Justia Tax Law Opinion Summaries

Woods and McCombs participated in a tax shelter to generate paper losses to reduce their taxable income. They purchased currency-option spread packages consisting of a long option, for which they paid a premium, and a short option, which they sold and for which they collected a premium. Because the premium paid was largely offset by that received, the net cost of the packages was substantially less than the cost of the long option alone. Woods and McCombs contributed the spreads, plus cash, to partnerships, which used the cash to purchase stock and currency. In calculating their basis in the partnership interests, they considered only the long component of the spreads and disregarded the nearly offsetting short component. When the partnerships’ assets were disposed of for modest gains, they claimed huge losses. Although they had contributed $3.2 million in cash and spreads to the partnerships, they claimed losses of more than $45 million. The IRS sent notices, finding that the partnerships lacked “economic substance,” disallowing related losses, and concluding that the partners could not claim a basis greater than zero for their partnership interests and that tax underpayments would be subject to a 40-percent penalty for gross valuation misstatements. The district court held that the partnerships were properly disregarded as shams but that the penalty did not apply. The Fifth Circuit affirmed. The Supreme Court reversed, first holding that the district court had jurisdiction to make the determination. The Tax Equity and Fiscal Responsibility Act authorizes courts in partnership-level proceedings to provisionally determine the applicability of any penalty that could result from an adjustment to a partnership item, even though imposing the penalty requires a subsequent, partner-level proceeding. In the later proceeding, a partner may raise reasons why the penalty may not be imposed on him personally. However, the valuation-misstatement penalty applies in this case. Once the partnerships were deemed shams, no partner could legitimately claim a basis greater than zero. Any underpayment resulting from use of a non-zero basis would be attributable to a partner having claimed an adjusted basis that exceeded the correct amount. When an asset’s adjusted basis is zero, a valuation misstatement is automatically deemed gross. The valuation¬misstatement penalty encompasses misstatements that rest on both legal and factual errors, so it is applicable to misstatements that rest on use of a sham partnership. View "United States v. Woods" on Justia Law

Appellant Lebanon Valley Farmers Bank (LVFB) is a Pennsylvania chartered bank, and a subsidiary of Fulton Financial Corporation, which merged with Keystone Heritage Group, Inc. The merger made Fulton the parent company of Lebanon Valley National Bank, which merged with Farmers Bank as part of the transaction, thereby forming LVFB. Prior to the merger, both Farmers Bank and National Bank were "institutions" subject to the Shares Tax. For the 2002 tax year, LVFB filed a Bank Shares Tax return, which included National Bank's pre-merger value in its calculation of its six-year average share value, as required by the combination provision. However, in 2005, LVFB filed a petition with the Board of Appeals, seeking a refund of the portion of its 2002 tax payment attributable to National Bank’s pre-merger share value. It claimed disparate treatment because the combination provision was inapplicable when mergers involved out-of-state banks or banks less than six years old. The Commonwealth Court has held, under the plain language of the statute, the combination provision applied only to combinations of "institutions" (i.e., banks with Pennsylvania locations). The trial court held LVFB, as the survivor of the merger of two Pennsylvania banks, should have reported a taxable share value which averaged the combined share value of each constituent institution over the past six years and was, therefore, not entitled to a refund. However, the court ordered the Commonwealth "to provide meaningful retrospective relief" to cure LVFB’s non-uniform treatment. The Commonwealth Court affirmed the Board of Finance and Revenue's classification of the merged LVFB and the 2002 tax assessment. After careful review, the Supreme Court disagreed with the Commonwealth Court's decision and reversed for further proceedings. View "Lebanon Valley Farmers Bank v. Pennsylvania" on Justia Law

Appellants appealed the tax court's decision, holding that the period to assess taxes for tax year 1999 against Jack Gaughf and his wife remained open as of March 30, 2007, when the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) to Gaughf Properties, L.P. The court affirmed the tax court's holding that (1) the Gaughfs' tax liability came within the unidentified partner exception to the general three-year statute of limitations under I.R.C. section 6229(e) because the Gaughfs were not identified as indirect partners to Gaughf Properties, L.P. in its 1999 return and (2) information identifying them as indirect partners was not otherwise timely furnished to the Secretary of the Treasury so as to trigger the one-year limitation period in I.R.C. section 6229(e). View "Gaughf Properties, L.P. v. Commissioner, IRS" on Justia Law

Ottaviano, believing himself not bound by U.S. tax law, marketed his views to others through his company, Mid-Atlantic, which offered financial products he claimed would help others avoid taxation and have the government pay their debts. Ottoviano made many representations about himself and the financial products. Customers paid Mid-Atlantic $3,500 each ($5,000 if purchased jointly) to participate. After a trial at which he represented himself, Ottaviano was convicted of conspiracy to defraud the U.S. under 18 U.S.C. 371, eight counts of mail and wire fraud under 18 U.S.C. 1341 and 1343, money laundering under 18 U.S.C. 1957, and two counts of tax evasion under 26 U.S.C. 51. The Third Circuit affirmed, noting overwhelming evidence of guilt and rejecting arguments that the district court denied him a fair trial in violation of his Fifth Amendment right to due process of law when it cross-examined him and violated his Sixth Amendment right to represent himself when it ordered him to leave the courtroom during a discussion about a letter he sent to the Treasury Secretary. View "United States v. Ottaviano" on Justia Law

Debtor appealed the bankruptcy court's order sustaining the trustee's objection to debtor's claimed exemption. Debtor had filed a petition for relief under Chapter 13 of the Bankruptcy Code and had claimed exempt, as a public assistance benefit under MO.REV.STAT. 513.430.1(10)(a), the portion of her 2012 federal income tax refund that was attributable to a child tax credit allowed under 26 U.S.C. 24. The court affirmed the bankruptcy court's order sustaining the trustee's objection to debtor's claimed exemption, concluding that the refundable portion of the child tax credit was not a public assistance benefit within the meaning of the statute and could not be claimed exempt under the statute. View "Hardy v. Fink" on Justia Law

The Seventh Circuit considered appeals by Illinois and Illinois counties and a Wisconsin county of district court holdings that those governmental bodies cannot levy a tax on sales of real property by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Although both are now private corporations, the relevant statutes provide that they are “exempt from all taxation now or hereafter imposed by any State … or local taxing authority, except that any real property of the corporation shall be subject to State … or local taxation to the same extent as other real property,” 12 U.S.C. 1723a(c)(2), 12 U.S.C. 1452(e). The Seventh Circuit affirmed. A transfer tax is not a tax on realty. After 2008 Fannie Mae owned an immense inventory of defaulted and overvalued subprime mortgages and is under conservatorship by the Federal Housing Finance Agency. The states essentially requested the court to “pierce the veil,” in recognition of the fact that if the tax is paid, it will be paid from assets or income of Fannie Mae or Freddie Mac, but their conservator is the United States, and the assets and income are those of entities charged with a federal duty. View "Milwaukee Cnty v. Fed. Nat'l Mortg. Ass'n" on Justia Law

Petitioners Scott and Audrey Blum appealed a Tax Court decision upholding the actions of the Commissioner of the Internal Revenue Service (IRS) invalidating a financial transaction as lacking economic substance and imposing two accuracy-related penalties for underpayment of taxes. "The intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it cannot make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages, and the Tax Court was right to uphold the Commissioner’s actions." View "Blum, et al v. CIR" on Justia Law

The issue before the Supreme Court in this case was the interpretation of Section 602 of the Real Estate Tax Sale Law, which concerned the notice requirements for an upset tax sale for non-payment of delinquent taxes. Specifically, the issue centered on whether the Commonwealth Court correctly held that “proof of mailing” in subsection 602(e)(2) referred exclusively to United States Postal Service Form 3817 (a Certificate of Mailing). Upon review of the facts of this case, the Supreme Court concluded that although the Washington County Tax Claim Bureau did not obtain a Certificate of Mailing, it did proffer other documents from the USPS as evidence to establish “proof of mailing.” The Court held that these USPS documents satisfied the statutory mandate for “proof of mailing” in subsection 602(e)(2). View "Horton v. Washington County Tax Claim Bureau" on Justia Law

Appellees (husband and wife) created The Dorothy M. Miller Family Irrevocable Trust, naming Mrs. Miller as settlor, and her and her husband as co-trustees. The sole beneficiaries of the trust were appellees and their only child. Appellees transferred title to their house and farm to the trust, but did not pay realty transfer tax on the transfer, claiming it was an excluded transaction under the Realty Transfer Tax Act as a transfer to a "living trust." The Department of Revenue issued a Realty Transfer Tax Notice of Determination providing the transfer was subject to realty transfer taxes, plus applicable interest and fees. Appellees unsuccessfully petitioned for redetermination with the Department’s Board of Appeals. The Commonwealth Court reversed, finding that Mrs. Miller's testimony that she intended the Trust to be a substitute for her will was sufficient to define it as a living trust. The Commonwealth appealed. The Supreme Court found the Miller Trust failed to meet the statutory definition of a living trust or will substitute. As such, the Court reversed and remanded for calculation of transfer tax. View "Miller v. Pennsylvania" on Justia Law

The Harold Warp Pioneer Village Foundation (Foundation) owned and operated a museum, motel, and campground. The motel and campground were primarily used by museum visitors. The museum, motel, and campground were all granted property tax exemptions for many years, but in 2011, state tax officials challenged the exemptions granted to the motel and campground. The Nebraska Tax Equalization and Review Commission determined that because the motel and campground were not used exclusively for educational purposes, neither was entitled to tax exemptions under Nebraska law. The Supreme Court reversed, holding that the motel and campground were beneficial to the museum and reasonably necessary to further its educational mission, and were therefore entitled to property tax exemptions. View "Harold Warp Pioneer Village Found. v. Ewald" on Justia Law