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

Husband and wife filed returns for tax years 1997-1999 reporting zero income, despite having reportable income. Based on advice from their dentist and their own research, they concluded that no provision of the Internal Revenue Code imposed liability on them for taxes, and attached this explanation to their returns. They succeeded in stopping their employer from withholding taxes claiming exemptions and having the employer treat them as independent contractors, not subject to withholding of social security and medicare taxes. Between 2000 and 2008, despite reportable income asserted by the government to exceed $100,000 in each year, they filed no returns and took steps that made it more difficult for the government to track their assets. Between 1999 and 2007, the IRS repeatedly informed them that their position was frivolous and specifically warned of criminal sanctions. Convicted of conspiracy to defraud the U.S., 18 U.S.C. 371 (2006); attempted evasion of payment of tax, 26 U.S.C. 7201; and four counts of willful failure to file income tax returns, each was sentenced to 36 months in prison. The First Circuit affirmed, reasoning that the convictions were based on defendants' conduct, not guilt by association.

Taxpayer, the founder of EMC, a manufacturer of computer storage devices received non-qualified options to acquire EMC stock. When he exercised those options in 2001, they generated $162 million of ordinary income; it was estimated this could create a tax liability of over $63 million. Prior to exercising the options, taxpayer met with tax and accounting professionals and implemented a plan to form a partnership (Fidelity) with a foreign national; that partnership would engage in transactions that would generate losses largely offsetting gains without net risk. Gain would be principally allocated to the foreign national. Following a series of such transactions, the IRS disallowed taxpayer's losses on Fidelity option transactions for 2001 and 2002 and determined that the partnership was a sham that lacked economic substance. The district court sustained the adjustments and imposed a 40 percent penalty. The First Circuit affirmed

Three defendants were charged with conspiring to defraud the U.S. by obstructing the functions of the IRS, endeavoring to obstruct administration of the Internal Revenue laws, filing false tax returns, making false statements to FBI agents, and scheming to conceal material facts from a federal agency in connection with a charitable organization founded in 1993, which promoted Islamic jihad. A 24-day trial resulted in acquittal on all charges for one defendant and sentences of 12 months and 11 months in prison for the others. The First Circuit reversed acquittal on conspiracy counts, reinstating a guilty verdict, and affirmed the convictions on other counts. The variance in proof at trial did not prejudice defendants' substantial rights and the evidence was sufficient to prove a conspiracy narrower than charged.

The executor paid estate taxes in October, 2003, and filed the estate tax return in September, 2004, but the IRS denied a second extension request and he did not file an amended return and refund request for overpaid estate taxes in the amount of $237,813.48 until September, 2007. The IRS denied the claim on the ground that the refund sought was outside the three-year look-back period set forth in 26 U.S.C. 6511(b)(2)(A). The district court dismissed and the First Circuit affirmed, for lack of subject matter jurisdiction. The IRS correctly determined that it did not have the authority to and did not grant a second six-month extension. While the regulations do not explicitly say that there may be only one extension for executors who are not abroad, they provide for only one automatic extension. An equitable estoppel claim is not available and would have no merit.

In 2002 one of the company's founders informed the company that he wanted the company to buy out his 23 percent stock ownership interest. The company agreed to pay $255,908 plus $400,000, the equivalent of one year's salary, for a one-year covenant not to compete. The company amortized the covenant payments over the 12-month duration, which straddled tax years 2002 and 2003. The IRS determined that the covenant was an amortizable section 197 intangible, amortizable over 15 years and not over the duration of the covenant. The tax court upheld the decision. The First Circuit affirmed. A "section 197 intangible" includes any covenant not to compete entered into in connection with the acquisition of any shares, substantial or not, of stock in a corporation that is engaged in a trade or business.