Articles Posted in Tax Law

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A Controlled Foreign Corporation’s income is not taxable to its domestic shareholders unless the income is distributed to them. CFC shareholders began taking loans either from the CFC or from third-party financial institutions using the CFC’s assets as collateral or having the CFC guarantee the loans to obtain a monetary return on their foreign investment. The Revenue Act of 1962 requires the inclusion in the domestic shareholder’s annual income of any increase in investment in U.S. properties made by a CFC it controls, 26 U.S.C. 956(c)(1)(C), and provides that a CFC shall be considered as holding an obligation of a U.S. person if such CFC is a pledgor or guarantor of such obligations. IRS regulations determine when a CFC’s pledge or guarantee results in the CFC being deemed the holder of the loan, and how much of the “obligation” a CFC pledgor or guarantor is deemed to hold, 26 C.F.R. 1.956-2(c)(1) and 1.956-1(e)(2). Through the SIH family, Appellant owns two CFCs. Another SIH affiliate, SIG, borrowed $1.5 billion from Merrill Lynch in 2007 in a loan guaranteed by over 30 SIH affiliates, including the CFCs that Appellant owns. Although the loan dwarfed the CFCs’ assets (roughly $240 million), Merrill Lynch insisted on having the CFCs guarantee. In 2011, when the CFCs distributed earnings to Appellant, their domestic shareholder, the IRS determined that Appellant should have reported the income at the time the CFCs guaranteed the SIG loan, treating each CFC as if it had made the entire loan directly, though the amount included in Appellant’s income was reduced from the $1.5 billion principal of the loan to the CFCs’ combined “applicable earnings.” This resulted in an additional tax of $378,312,576 to Appellant. The IRS applied the then-applicable 35% rate for ordinary income. The Tax Court and Third Circuit ruled in favor of the IRS, rejecting Appellant’s challenges to the validity of the regulations and the use of the ordinary income tax rate. View "SIH Partners LLLP v. Commissioner of Internal Revenue" on Justia Law

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In 1973, Bedrosian opened a UBS savings account in Switzerland to make work purchases while traveling abroad. Later, he began to use it as a savings account. From 1973-2007, Handelman prepared Bedrosian’s income tax returns. In the 1990s Bedrosian told Handelman about the Swiss bank account. Handelman replied that Bedrosian had been breaking the law every year by not reporting the account but that his estate could deal with it after he was dead. Bedrosian continued not to report his UBS account. In 2005, Bedrosian created a second (investment) account. Handelman died. Bedrosian authorized his new accountant, Bransky, to obtain his records from Handelman’s offices. Bransky prepared Bedrosian’s 2007 tax return, listing the bank account, and a Report of Foreign Bank and Financial Accounts (FBAR), 31 U.S.C. 5314, showing one of Bedrosian’s UBS accounts ($240,000); the account omitted contained $2 million. Bedrosian did not review the return but simply signed. He later sought legal counsel and began correcting his prior tax filings. In 2015 the IRS assessed a penalty for “willful” failure to disclose the larger UBS account at the statutory maximum of $975,789--50% of the undisclosed account. Bedrosian paid $9,757.89 and sought to recover that payment as an unlawful exaction. The government counterclaimed for $1,007,345. The district court concluded that Bedrosian’s violation was not willful. The Third Circuit remanded, reserving the question of whether federal court jurisdiction is established when a taxpayer files suit to challenge an FBAR penalty before fully paying it. The court clarified that, to prove a “willful” FBAR violation, the government must satisfy the civil willfulness standard, which includes both knowing and reckless conduct. View "Bedrosian v. United States" on Justia Law

Posted in: Tax Law

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Midland sent six letters to the Schultzes, attempting to collect separate outstanding debts that had been outsourced to Midland for collection after default. None of the debts exceeded $600. Each letter offered to settle for less than the full amount owing and each stated: We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case.” Since the Treasury only requires an entity to report a discharge of indebtedness of $600 or more to the IRS, the Schultzes claimed that the statement was “false, deceptive and misleading” in violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692. Their putative class action complaint was dismissed. The Third Circuit reversed, finding that the statement may violate the FDCPA. A dunning letter is false and misleading if it implies that certain outcomes might befall a delinquent debtor, when legally, those outcomes cannot occur. Even if the least sophisticated debtor can distinguish between “may” and “must,” the language at issue references an event that would never occur. It is reasonable to assume that a debtor would be influenced by potential IRS reporting and that, if that reporting cannot occur, it could signal a potential FDCPA violation regardless of the conditional language. View "Schultz v. Midland Credit Management, Inc." on Justia Law

Posted in: Consumer Law, Tax Law

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Spireas earned $40 million in technology license royalties in 2007-2008s. Royalties paid under a license agreement are usually taxed as ordinary income at 35 percent but Spireas claimed capital gains treatment (15 percent) under 26 U.S.C. 1235(a), which applies to money received “in consideration of” “[a] transfer . . . of property consisting of all substantial rights to a patent.” The IRS disagreed and gave Spireas notice of a $5.8 million deficiency for the two tax years. The Tax Court and Third Circuit affirmed. To qualify for automatic capital-gains treatment, income must be paid in exchange for a “transfer of property” that consists of “all substantial rights” to a “patent.” Not every transfer of “rights” qualifies because the statute grants capital gains treatment only to transfers of property. Spireas’s original theory was that he reduced the formulation to practice in 2000, giving him the required property interest, and later assigned his interest. Spireas later abandoned that theory, arguing that he transferred his rights prospectively in 1998. Because that was two years before the invention of the formulation, Spireas’s second position cannot depend on the legal standard of reduction to actual practice to establish that he held a property right at the time of transfer. Spireas’s sole claim on appeal was, therefore, waived. View "Spireas v. Commissioner of Internal Revenue" on Justia Law

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The Duquesne entities filed tax returns as a consolidated taxpayer, which requires a mixed approach: calculating some aspects of the group’s taxes as though the entities were a single taxpayer and calculating others as if each were a separate taxpayer, 26 U.S.C. 1502. There is, nonetheless, the potential for the group to deflect its tax liability by using stock sales to claim a “double deduction” for a single loss at a subsidiary. In 2001, the Federal Circuit invalidated Treas. Reg. 1.1502-20, which prevented double deductions when the parent’s loss on its sale of stock occurred before the subsidiary recognized its loss, leaving intact the regulatory prohibition on double deductions where the transactions are structured so that the losses occur in reverse order. Duquesne group then arranged a series of transactions, so that on its 2001 tax return, it carried back $161 million of loss and claimed a tentative refund of $35 million. In 2002 the IRS issued temporary regulations that applied to stock losses occurring on or after March 7, 2002. Duquesne group incurred further stock losses in transactions after March 2002. The IRS determined that it had claimed a double deduction and disallowed $199 million of these losses under the Ilfeld doctrine, that the Code should not be interpreted to allow the taxpayer the practical equivalent of a double deduction absent a clear declaration of intent by Congress. The Tax Court granted the IRS summary judgment. The Third Circuit affirmed, concluding that the Ilfeld doctrine remains good law. View "Duquesne Light Holdings Inc v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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The Virgin Islands Bureau of Internal Revenue (BIR) sent the Hassens a final notice of intent to levy their property to satisfy an outstanding tax debt of $5,778.32 for the 2004 tax year and subsequently issued a levy against the Hassens’ bank account. In June and December 2013, the Hassens submitted letters requesting an installment agreement. The December letter reflects that the Hassens and the BIR engaged in discussions and that the BIR directed the Hassens to submit IRS Form 9465 to request an installment agreement. The Hassens failed to do so. Thereafter, the BIR issued four additional levies against the Hassens’ accounts. Rather than file an administrative claim as required by 26 U.S.C. 7433(d), the Hassens filed suit under section 7433(a), alleging that the additional levies violated 26 U.S.C. 6331(k)(2), which prohibits the issuance of any levy while a proposed installment agreement is pending. The district court determined that exhaustion of administrative remedies was not a jurisdictional prerequisite, but was a condition to obtain relief, and dismissed their complaint. The Third Circuit affirmed. To bring a claim under section 7433(a), a taxpayer must exhaust the administrative remedies under section 7433(d). While such exhaustion is not a jurisdictional requirement, it is mandatory. View "Hassen v. Government of the Virgin Islands" on Justia Law

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Deadline for petition to Tax Court is jurisdictional and cannot be waived for equitable reasons. When spouses file a joint tax return, each is jointly and severally liable for the tax due, 26 U.S.C. 6013(d); the IRS may grant relief where it would be “inequitable to hold the individual liable.” Rubel and her ex-husband filed joint income tax returns, 2005-2008. They had an unpaid tax liability for each year. In 2015, Rubel sought relief under the innocent spouse relief provisions. On January 4, 2016, the IRS denied relief for tax years 2006-2008. On January 13, the IRS sent a denial for 2005. The determinations stated that Rubel could appeal to the Tax Court within 90 days; Rubel needed to file a petition by April 4 for the 2006-2008 tax years and by April 12 for 2005. Rubel submitted additional information to the IRS. In a March 3 letter, the IRS stated that it “still propose[d] to deny relief” and, incorrectly, “Your time to petition … will end on Apr. 19.” Rubel mailed a petition on April 19. The Third Circuit affirmed the Tax Court’s dismissal. The deadline set forth in 26 U.S.C. 6015(e)(1)(A), is jurisdictional and cannot be altered, regardless of the equities of the case. View "Rubel v. Commissioner Internal Revenue" on Justia Law

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District court has authority to consider whether tax debtor’s property should be subject to a forced sale. Cardaci owned Holly Construction. In 2000-2001, the business floundered; Cardaci used $49,600 in taxes withheld from his employees’ wages to pay suppliers and wages, including his $20,000 salary, rather than payroll taxes. Cardaci, now 58, has not had a regular income since 2009 and has medical problems. Beverly Cardaci, 62, earns $62,000 a year as a teacher. The Cardacis bought their Cape May County home in 1978; two adult children live with them part-time, without paying rent. The district court determined that the house has a fair market value of $150,500. It has no mortgage. The government sought to force its sale, to use half of the proceeds to pay Cardaci’s tax liability, with the remainder for Beverly. The court considered various equitable factors, declined to force the sale, fixed an imputed monthly rental value of $1,500 and ordered Cardaci to pay half of that to the IRS each month. Cardaci defaulted on his monthly payment obligation and failed to provide required proof of homeowner’s insurance. The Third Circuit remanded for recalculation of the factors weighing for and against a sale and for recalculation of the Cardacis’ respective interests in the property. View "United States v. Cardaci" on Justia Law

Posted in: Tax Law

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IRS Form 1040, filed after the IRS made an assessment of the taxpayer’s liability, did not constitute “returns” for purposes of determining the dischargeability in bankruptcy of tax debts under 11 U.S.C. 523(a)(1)(B). Giacchi filed his tax returns on time for the years 2000, 2001, and 2002 years after they were due and after the IRS had assessed a liability against him. In 2010, Giacchi filed for Chapter 7 bankruptcy; in 2012 he filed a Chapter 13 petition and brought an adversary proceeding seeking a judgment that his tax liability for the years in question had been discharged in the Chapter 7 proceeding. The district court and Third Circuit affirmed the bankruptcy court’s order denying the discharge. The tax debt was nondischargeable under 11 U.S.C. 523(a)(1)(B) because Giacchi had failed to file tax returns for 2000, 2001, and 2002, and Giacchi’s belatedly filed documents were not “returns” within the meaning of section 523(a)(1)(B) and other applicable law. View "Giacchi v. United States" on Justia Law

Posted in: Bankruptcy, Tax Law

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Pennsylvania statute, prohibiting payment of fire insurance proceeds to named insured when there are delinquent property taxes, is not limited to situations where the named insured is also responsible for those taxes. Conneaut Lake Park, in Crawford County, included a historic venue, “the Beach Club,” owned by the Trustees. Restoration operated the Club under contract with the Trustees. Restoration insured the Club against fire loss through Erie. When the Club was destroyed by fire, Restoration submitted a claim. In accordance with 40 Pa. Stat 638, Erie required Restoration to obtain a statement of whether back taxes were owed on the property. The statement showed $478,260.75 in delinquent taxes, dating back to 1996, before Restoration’s contract, and owed on the entire 55.33-acre parcel, not just the single acre that included the Club. Erie notified Restoration that it would transfer to the taxing authorities $478,260.75 of the $611,000 insurance proceeds. Erie’s interpleader action was transferred after the Trustees filed for bankruptcy. Restoration argued that Section 638 applied only to situations where the owner of the property is insured and where the tax liabilities are the financial responsibility of the owner. The Third Circuit reinstated the bankruptcy court holding, rejecting Restoration’s argument. The statute does not include any qualifications. When Restoration insured the Club, its rights to any insurance proceeds were subject to the claim of the taxing authorities. Without a legally cognizable property interest, Restoration has no cognizable takings claim. View "In re: Trustees of Conneaut Lake Park, Inc." on Justia Law