Articles Posted in Tax Law

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The First Circuit reversed the decision of the Tax Court ruling that Appellants owed an excise tax for contributions made to their Roth individual retirement accounts (Roth IRAs) in violation of contribution limits, holding that a transaction Appellants entered into to reduce their federal taxes violated neither the letter nor purpose of the relevant statutory provisions. Specifically, the Tax Court found that the Commissioner of Internal Revenue appropriately recharacterized the transaction at issue under the common-law substance over form doctrine because the transaction’s sole purpose was to “shift[] millions of dollars into Roth IRAs in violation of the statutory contribution limits.” The First Circuit reversed, holding that the Commissioner did not have the power to call Appellants’ transaction a violation of the Tax Code where the transaction did not violate the plain intent of the relevant statutes. View "Benenson v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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The First Circuit reversed the decision of the Tax Court ruling that Appellants owed an excise tax for contributions made to their Roth individual retirement accounts (Roth IRAs) in violation of contribution limits, holding that a transaction Appellants entered into to reduce their federal taxes violated neither the letter nor purpose of the relevant statutory provisions. Specifically, the Tax Court found that the Commissioner of Internal Revenue appropriately recharacterized the transaction at issue under the common-law substance over form doctrine because the transaction’s sole purpose was to “shift[] millions of dollars into Roth IRAs in violation of the statutory contribution limits.” The First Circuit reversed, holding that the Commissioner did not have the power to call Appellants’ transaction a violation of the Tax Code where the transaction did not violate the plain intent of the relevant statutes. View "Benenson v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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The First Circuit affirmed the Tax Court’s decision upholding the Commissioner’s notice of deficiency against Transupport, Inc. The notice of deficiency reduced Transport’s cost of goods sold, reduced deductions it took for compensation paid to four employee-shareholders, and assessed a twenty percent accuracy-related penalty for tax years 2006 through 2008. This was the Tax Court’s second opinion in this case, the first of which addressed whether Transupport committed fraud. The First Circuit affirmed the Tax Court’s decision in Transupport II, as to which this appeal was taken, holding that the Tax Court (1) did not make errors of law or err in its findings of fact when upholding the notice of deficiency’s adjustment to deductions Transupport took for compensation paid to the employee-shareholders; (2) did not clearly err in determining Transupport’s gross profit percentage with regard to the cost of goods sold; and (3) did not clearly err in applying the accuracy-related penalty. View "Transupport, Inc. v. Commissioner of Internal Revenue" on Justia Law

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Defendant divorced his wife in order to transfer assets fraudulently and avoid some tax liability. The district court set aside the separation agreement as a fraudulent transfer and proceeded to redivide and reallocate certain assets applying Massachusetts law. The government’s tax liens attached directly to any assets allocated to Defendant, but the government argued that its tax liens also attached indirectly to certain assets allocated to Defendant’s wife. This appeal concerned the district court’s allocation of two assets that the district court divided more or less evenly. The First Circuit vacated in part and affirmed in part, holding (1) with regard to funds that were directly traceable to the tax shelter that Defendant used to reduce his taxable income for several years, it was not clear whether the district court considered fourteen factors required by Massachusetts law in order to arrive at an equitable division of the parties’ assets; and (2) the government was not entitled to Defendant’s wife’s half of the proceeds from the sale of property owned by Defendant and his wife in Massachusetts on a lien-tracing theory. Remanded. View "United States v. Baker" on Justia Law

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A court-appointed receiver (the Receiver), acting on behalf of a class of defrauded persons (the underlying plaintiffs), attempted to collect judgments previously rendered against several corporations and their proprietors. When the Receiver was able to recoup only a portion of the amount, it filed a tax-refund claim. The IRS denied the tax-refund claim. Thereafter, the Receiver responded by bringing this suit pursuant to 28 U.S.C. 1346(a). At issue in this case was the statute’s requirement that a taxpayer who seeks to reduce her tax liability under certain circumstances have an “unrestricted right” to income when she first reported it. The district court fashioned a judicially-created exception to the statute’s “unrestricted right” requirement, proceeded to deny the government’s motion to dismiss, and granted a modicum of relief. The First Circuit reversed, holding that the district court erred in refusing to follow section 1341(a)’s unambiguous textual mandate by carving out a special exemption from the “unrestricted right” requirement for parties in either the Receiver’s or the underlying plaintiffs’ position. Remanded for entry of judgment dismissing the tax-refund suit. View "Robb Evans & Associates, LLC v. United States" on Justia Law

Posted in: Tax Law

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Pursuant to the Internal Revenue Code, taxpayers receive credits against owed U.S. income tax for money paid to a foreign country for “taxable international business transactions of economic substance.” Some banks have engaged in transactions that generate a foreign tax credit in order to take advantage of the U.S. deductions. In this case, the IRS began disallowing the claim for foreign tax credits sought by Sovereign Bancorp, Inc., later acquired by Santander Holdings USA, Inc. (together, Sovereign), a U.S. taxpayer, and, in 2008, began imposing accuracy-related penalties. Sovereign brought suit to obtain a refund from the IRS, the amount of which was approximately $234 million in taxes, penalties, and interest. The transaction at issue complied on its face with then-existing U.S. statutory and regulatory requirements. The government opposed the refund, arguing that the transaction failed the common law economic substance test. The district court awarded summary judgment to Sovereign, concluding that the transactions had economic substance. The First Circuit reversed, holding that the government was entitled to summary judgment in its favor as to the economic substance of the transaction at issue. View "Santander Holdings USA, Inc. v. United States" on Justia Law

Posted in: Tax Law

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After Appellants went bankrupt, Appellees foreclosed on their home. Appellants each received an IRS Form 1099-A in the mail at the end of the tax year stating that the foreclosure might have tax consequences. The mortgage debt, however, was discharged during Appellants’ Chapter 7 bankruptcy proceedings. Appellants sued Appellees, claiming that the Forms were a coercive attempt to collect on the mortgage debt, which Appellees had no right to collect. The bankruptcy court found the Forms gave Appellants “no objective basis” to believe Appellees were trying to collect the discharged mortgage debt. The district court affirmed. The First Circuit affirmed, holding that the evidence in the record showed that the Forms were not objectively coercive. View "Bates v. CitiMortgage, Inc." on Justia Law

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After a merger in 1995, William and Patricia Cavallaro received 38 shares of stock in Camelot, the merged company. Their three sons received 54 shares each. When Camelot was subsequently acquired, the Cavallaros received a total of $10,830,000, and each son received $15,390,000. The IRS issued notices of deficiency to the Cavallaros for tax year 1995, determining that Camelot had a pre-merger value of $0 and that when the merger occurred, William and Patricia each made a taxable gift of $23,085,000 to their sons. Therefore, each of the Cavallaros incurred an increase in tax liability in the amount of $12,696,750. The Tax Court ultimately concluded that William owed $7,652,980 and that Patricia owed $8,009,202. The Cavallaros appealed, arguing that the Tax Court erred by failing to shift the burden of proof to the Commissioner. The First Circuit affirmed in part, reversed in part, and remanded, holding (1) the Tax Court correctly determined that the burden of proof was on the Cavallaros; but (2) the Tax Court misstated the nature of the Cavallaros’ burden of proof. Remanded. View "Cavallaro v. Koskinen" on Justia Law

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Daniel George, a self-taught chemist who created his own health supplements, was convicted of tax evasion based on his failure to pay taxes for the tax years 1996 through 1999. Six weeks after his tax evasion indictment, George incorporated Biogenesis Foundation, Inc. George then applied for tax-exempt status for Biogenesis as a charitable organization. The IRS granted Biogensis’s application in 2003. In 2011, Biogenesis retroactively filed tax forms claiming it was a section 26 U.S.C. 501(c)(4) organization for the tax years 1996 through 2002. Thereafter, the IRS issued a notice of deficiency to George, stating that he owed $3.790 million in income taxes and penalties on $5.65 million in bank deposits he made and interest earned for the tax years 1995 through 2002. George petitioned for review, asserting that the income earned for those tax years was not his but Biogenesis’s. The tax court rejected George’s arguments and found George liable for the full amount of the alleged deficiency. The Supreme Court affirmed, holding that the tax court did not err in determining that an organization distinct from George did not exist during the applicable tax years. View "George v. Comm’r of Internal Revenue" on Justia Law

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In an effort to raise more tax revenue, the Puerto Rico legislature amended the corporate alternative minimum tax (AMT) in 2015. Wal-Mart Puerto Rico, Inc., the largest private employer in Puerto Rico, brought this action seeking an injunction against the continued enforcement of the AMT against it and a declaration that the AMT was unlawful. The district court permanently enjoined and declared invalid the enforcement of the AMT, concluding that the AMT violates the dormant Commerce Clause, the Federal Relations Act, and the Equal Protection Clause. The First Circuit affirmed, holding (1) the federal district court had jurisdiction over the suit; and (2) the AMT is a facially discriminatory law that does not survive the heightened level of scrutiny under the dormant Commerce Clause. View "Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez" on Justia Law