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

Articles Posted in Tax Law

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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

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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

Posted in: Criminal Law, Tax Law

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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

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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

Posted in: Bankruptcy, Tax Law

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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

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The states of Massachusetts and Rhode Island each tax the transfer of real estate. In separate actions, the Town of Johnston, Rhode Island and the Commissioners of Bristol County, Massachusetts (the municipalities) brought actions against Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (collectively, the entities), seeking declaratory judgments that the entities owed transfer taxes as well as money damages and equitable relief to recover the unpaid taxes. Federal district courts granted the entities’ motions to dismiss based on statutory exemptions from taxation. The municipalities appealed, arguing that a real property exception in the entities’ tax exemptions applies to the transfer taxes and that the exemptions themselves are unconstitutional. The First Circuit affirmed the dismissal of all claims, holding (1) the transfer taxes are not included in the real property exception to the entities’ tax exemptions; and (2) the tax exemptions are a constitutional exercise of Congress’ power under the Commerce Clause and do not violate the Tenth Amendment.View "Town of Johnston v. Fed. Housing Fin. Agency" on Justia Law

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In 1995, a number of government agencies opened investigations into the dealings of Fresenius Medical Care Holdings, Inc. with various federally funded health-care programs. In 2000, Fresenius entered into a series of criminal plea and civil settlement agreements with the government. The civil settlement agreements released several claims against Fresenius, including claims made under the False Claims Act (FCA). Those agreements eschewed any tax characterization. Thereafter, the parties began disputing the tax treatment of the balance of the civil settlements. Fresenius commenced a tax refund action for the purpose of determining the deductibility of the amount in dispute. The district court concluded that where the parties had eschewed any tax characterization, the critical consideration in determining deductibility was the extent to which the disputed payment was compensatory as opposed to punitive. At trial, the court’s jury instructions embodied this conclusion. The jury found that a large chunk of the settlement was deductible. The court accepted this finding and ordered tax refunds totaling more than $50,000,000. The First Circuit affirmed, holding that, “in determining the tax treatment of an FCA civil settlement, a court may consider factors beyond the mere presence or absence of a tax characterization agreement between the government and the settling party.” View "Fresenius Med. Care Holdings, Inc. v. United States" on Justia Law

Posted in: Health Law, Tax Law

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George Schussel’s former company fraudulently transferred millions of dollars to him in order to avoid paying income taxes. The IRS, which is authorized by statute to collect a person’s tax debt by reclaiming assets the debtor has transferred to someone else, claimed that Schussel was liable as a transferee for the company’s tax deficiencies. The United States Tax Court held Schussel liable for the company’s back taxes of over $4.9 million plus interest of at least $8.7 million. Schussel appealed, disputing the amount he owed the IRS as a result of the fraudulent transfers. The First Circuit reversed in part and affirmed in part, holding (1) the tax court erred in calculating prejudgment interest on the fraudulently transferred funds under the federal tax interest statute rather than assessing the prejudgment interest at the Massachusetts rate; (2) the tax court did not err in accepting as a proper measure of the assets Schussel received the actual amount transferred from the company into Schussel-controlled accounts; and (3) Schussel’s loans to the company to pay Schussel’s litigation expenses did not reduce the net amount transferred to him. View "Schussel v. Werfel" on Justia Law

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At issue in this appeal was a tax credit that offset federal tax owed on income earned in the operation of a business in Puerto Rico. The credit remained available to taxpayers under section 936 of the Internal Revenue Code during the ten-year transition period after section 936 was repealed. During the transition period, the taxable income an eligible claimant could claim in computing its credit was capped at an amount approximately equal to the average of the amounts it had previously claimed, but the cap could be adjusted for a taxpayer’s purchases and sales of businesses that had generated credit-eligible income. In this case, Appellant-corporation, a U.S. taxpayer, sold a line of businesses in Puerto Rico to a foreign corporation that did not pay U.S. corporate income taxes. Appellant argued it was not required to reduce its cap because the buyer had no credit cap to increase. The district court granted summary judgment for the government. The First Circuit reversed, holding (1) the reduction in a seller’s cap as a result of the sale of a business line is appropriate only in the event of a corresponding increase in the buyer’s cap; and (2) therefore, the transfers did not reduce Appellant’s credit cap. View "OMJ Pharms., Inc. v. United States" on Justia Law

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The IRS held a tax lien against Patrick Hannon’s property, including a parcel of land Hannon owned in Newton, Massachusetts. The IRS discharged that specific parcel from its tax lien under 26 U.S.C. 6325(b)(2)(A) to allow the City of Newton could take the property by eminent domain, and the IRS authorized the discharge upon its receipt of a portion of the amount paid by Newton. Following the taking, Hannon sued Newton in Massachusetts state court and was awarded damages for undercompensation. Both the government and Rita Manning, a lower-priority creditor who had obtained a judgment against Hannon, intervened and asserted priority to receive the damages award. A federal district court entered summary judgment in favor of Manning on the issue of whose lien had priority, concluding that the IRS’s decision to discharge the property from federal tax liens in exchange for payment from the taking meant the government had relinquished any tax lien on the later damages award. The First Circuit Court of Appeals reversed, holding (1) the IRS certificate issued under section 6325(b)(2)(A) did not release any claims the IRS had on the post-taking proceeds awarded to Hannon; and (2) the IRS tax lien on those post-taking proceeds was valid and thus senior to Manning’s judgment lien. View "Hannon v. United States" on Justia Law