U.S.C. 162(a). In this case, petitioner has not carried his burden of proof to show that the origin of the claims underlying his litigation to recoup his trading agreement losses—the trading agreement venture—was related to his engagement in a trade or business within the meaning of section 162(a). The court also concluded that the Tax Court did not err in finding that petitioner cannot deduct his legal expenses incurred litigating to recover on his ex-wife's indebtedness as expenses for the production of income under 26 U.S.C. 212(1). However, the court concluded that petitioner is entitled to a reasonable cause and good faith defense for his understatement attributable to deducting his trading agreement legal fees under section 162(a) rather than section 212. View "Ray v. Commissioner of Internal Revenue" on Justia Law

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The Fifth Circuit affirmed the district court's grant of the IRS's motion to dismiss an action brought by plaintiff, seeking to recover penalties that he paid for filing late tax returns and making late tax payments for the 2012-2015 tax years. Plaintiff alleged that he was entitled to the "reasonable cause" exception to the otherwise mandatory penalties.The court concluded that plaintiff failed to sufficiently plead reasonable cause under I.R.C. 6651(a)(1)–(2) for exemption from the mandatory penalties where plaintiff could have used ordinary business care and prudence to assure that his taxes were filed and paid, much like he conducted business and employed a CPA while incarcerated. Likewise, the court concluded that plaintiff failed to demonstrate reasonable cause under I.R.C. 6654 for the same reasons. View "Lindsay v. United States" on Justia Law

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Plaintiffs-Appellants Walter “Gil” Goodrich (individually and in his capacity as the executor of his father—Henry Goodrich, Sr.’s— succession), Henry Goodrich, Jr., and Laura Goodrich Watts brought suit against Defendant-Appellee United States of America. Plaintiffs claimed that, in an effort to discharge Henry Sr.’s tax liability, the Internal Revenue Service (“IRS”) wrongfully levied their property, which they had inherited from their deceased mother, Tonia Goodrich, subject to Henry Sr.’s usufruct. A magistrate judge previously determined Plaintiffs were not the owners of money seized by the IRS, and that represented the value of certain liquidated securities. The Fifth Circuit determined that whether Plaintiffs were in fact owners of the disputed funds was an issue governed by Louisiana law. The Fifth Circuit declined further review until the Louisiana Supreme Court had a chance to review the ownership issue in the first instance. View "Goodrich, et al v. United States" on Justia Law

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Plaintiff filed suit seeking a declaratory judgment that an IRS transfer certificate is not necessary to transfer ownership of her account with Fidelity. The district court sua sponte dismissed the action for lack of subject matter jurisdiction, concluding that such a declaration would necessarily involve a determination with respect to federal taxes.The Fifth Circuit affirmed, concluding that the Declaratory Judgment Act's federal-tax exception is a jurisdictional condition, requiring dismissal, rather than a nonjurisdictional condition, which may be waived. In this case, because the requested relief—declaring that plaintiff was not required to provide a transfer certificate to Fidelity—necessarily involves a determination with respect to federal taxes, the district court properly dismissed her action for lack of jurisdiction. View "Rivero v. Fidelity Investments, Inc." on Justia Law

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The Fifth Circuit affirmed the judgment of the tax court and held that MoneyGram, a global payment services company, is not a "bank" under the tax code, 26 U.S.C. 581, because customers do not give MoneyGram money for safekeeping, which is the most basic feature of a bank. The court explained that purchasers of money orders are not placing funds with MoneyGram for safekeeping. Nor are the financial institutions that use MoneyGram to process official checks doing so for the purpose of safekeeping. In this case, examining the substance of MoneyGram's business confirms how the company has long described itself on its tax returns: as a nondepository institution. Therefore, without deposits, MoneyGram cannot be a bank. View "MoneyGram International, Inc. v. Commissioner of Internal Revenue" on Justia Law

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After the IRS assessed taxpayer in 2014 for tax deficiencies dating back to 2005, taxpayer contends that the assessment is barred by the Internal Revenue Code's three-year limitations period, which runs from the date "the return" is filed. The district court held that the limitations period never began to run because taxpayer never filed "the return."The Fifth Circuit vacated the district court's judgment allowing the tax assessment and held that taxpayer filed "the return" that started the limitations clock when he filed forms containing data sufficient to (1) show that he was liable for the taxes assessed and (2) calculate the extent of his tax liability. In this case, taxpayer's Forms 1040 and 1099 constitute "the return" that begins the running of the Internal Revenue Code's three-year assessment limitations period. Because the IRS assessment came more than three years after taxpayer filed those forms, the court concluded that the assessment is barred by the limitations period. The court remanded to the district court with instructions to remand the case to the bankruptcy court for entry of judgment in accord with the opinion. View "Quezada v. Internal Revenue Service" on Justia Law

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The Fifth Circuit affirmed the tax court's denial of petitioners' motion for costs under 26 U.S.C. 7630. Petitioners moved for costs after a dispute over an IRS notice of deficiency assessing them about $51,000 in taxes, penalties, and interest that resulted in their favor. The court held that, given the available facts, the tax court did not abuse its discretion by concluding that the IRS's position was substantially justified. In this case, the record plainly reflects a discrepancy between petitioners' return and the IRS's third-party material. Furthermore, when the Commissioner answered, the IRS had not received any substantiating documents from petitioners. Therefore, the tax court did not abuse its discretion. View "Johnson v. Commissioner" on Justia Law