Justia Tax Law Opinion Summaries

Taxpayers, United States citizens claiming to be bona fide residents of the Virgin Islands, petitioned the Tax Court, challenging the IRS's deficiency notices. In consolidated appeals, the court reviewed the Tax Court's denial of the Virgin Islands' motion to intervene in Taxpayers' proceedings in the Tax Court. The court concluded that the Virgin Islands qualified for intervention of right under Federal Rule of Civil Procedure 24(a)(2) and held that Rule 24(a)(2) applied in this instance. Because the court concluded that the Tax Court should have allowed the Virgin Islands to intervene as a matter of right under Rule 24(a)(2), the court did not reach the question of whether the Tax Court abused its discretion in denying permissive intervention under Rule 24(b)(2). Accordingly, the court remanded with instruction to grant the Virgin Islands intervention. View "Huff v. Commissioner of IRS, et al." on Justia Law

Plaintiff, former vice president and CFO of National Airlines, filed suit under 26 U.S.C. 7422 against the United States for a refund of taxes erroneously assessed. The United States counterclaimed for the unpaid balance of the tax assessments. The district court granted summary judgment in favor of the government on both the claim and counterclaim. The court held that assets are "encumbered" for purposes of 26 U.S.C. 6672 only if "the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds," a test that is not met here. Therefore, the district court properly held that plaintiff willfully failed to pay over excise taxes that he was obligated to pay as a responsible person. The court also held that the Air Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, section 301(a)(1), did not "allow the airlines to use the excise taxes as working capital" and does not defeat trust status for unpaid excise taxes for purposes of personal liability under section 6672. Accordingly, the court affirmed the judgment of the district court. View "Nakano v. United States" on Justia Law

Deutsche Bank filed its 1999 Form 1120F (U.S. Income Tax Return of a Foreign Corporation), reporting total tax of $105,725,463, total payment of $188,256,721, including credit for taxes withheld at the source ($13,256,721), and a resulting overpayment of $82.5 million. Form 1120F does not itemize withholding credits, which were derived from Forms 8805 (Foreign Partner’s Information Statement of Section 1446 Withholding Tax) and 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) received from withholding agents. Deutsche Bank did not attach those forms . The IRS returned the filing, unprocessed, requesting documentation of the withholding credit. In its amended return, Deutsche Bank stated that it discovered an overstatement of the withholding credit by $11,240 and that the correct amount was $13,245,481. The IRS processed the resubmitted return without correcting the error and credited the overpayment to the 2000 tax year. Later, Deutsche Bank filed an amended 1999 return claiming an additional refund of $59 million based on a valuation adjustment. The IRS issued the refund and $5 million in overpayment interest for January 1, 2001 to November 14, 2002. The IRS denied its request for additional interest for March 15 to December 31, 2000. The Claims Court agreed. The Federal Circuit affirmed, stating that the return was not filed by the extended return filing due date in processible form to commence the accrual of overpayment interest. View "Deutsche Bank AG v. United States" on Justia Law

In 1997, the trusts acquired all shares of AIS with an aggregate basis of $5,612,555. In 1999, the trusts formed Wind River Corporation and contributed their AIS shares in exchange for all Wind River shares. Wind River designated itself a subchapter S Corporation. In 2003, Wind River elected to treat AIS as a qualified subchapter S subsidiary. Before that election, the trusts’ aggregate adjusted basis in Wind River was $15,246,099. After the Qsub election, the trusts increased their bases in that stock to $242,481,544. The trusts sold their Wind River interests to Fox. After transaction costs, the sale yielded $230,111,857 in cash and securities in exchange for the Wind River stock. The trusts claimed a loss of $12,247,229: the difference between the amount actually received for the sale and the new basis in the Wind River stock. The trusts shareholders’ 2003 tax returns showed that capital loss. The IRS determined that a capital gain of approximately $214 million had been realized from the sale to Fox, for a cumulative tax deficiency of $33,747,858. Deficiency notices stated “the Qsub election and the resulting deemed I.R.C. 332 liquidation did not give rise to an item of income under I.R.C. 1366(a)(1)(A); therefore, [the Trusts] could not increase the basis of their [Wind River] stock under I.R.C. 1367(a)(1)(A).” The Tax Court found the increase in basis and declared loss to be improper. The Third Circuit affirmed. View "Ball v. Comm'r of Internal Revenue Serv." on Justia Law

Plaintiffs, three independent tax-return preparers, filed suit contending that the IRS's new regulations exceeded the agency's authority under the statute. At issue was whether the IRS's statutory authority to "regulate the practice of representatives of persons before the Department of the Treasury" encompassed authority to regulate tax-return preparers. In the court's judgment, the traditional tools of statutory interpretation - including the statute's text, history, structure, and context - foreclosed and rendered unreasonable the IRS's interpretation of 31 U.S.C. 330. Therefore, the court affirmed the judgment of the district court, agreeing that the IRS's statutory authority under Section 3303 could not be stretched so broadly as to encompass authority to regulate tax-return preparers. View "Loving, et al. v. IRS, et al." on Justia Law

The County filed a putative class action on behalf of similarly situated Minnesota counties seeking a declaratory judgment that Fannie Mae, Freddie Mac, and the FHFA violated state laws by failing to pay a tax on transfers of deeds to real property. The district court granted the federal agencies' motion to dismiss for failure to state a claim. Since Congress exempted the federal agencies from all state taxation except on real property, and Minnesota's deed transfer fell within the broad exemption, the court affirmed the judgment of the district court. View "Hennepin County v. Federal National Mortgage, et al." on Justia Law

In 1993, Dr. Dargie was a student at the UT College of Medicine. In 1994, Middle Tennessee Medical Center agreed to pay Dargie’s tuition, fees, and other reasonable expenses for attending UT. After graduation and completion of his residency, Dargie was required to repay MTMC’s grant by either working as a doctor in the medically underserved community of Murfreesboro for four years or repaying two times the uncredited amount of all conditional award payments he received. MTMC paid UT $73,000 on Dargie’s behalf. After completing his medical training in 2001, Dargie chose to practice in Germantown, near Memphis. In 2002, Dargie repaid $121,440.02. In 2005, the Dargies filed an amended tax return for 2002, claiming they had “inadvertently omitted an ordinary and necessary business expense” on their Schedule C for the $121,440 repayment. The IRS disallowed the deduction under I.R.C. 162. The Dargies sued. The district court granted summary judgment to the government, finding that the repayment was a personal expense and, regardless, no deduction would be allowed under I.R.C. 265(a)(1) because the amount was allocable to income the Dargies had received tax-free. The Sixth Circuit affirmed, finding the repayment a personal expense.View "Dargie v. United States" on Justia Law

EAR, a subchapter S corporation, filed for Chapter 11 bankruptcy. In the years before its petition, EAR made federal income tax payments on behalf of its shareholders; eight of the payments in the two years preceding its petition. Once in Chapter 11, EAR, acting as debtor in possession, filed an adversary complaint against the government seeking to recover all nine payments as fraudulent transfers: the eight most recent payments under 11 U.S.C. 548(a)(1), which provides for recovery of transfers made within two years of the filing, and the ninth under 11 U.S.C. 544(b), which enables a trustee to bring a state‐law fraudulent‐transfer action. EAR asserted that the IRS was precluded from raising sovereign immunity as a defense. The U.S. agreed to disgorge the eight payments, but contested EAR’s ability to recover the ninth payment under 544(b). The bankruptcy court rejected the government’s theory, finding that 11 U.S.C. 106(a)(1) abolished federal immunity from suit under listed bankruptcy causes of action, including section 544. The district court affirmed. The Seventh Circuit reversed, holding that 106(a)(1) does not displace the actual‐creditor requirement in section 544(b)(1). Ordinarily, a creditor cannot bring an Illinois fraudulent‐transfer claim against the IRS; therefore, under 544(b)(1), neither can the debtor in possession.View "United States v. Equip. Acquisition Res., Inc." on Justia Law

In 2011 Rizzo filed a voluntary petition for personal Chapter 7 bankruptcy and received a general discharge. Despite his discharge, the Michigan Department of Treasury sent collection letters demanding that he pay $72,286.39 in delinquent Single Business Tax that had been assessed against a company, for which Rizzo had been an officer. Rizzo filed an adversary action, contending that his personal liability for the unpaid SBT had been discharged in bankruptcy. Treasury claimed that liability for the SBT deficiency is a nondischargeable “excise tax” debt under 11 U.S.C. 507(a)(8)(E). The bankruptcy court agreed and dismissed. The district court and Sixth Circuit affirmed, rejecting Rizzo’s argument that the debt was derivative, not primary, and therefore not an excise tax. Rizzo conceded that the unpaid SBT was an “excise tax” deficiency as to the company and did not dispute that he was personally liable for the company’s unpaid tax under state law. Michigan law simply confers derivative liability upon Rizzo for precisely the same excise tax deficiency that was assessed against the company. View "Rizzo v. MI Dep't of Treasury" on Justia Law

These appeals concerned whether Fannie Mae and Freddie Mac were exempt from the payment of state and local taxes imposed on the transfer of real property in Maryland and South Carolina. Fannie Mae and Freddie Mac claimed that they were exempt from such transfer taxes under 12 U.S.C. 1723a(c)(2) and 1452(e) respectively. The district courts in Maryland and South Carolina rejected the Counties' claims, concluding that the general tax exemptions applicable to Fannie Mae and Freddie Mac, while not applicable to real property taxes, did cover real property transfer taxes, thus making a distinction between property and transfer taxes. The district courts also concluded that Congress acted within its Commerce Clause power. The court held that the real property exclusions from the general tax exemptions of section 1723a(c)(2) and 1452(e) did not include transfer and recordation taxes; in the absence of a particular constitutional right that would trigger heightened scrutiny, the court held that a congressional exemption from state taxation under the Commerce Clause was subject to rational-basis review; Congress could exempt Fannie Mae and Freddie Mac from state and local transfer taxes, even though they were collected in the context of interstate transactions, because the taxes could substantially interfere with or obstruct the constitutionally justified missions of Fannie Mae and Freddie Mac in bolstering the secondary mortgage market; and the Counties' remaining arguments for finding the statutory tax exemptions unconstitutional were rejected. Accordingly, the court affirmed the judgment of the district courts. View "Montgomery County, Maryland v. Federal National Mortgage Assoc." on Justia Law