Articles Posted in US Court of Appeals for the Sixth Circuit

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Anthony, his brother Christopher, their sister Sharon, and Sharon’s husband, Durand, sought tax refunds for 21 separate fictitious trusts that they created. They were successful in obtaining refund checks based upon many of these returns, receiving over $360,000. They were convicted of mail fraud, conspiracy to commit mail fraud, aggravated identity theft, conspiracy to commit identity theft, and illegal monetary transactions. The Seventh Circuit affirmed, rejecting arguments that insufficient evidence supported Sharon’s convictions; that insufficient evidence supported the finding that Anthony and Sharon knew that they were using the names and personal identifying information of real people; that Anthony and Christopher were deprived of the effective assistance of counsel because their state-bar grievances against their attorneys created conflicts of interest; that the indictment was duplicitous regarding the aggravated-identify-theft charges and the district court failed to cure this defect by issuing a specific unanimity jury instruction; that the court’s aiding-and-abetting jury instruction was legally incorrect, and that insufficient evidence supported the court’s aiding-and-abetting jury instruction. View "United States v. Gandy" on Justia Law

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The American Jobs Creation Act of 2004 authorized the IRS to gather information about tax shelters, 26 U.S.C. 6707A. The IRS requires taxpayers and certain third parties to submit records pertaining to “reportable transaction[s]” as defined by IRS regulations, subject to significant penalties. A “material advisor” who provides material aid to a taxpayer in carrying out reportable transactions and who derives a threshold amount of gross income from that aid, faces similar penalties. A material advisor who fails to maintain a list of taxpayers that he aided in carrying out reportable transactions faces a $10,000 per day penalty. Notice 2016-66 identified “micro-captive transactions” as “transactions of interest,” a subset of reportable transactions that have “a potential for tax avoidance or evasion,” but stated that the IRS “lack[s] sufficient information” to distinguish between those that are lawful and those that are unlawful. Plaintiff, a material advisor to taxpayers engaging in micro-captive transactions, challenged the Notice under the Administrative Procedure Act, 5 U.S.C. 500, and the Congressional Review Act, 5 U.S.C. 801, arguing that it was a legislative rule that required notice-and-comment rulemaking, was arbitrary, and required submission for congressional review. The Sixth Circuit affirmed the dismissal of the complaint as barred by the Anti-Injunction Act, 26 U.S.C. 7421(a) and the tax exception to the Declaratory Judgment Act, 28 U.S.C. 2201, which divest federal district courts of jurisdiction over suits “for the purpose of restraining the assessment or collection of any tax.” The court noted that the IRS does “not have a great history of complying with APA procedures.” View "CIC Services., LLC v. Internal Revenue Service" on Justia Law

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Rotondo was the sole owner of Apex, which wholly owned four limited liability companies (Directional Entities). Apex and the Directional Entities provided services, such as human resources, to different clients. Rotondo sold the Directional Entities’ key asset, customer lists, to AES, which agreed to pay Rotondo a share of its gross profits in the form of “Consulting Fees.” Two entities sought to collect Rotondo’s Consulting Fees: Akouri loaned money to one of Rotondo’s other companies and had a security interest in Apex’s assets and a judgment against Rotondo and Apex for $1.4 million. Rotondo also owes the IRS $3.4 million. The IRS filed several notices of tax liens against Rotondo, Apex, and the Directional Entities. AES filed an interpleader action. The Sixth Circuit affirmed summary judgment in favor of the IRS. The timing of a federal tax lien is measured by when the IRS gave notice of its lien, 26 U.S.C. 6323(a), (f); the timing of state security interests, like Akouri’s, is measured by when they become “choate”—i.e., complete or perfected. Akouri’s interest would be choate as of 2019, but the IRS’s tax liens date to before 2019. The court rejected Akouri’s attempt to recategorize the customer list assets as originally belonging to Apex rather than the Directional Entities. View "AES-Apex Employer Services, Inc. v. Rotondo" on Justia Law

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After Hawk died, his wife, Nancy, decided to sell the family business, Holiday Bowl and made a deal with MidCoast, which claimed an interest in acquiring companies with corporate tax liabilities that it could set off against its net-operating losses. Holiday first sold its bowling alleys to Bowl New England, receiving $4.2 million in cash and generating about $1 million in federal taxes. Nancy and Billy’s estate then sold Holiday Bowl to MidCoast for about $3.4 million,"in essence exchanging one pile of cash for another minus the tax debt MidCoast agreed to pay." MidCoast never paid the taxes. The United States filed a transferee-liability action against Nancy and Hawk’s estate. The Tax Court ruled for the government. The Sixth Circuit affirmed, reasoning that the Hawks were transferees of a delinquent taxpayer under 26 U.S.C. 6901, and that Tennessee has adopted the Uniform Fraudulent Transfer Act, which provides remedies to creditors (like the United States) when insolvent debtors fraudulently transfer assets to third parties. Holiday Bowl owed taxes. “Congress, with assistance from the courts, has constructed a formidable defense against taxpayer efforts to traffic in net operating losses and other corporate tax benefits.” View "Billy F. Hawk, Jr., GST Non-Exempt Marital Trust v. Commissioner of Internal Revenue" on Justia Law

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Gold Forever, a music publishing company solely owned by Holland, has agreements with various artists entitling it to half of the royalties collected for the sale and performance of those artists’ work. Holland was a Motown artist and co-wrote several famous songs. His music forms some, but not all, of Gold’s catalog. BMI and Universal license others to use Gold’s music; they collect and remit the royalties to Gold. Holland owes millions of dollars to the IRS in taxes, interest, and penalties. In 2012, the IRS served notices of levy to BMI and Universal, identifying Gold as the “alter ego/nominee transferee of" Holland and requiring the companies to remit to the IRS property and rights to property that they were obligated to pay Gold. Beginning on October 6, 2016, the companies remitted $967,140.76 to the IRS. Gold made requests for refunds to the IRS within nine months. On December 6, 2017, Gold filed a wrongful levy action for the funds remitted beginning on October 6, 2016, alleging that most, if not all, of the money belongs either to Gold or to artists other than Holland. The court dismissed the suit as untimely. The Sixth Circuit reversed. The statute of limitations for a wrongful levy action cannot begin until there has been a levy that attaches to the property at issue. Notices of levy in 2012 did not constitute levies on royalties generated after the notices were served, so the statute of limitations did not bar the wrongful levy action. View "Gold Forever Music, Inc. v. United States" on Justia Law

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The defendants took part in a decade-long scheme surreptitiously to sell tax-free cigarettes, thereby defrauding federal, state, and local governments of more than $45 million in tax revenue. The federal government eventually uncovered the scheme and charged them with 34 counts, including conspiracy to commit mail or wire fraud 18 U.S.C. 1349; conspiracy to launder money, 18 U.S.C. 1956(h); and conspiracy against the United States, 18 U.S.C. 371. Maddux pleaded guilty to 29 counts; Carman, Coscia, and Smith went to trial, where a jury convicted each of them on various counts. The Sixth Circuit affirmed their convictions and sentences--Maddux to 120 months’ imprisonment, Carman to 60 months, Smith to 42 months, and Coscia to 36 months. The scheme involved use of interstate wire communications and the United States mails; it was Congress’s prerogative to punish this combination of conduct more severely than a violation of the Jenkins Act, 15 U.S.C. 376(a), which requires cigarette sellers to file monthly reports. The court rejected an argument that the trial court should have specifically instructed the jury that defendants were not charged with a violation of either the Jenkins Act or the Cigarette Trafficking Act, 15 U.S.C. 377(a). The indictment sufficiently alleged a scheme to defraud. View "United States v. Smith" on Justia Law

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Murdock, an employee with the Tipton County Board of Education, received an email purporting to be from Dr. Bibb, Director of Tipton County Schools, requesting all 2016 employee W-2s and tax information. Murdock responded with a document containing information from the W-2s of every Board employee, including names, addresses, social security numbers, income information, deductions, exemptions, withholdings, tax payments and taxpayer identifying numbers. Murdock then learned that Bibb had not requested the information. The Tipton County Sheriff notified the U.S. Secret Service and the Internal Revenue Service. The Board notified employees of the information release. Smith, a Board employee, filed suit under 26 U.S.C. 6103 and 7431. Section 6103 of the Internal Revenue Code prohibits “any local agency administering a program listed in [§ 6103](l)(7)(D)” from disclosing “return information.” Smith argues that, because the Board works with the Tennessee State Board of Education to administer the National School Lunch Program, the Board provided a qualifying SNAP benefit. The Sixth Circuit affirmed the dismissal of the suit, finding that the Board does not administer a SNAP benefit in providing lunches to students as part of the National School Lunch Program. View "Smith v. Tipton County Board of Education" on Justia Law

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In September 2005, the government assessed Chicorel $140,903.52 in income tax for the 2002 tax year. Chicorel died in 2006 having not paid the assessed taxes. On May 4, 2007, Behar, the estate’s personal representative, published a notice to creditors of the four-month deadline for presenting claims, but he did not mail the notice to the government despite it being a known creditor of the estate. In January 2009, the government filed a proof of claim in the probate proceeding concerning the tax assessment. Behar has not responded to the proof of claim; probate is ongoing. The government filed this collections proceeding in March 2016, seeking judgment on the 2005 tax assessment, which is the subject of the proof of claim. The district court granted the government summary judgment. The Sixth Circuit affirmed, holding that the government’s 2009 proof of claim filing tolled the statute of limitations, 26 U.S.C. 6502(a), which provides that, after the government assesses a tax, “such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun—(1) within 10 years after the assessment of the tax.” View "United States v. Estate of Chicorel" on Justia Law

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Losantiville Country Club hosted unprofitable nonmember events for many years, consistently using those losses to avoid paying tax on its investment income. Because the Internal Revenue Service determined that Losantiville did not hold nonmember events for the primary purpose of making a profit, the club could not offset its income from investments with losses from those nonmember activities. Invalidating those deductions resulted in Losantiville having underpaid tax on its unrelated business income between 2010 and 2012. Plus, the IRS imposed accuracy-related penalties. On appeal, the Tax Court upheld this determination, reasoning that Losantiville did not intend to profit from its nonmember events. Finding no reversible error in that decision, the Sixth Circuit affirmed. View "Losantiville Country Club v. Comm'r of Internal Revenue" on Justia Law

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Petitioners-appellants John Machacek, Jr. and Marianne Machacek were the sole shareholders of John J. Machacek, Jr., Inc. (Machacek, Inc.), a corporation organized under Subchapter S of the Internal Revenue Code. John was also an employee of Machacek, Inc. The Machaceks appealed the Tax Court’s ruling requiring them to treat as income the economic benefits resulting from Machacek, Inc.’s payment of a premium on John's life insurance policy under a compensatory split-dollar arrangement. Relying on the compensatory nature of the arrangement, the Tax Court rejected the Machaceks’ argument that the economic benefits should be treated as a shareholder distribution. The Sixth Circuit reversed, finding that the Tax Court did not consider the impact of a provision of the tax regulations specifically requiring that such economic benefits be treated as shareholder distributions. View "Machacek v. Comm'r of Internal Revenue" on Justia Law