Justia U.S. 1st Circuit Court of Appeals Opinion Summaries

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

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

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

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

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

As part of an investigation into the 2008 tax liability of Defendant and his wife, the IRS served a summons on Defendant requiring him to appear for an interview and to produce banking and financial records. Defendant refused to answer any questions and did not provide the requested documents. The government filed a petition to enforce the portion of the summons seeking the production of the documents. In response, Defendant asserted a Fifth Amendment claim of privilege over his compelled act of producing the documents. The district court ultimately ordered Defendant to produce all of the requested documents, including those covered and those not covered by the Bank Secrecy Act (BSA). The First Circuit affirmed the district court’s enforcement of the summons as to documents required to be kept under the BSA and vacated the enforcement of the summons for documents not subject to the BSA, holding that a taxpayer must comply with an IRS summons for documents he or she is required to keep under the BSA, where the IRS is civilly investigating the failure to pay taxes and the matter has not been referred for criminal prosecution. View "United States v. Chen" on Justia Law

Richard Schiffmann and Stephen Cummings were officers of ICOA, Inc. (ICOA), a corporation that struggled to stay current on federal trust fund tax - or payroll tax - obligations. After Schiffmann and Cummings were fired, the Internal Revenue Service (IRS) made trust fund recovery penalty assessments against Schiffmann and Cummings. Schiffman filed suit seeking to recover the sums previously seized from him and to nullify the assessments. The government counterclaimed against Schiffman, Cummings, and others seeking to recover the remainder of the overdue taxes and penalties. Cummings, in turn, counterclaimed against the government seeking to nullify the assessments against him. The district court entered summary judgment for the government on its counterclaims and on the claims asserted by Schiffmann and Cummings, concluding that, as a matter of law, Schiffmann and Cummings were responsible persons who had acted willfully in not paying ICOA’s trust fund taxes. The First Circuit affirmed, holding that the district court did not err in concluding that Schiffmann and Cummings were responsible persons who had willfully caused ICOA to shirk its payroll tax obligations. View "Schiffmann v. United States" on Justia Law

Taxpayers claimed a $220,800 charitable deduction on their 2003 and 2004 returns that corresponded to the purported value of a historic preservation facade easement on their Boston home, which they donated to the Trust of Architectural Easements. The Commissioner of Internal Revenue disallowed the deduction. The Tax Court found that the actual value of the easement was zero and that Taxpayers were liable under applicable IRS regulations for a forty percent accuracy-related penalty for making a gross valuation misstatement. The First Circuit affirmed, holding (1) the Tax Court’s finding that Taxpayers were liable for accuracy-related penalties was sound as a legal matter and not clearly erroneous as a factual matter; and (2) Taxpayers' second argument on appeal was waived. View "Kaufman v. Comm’r of Internal Revenue" on Justia Law

The four debtors involved in these bankruptcy appeals all failed to timely file their Massachusetts income tax returns and failed to pay their taxes. Each debtor eventually filed his late tax returns but still failed to pay the taxes that were due. Each debtor eventually filed for Chapter 7 bankruptcy and sought a ruling that their obligation to pay the unpaid taxes was dischargeable. The Massachusetts Department of Revenue argued that unpaid taxes for which no return was timely filed by the Commonwealth’s statutory deadline fit within an exception to discharge under 11 U.S.C. 532(a)(1)(B)(i). The bankruptcy courts split three to one in favor of the debtors. In the two cases appealed to the Bankruptcy Appellate Panel (BAP), the BAP sided with the debtors. In the two cases appealed to the district court, the court granted summary judgment to the Department. The First Circuit affirmed the district court’s judgment in favor of the Department and reversed the BAP’s grant of judgment for the debtors, holding that a Massachusetts state income tax return filed after the date by which Massachusetts requires such returns to be filed does not constitute a “return” under 11 U.S.C. 523(a) such that unpaid taxes due under the return can be discharged in bankruptcy. View "Fahey v. Mass. Dep’t of Revenue" on Justia Law

Plaintiffs, two limited partnerships, each owned an apartment building in Puerto Rico that qualified for low-income housing tax credits. Defendant was the agency responsible for allocating the credits. Plaintiffs and Defendant entered into agreements setting the applicable percentage for their covered projects at 8.12 percent. Thereafter, Congress passed legislation providing that the applicable percentage for developments such as those owned by Plaintiffs should not be less than nine percent. Defendant, however, allocated to Plaintiffs the exact amount of credits specified in the agreements. Plaintiffs sued Defendant in federal court, alleging that Defendant had unlawfully seized the additional tax credits to which they were apparently entitled. Defendant moved for judgment on the pleadings, asserting, among other things, that Plaintiffs’ action was time-barred. The district court granted the motion, identifying three justifications supporting for the entry of judgment on the pleadings: waiver, untimeliness, and the absence of any cognizable property interest in the additional tax credits. The First Circuit affirmed on the basis that Plaintiffs’ action was brought outside the applicable limitations period, and equitable tolling did not apply. View "Jardin de las Catalinas Ltd. P’ship v. Joyner" on Justia Law