Justia Tax Law Opinion Summaries

Utility companies operating in Placer County, California, filed a complaint against the County and the Board of Equalization, seeking a refund of taxes. They alleged that the tax rate imposed on their state-assessed property was unconstitutionally higher than the rate imposed on locally-assessed property. The tax rate for state-assessed property is calculated under Revenue and Taxation Code section 100, while locally-assessed property is taxed under a different formula. The utility companies argued that this discrepancy violated article XIII, section 19 of the California Constitution, which mandates that utility property be taxed to the same extent and in the same manner as other property.The Superior Court of Placer County sustained the County's demurrer, effectively dismissing the complaint. The trial court relied on the precedent set by the appellate court in County of Santa Clara v. Superior Court, which held that the tax rates imposed on utility property were constitutional. The utility companies acknowledged that the Santa Clara decision was binding on the trial court but maintained that they had a good faith basis for their claims on appeal.The California Court of Appeal for the Third Appellate District reviewed the case. The court affirmed the trial court's decision, concluding that the utility companies had not established that the trial court erred. The appellate court found that the utility companies did not present a valid basis for defining comparability to state a valid claim. The court noted that while the utility companies argued for comparable tax rates, they failed to provide a clear standard or formula to determine what constitutes comparability. Consequently, the court held that the utility companies did not meet their burden of proving that the County's tax rates were unconstitutional. View "Pacific Bell Telephone Co. v. County of Placer" on Justia Law

A cheesesteak restaurant owner, Nicholas Lucidonio, was involved in a payroll tax fraud scheme at Tony Luke’s, where he avoided employment taxes by issuing paychecks for “on-the-books” wages, requiring employees to sign back their paychecks, and then paying them in cash for both “on-the-books” and “off-the-books” wages. This led to the filing of false employer tax returns that underreported wages and underpaid employment taxes. Employees, aware of the scheme, received Form W-2s listing only “on-the-books” wages, resulting in underreported income on their personal tax returns. The conspiracy spanned ten years and involved systemic underreporting of wages for 30 to 40 employees at any given time.Lucidonio pleaded guilty to one count of conspiracy to defraud the IRS (Klein conspiracy) under 18 U.S.C. § 371. He did not appeal his conviction but challenged his sentence, specifically the application of a United States Sentencing Guideline that increased his offense level by two points. The enhancement applies when conduct is intended to encourage others to violate internal revenue laws or impede the IRS’s collection of revenue. Lucidonio argued that the enhancement was misapplied because it required explicit direction to others to violate the IRS Code, which he claimed did not occur, and that his employees were co-conspirators, not additional persons encouraged to violate the law.The United States Court of Appeals for the Third Circuit reviewed the case. The court disagreed with Lucidonio’s interpretation that the enhancement required explicit direction. However, it found that the government failed to prove by a preponderance of the evidence that Lucidonio encouraged anyone other than co-conspirators, as the employees were aware of and participated in the scheme. Consequently, the court vacated the sentence and remanded the case for resentencing without the enhancement. View "United States v. Lucidonio" on Justia Law

Richard Spizzirri and his fourth wife, Holly Lueders, entered into a prenuptial agreement requiring Spizzirri’s estate to transfer $6 million to Lueders and $3 million to her children upon his death. After Spizzirri’s death, the estate paid the stepchildren and deducted the payments as “claims against the estate” for tax purposes. The Commissioner of Internal Revenue issued a notice of deficiency, denying these deductions, leading the estate to petition the tax court for review.The U.S. Tax Court ruled that the transfers to the stepchildren were not deductible as “claims against the estate” because they were neither “contracted bona fide” nor “for an adequate and full consideration in money or money’s worth.” The estate failed to shift the burden of proof to the Commissioner, as it did not provide credible evidence to support the deductions. The court found that the payments were essentially donative in character, as they were made to keep Lueders happy and maintain the marriage, rather than as part of an arm’s length transaction.The United States Court of Appeals for the Eleventh Circuit reviewed the case and affirmed the tax court’s decision. The appellate court agreed that the payments to the stepchildren were not contracted bona fide, as they were related to Lueders’s expectation of inheritance and lacked the characteristics of a bona fide transaction. The court emphasized that the payments were made with donative intent and were not part of an ordinary business transaction. Therefore, the estate was not entitled to deduct the $3 million transfer to the stepchildren as “claims against the estate.” View "Estate of Spizzirri v. Commissioner of Internal Revenue" on Justia Law

Burnsville Medical Building, LLC owns a three-story medical office building in Burnsville, Minnesota. Dakota County assessed the value of the property for 2021 taxes at $8,007,800. The taxpayer challenged this assessment, arguing that it overstated the property's value. The property was 25 years old, with 47,894 square feet of rentable space and an occupancy rate of 90.13 percent. The taxpayer presented an appraisal report by Kelsey K. Hornig, who used both the sales comparison approach and the income capitalization approach to value the property at $7,075,000 and $7,175,000, respectively.The Minnesota Tax Court held a trial and found that the taxpayer's appraisal overcame the prima facie validity of Dakota County's assessment. However, the tax court rejected Hornig's occupancy adjustment under the sales comparison approach, finding her testimony not credible and her adjustments internally inconsistent. The tax court also rejected Hornig's use of effective net rent to calculate potential gross income under the income capitalization approach, determining that the taxpayer did not present sufficient evidence to support reducing potential gross income by tenant improvement allowances or free rent.The Minnesota Supreme Court reviewed the case and affirmed the tax court's decision. The Supreme Court held that the tax court did not err in using market rent rather than effective net rent to calculate the property's potential gross income, as there was no evidence that the tenant improvement allowances or rent concessions were excessive or atypical. The Supreme Court also upheld the tax court's rejection of Hornig's occupancy adjustment, finding no clear error in the tax court's credibility determinations and factual findings. The final valuation of the property was set at $9,300,000. View "Burnsville Medical Building, LLC vs. County of Dakota" on Justia Law

In 2017, Gratiot County foreclosed on Donald Freed’s home due to unpaid taxes. Freed’s property, valued at $98,800, was sold for $42,000, although he owed just under $1,110. The county kept all proceeds from the sale, as Michigan’s General Property Tax Act (GPTA) did not require returning surplus proceeds to the property owner. Freed sued Gratiot County and its treasurer, Michelle Thomas, under 42 U.S.C. § 1983, claiming a violation of the Fifth and Fourteenth Amendments. Michigan intervened to defend the GPTA’s constitutionality.The United States District Court for the Eastern District of Michigan dismissed Freed’s complaint for lack of subject matter jurisdiction, citing Wayside Church v. Van Buren County. Freed appealed, and the Sixth Circuit reversed the dismissal, recognizing that the Supreme Court’s ruling in Knick v. Township of Scott partially abrogated Wayside Church. On remand, the district court granted partial summary judgment to Freed, affirming that the county had to pay Freed the difference between the foreclosure sale and his debt, but dismissed claims against Thomas due to qualified immunity.The United States Court of Appeals for the Sixth Circuit reviewed the case and affirmed Freed’s entitlement to attorneys’ fees from Gratiot County and Michigan. However, the court vacated the district court’s fee calculation and remanded for further proceedings. The Sixth Circuit held that Freed prevailed against both Gratiot County and Michigan, and Michigan’s intervention under 28 U.S.C. § 2403(b) subjected it to attorneys’ fee liability. The court found the district court’s explanation for reducing Freed’s hours and rate by 35% insufficient and required a more detailed justification for the fee award calculation. View "Freed v. Thomas" on Justia Law

Tennessee Gas Pipeline Company, LLC (Tennessee Gas) provides natural gas transportation services and purchased tangible personal property for use in Mississippi, paying use tax on these purchases. However, Tennessee Gas later paid freight charges to a third-party carrier to ship these goods to Mississippi and did not include these charges in its tax base for the use tax calculation. The Mississippi Department of Revenue (MDOR) conducted a use-tax audit for the period of November 1, 2016, through November 30, 2019, and assessed use tax on the freight charges.Tennessee Gas appealed the assessment to MDOR’s Board of Review and then to the Board of Tax Appeals (BTA), arguing that the freight charges were not taxable under Mississippi Code Sections 27-67-3 and -5 because they constituted a separate transaction from the purchase of tangible personal property. The BTA agreed with Tennessee Gas. MDOR then appealed to the Hinds County Chancery Court, which granted summary judgment in favor of Tennessee Gas, finding that the freight charges paid to a third-party carrier were not subject to use tax.The Supreme Court of Mississippi reviewed the case de novo. The court held that MDOR did not meet its burden of proving its statutory power to tax Tennessee Gas for freight charges paid to a third party. The court found that the use tax statutes and sales tax statutes must be read in conjunction, and the purchase of shipping services from an independent third party constituted a separate, closed transaction. Therefore, the freight charges should not be included in the use tax base. The court affirmed the chancery court’s decision. View "Mississippi Department of Revenue v. Tennessee Gas Pipeline Company, LLC" on Justia Law

AMTAX Holdings 227, LLC ("AMTAX") filed a lawsuit against CohnReznick LLP ("CohnReznick") in federal court, alleging breach of fiduciary duty, professional negligence, unjust enrichment, and fraud. The dispute arose from CohnReznick's calculation of a purchase price for a property under a right of first refusal agreement, which AMTAX claimed excluded exit taxes required by Section 42 of the Internal Revenue Code. AMTAX argued that this exclusion violated the agreement and federal law.The United States District Court for the Southern District of New York dismissed AMTAX's complaint for lack of subject matter jurisdiction. The court applied the Grable-Gunn test to determine whether the state-law claims presented a substantial federal issue that would warrant federal jurisdiction. The district court concluded that AMTAX's claims did not meet the criteria for federal question jurisdiction, as they did not necessarily raise a substantial federal issue and allowing federal jurisdiction would disrupt the federal-state balance.The United States Court of Appeals for the Second Circuit reviewed the district court's decision de novo. The appellate court agreed with the lower court's application of the Grable-Gunn test, finding that AMTAX's claims were primarily based on contract interpretation rather than federal tax law. The court held that the federal issue was not substantial enough to warrant federal jurisdiction and that exercising jurisdiction would disrupt the balance of state and federal judicial responsibilities. Consequently, the Second Circuit affirmed the district court's dismissal of the case for lack of subject matter jurisdiction. View "AMTAX Holdings 227, LLC v. CohnReznick LLP" on Justia Law

Michael and Susan Gates failed to file individual or corporate tax returns from 2012 to 2017. Mr. Gates pled no contest to one count of failing to file or pay taxes and was ordered to file tax returns for 2015, 2016, and 2017. The Department of Finance and Administration (DFA) audited these returns and found that the Gateses had not properly calculated their tax liability. The Gateses disputed this determination, submitted additional documentation, and DFA adjusted its calculations but still found the Gateses owed taxes. The Gateses continued to dispute the amount, leading to this lawsuit.The Garland County Circuit Court initially granted summary judgment in favor of DFA, but this decision was reversed and remanded by a higher court, which found that DFA had not adequately explained its calculations. On remand, DFA provided detailed evidence of its calculations and disallowances, and the circuit court again granted summary judgment in favor of DFA, noting the Gateses' failure to meaningfully respond to the new evidence.The Supreme Court of Arkansas reviewed the case and affirmed the circuit court's decision. The court held that DFA had met its prima facie burden by providing detailed evidence of the Gateses' net taxable income and tax liability for 2015, 2016, and 2017. The Gateses failed to meet their burden of proof by not providing specific facts to dispute DFA's calculations. The court concluded that the Gateses' general references to a large volume of documents were insufficient to create a genuine issue of material fact. The court did not address the Gateses' evidentiary objections, as it found that even considering the disputed documents, summary judgment was still appropriate. View "GATES v. HUDSON" on Justia Law

Dynamic Logic Inc. (Dynamic) markets products to help clients measure the effectiveness of their advertising campaigns. The product in question, AdIndex, uses a control/exposed methodology to measure the effectiveness of digital advertising. Dynamic surveys individuals exposed to a client's advertisements and a control group, compares the results to broader market data in its MarketNorms database, and generates a report for the client. The data from each AdIndex report is later incorporated into the MarketNorms database for future use.In 2014, the Commissioner of Taxation and Finance audited Dynamic and concluded that AdIndex was a taxable information service under Tax Law § 1105 (c) (1), assessing additional sales tax. Dynamic challenged the assessment before the Division of Tax Appeals, which upheld the tax imposition. The Tax Appeals Tribunal affirmed, finding that AdIndex's primary function was the collection and analysis of information, and that any recommendations were ancillary to the data collection. The Tribunal also determined that Dynamic was not entitled to an exclusion under Tax Law § 1105 (c) (1) because the data collected was furnished to other persons through its incorporation into the MarketNorms database.Dynamic filed a CPLR article 78 petition in the Appellate Division to annul the Tribunal's determination. The Appellate Division confirmed the determination and dismissed the petition, holding that the Tribunal had rationally determined that AdIndex was an information service and that there was substantial evidence supporting its reasoning. The court also held that the Tribunal rationally concluded that the information provided through AdIndex was substantially incorporated into reports furnished to other persons, disqualifying Dynamic from the exclusion.The New York Court of Appeals affirmed the Appellate Division's judgment, holding that the Tribunal's determination was rational and supported by substantial evidence. The court found that AdIndex fit the definition of a taxable information service and that the data was substantially incorporated into subsequent reports, making Dynamic ineligible for the exclusion under Tax Law § 1105 (c) (1). View "Matter of Dynamic Logic, Inc. v Tax Appeals Trib. of the State of New York" on Justia Law

Medtronic USA, Inc. (Medtronic) manufactures insertable cardiac monitors (RICMs) that are implanted in a patient's chest to monitor heart rhythms and detect cardiac arrhythmias. The California Department of Tax and Fee Administration (Tax Department) collected sales tax on these devices. Medtronic argued that the devices should be exempt from sales tax under Revenue and Taxation Code section 6369 and Regulation 1591, which define "medicines" exempt from tax. After exhausting administrative remedies, Medtronic filed a lawsuit seeking a refund of the collected taxes, totaling $3,329,195.79, but the trial court granted summary judgment in favor of the Tax Department.The trial court ruled that the RICMs did not qualify as "medicines" under the relevant tax exemption statutes and regulations. Medtronic appealed the decision, arguing that both the Tax Department and the trial court misinterpreted the law. The appeal was heard by the Court of Appeal of the State of California, First Appellate District, Division Two.The Court of Appeal affirmed the trial court's decision, holding that the RICMs are not exempt from sales tax. The court found that the devices are classified as "instruments, apparatus, contrivances, appliances, devices, or other mechanical, electronic, optical, or physical equipment," which are explicitly excluded from the definition of "medicines" under section 6369, subdivision (b)(2). Additionally, the court determined that the RICMs do not "assist the functioning of any natural organ" as required by subdivision (c)(2) for exemption, as their primary function is diagnostic rather than directly aiding organ function. The court emphasized that tax exemptions must be clearly mandated by statute and are strictly construed against the taxpayer. View "Medtronic USA v. Department of Tax and Fee Administration" on Justia Law