Justia U.S. 3rd Circuit Court of Appeals Opinion Summaries

Articles Posted in Tax Law
by
The case involves a dispute between SPS Corp I, Fundo de Investimento em Direitos Creditórios Não Padronizados (SPS), and General Motors Co. (GM). GM Brazil, a subsidiary of GM, sued the Brazilian government to recover tax overpayments made by car dealerships. After winning the right to recover, GM Brazil filed a claim with Brazil’s tax agency, Receita Federal do Brasil (RFB), to determine the exact amount. Meanwhile, SPS, as the assignee of thirty-five dealerships, sought to recover the tax overpayments from GM Brazil in Brazilian courts but faced adverse decisions regarding standing and preliminary discovery.The District Court for the District of Delaware reviewed SPS’s application for discovery against GM under 28 U.S.C. § 1782, which allows for discovery in aid of foreign litigation. The District Court denied the request, citing the factors from the Supreme Court’s decision in Intel Corp. v. Advanced Micro Devices, Inc. The court found that the discovery sought was within the jurisdictional reach of Brazilian courts, which had already denied similar requests by SPS. The court also noted that allowing the discovery would undermine the decisions of the Brazilian courts and lead to inefficiency.The United States Court of Appeals for the Third Circuit reviewed the District Court’s decision. The Third Circuit affirmed the lower court’s ruling, agreeing that the Intel factors weighed against granting SPS’s discovery request. The court emphasized that the Brazilian courts had jurisdiction over the requested documents and had already denied SPS’s requests. The Third Circuit found no abuse of discretion in the District Court’s decision to respect the Brazilian courts’ rulings and to avoid circumventing foreign proof-gathering restrictions. View "SPS Corp I v. General Motors Co." on Justia Law

by
This case involves a dispute between Jennifer Zuch and the Internal Revenue Service (IRS) over the allocation of estimated tax payments and the subsequent application of those payments to pay off her tax liability. Zuch argued that the IRS erroneously applied $50,000 in estimated tax payments, which she and her then-husband had made, to her ex-husband's tax liability instead of hers. As the dispute was litigated over several years, the IRS withheld tax refunds owed to Zuch and applied them to her alleged unpaid balance, thereby satisfying it in full. The IRS then moved to dismiss the Tax Court proceeding, arguing the case was moot since there was no more tax to be paid. The Tax Court granted the motion.In appeal, the U.S. Court of Appeals for the Third Circuit vacated the Tax Court's dismissal and remanded the matter back to the Tax Court. The appellate court found that Zuch's claim was not moot, even though the IRS had satisfied her tax liability by applying her tax refunds to it. The court held that the IRS cannot unilaterally moot a case by withdrawing its proposed collection action, especially when the Tax Court has already obtained jurisdiction of a liability challenge. The court also found that a taxpayer's challenge to the tax liability at issue in an action under § 6330(c)(2)(B) of the Internal Revenue Code cannot be rendered moot by the unilateral action of the IRS. The court concluded that the Tax Court retained jurisdiction to review Zuch's liability and to determine whether she is entitled to receive credit for any amount of the estimated tax payments at issue. View "Zuch v. Commissioner of Internal Revenue" on Justia Law

by
Mylan regularly submitted abbreviated new drug applications (ANDAs) to the FDA, often including Paragraph IV certifications stating that the proposed generic drug at issue would not infringe valid patents. Mylan incurred tens of millions of dollars in legal fees defending itself in about 120 patent infringement suits, 35 U.S.C. 271(e)(2). Mylan incurred additional, much lower legal fees in preparing the notice letters associated with the Paragraph IV certifications. Mylan's fees were $46,158,403, $38,211,911, and $38,618,993 during 2012, 2013, and 2014, respectively, for preparing notice letters and litigating the ANDA suits. In tax filings, Mylan deducted those amounts in the years incurred. The IRS responded that Mylan could not deduct the nearly $130 million of legal expenses incurred from 2012-2014 and that its additional tax liability was about $50 million.The Tax Court considered expert testimony regarding internal FDA processes and the typical course of dealing between an ANDA applicant and the FDA during the submission process for an ANDA with a paragraph IV certification and held that the legal expenses Mylan incurred to prepare notice letters were required to be capitalized because they were necessary to obtain FDA approval of its generic drugs. The Third Circuit affirmed its holding that the legal expenses incurred to defend patent infringement suits were deductible as ordinary and necessary business expenses because the patent litigation was distinct from the FDA approval process. View "Mylan Inc v. Commissioner of Internal Revenue" on Justia Law

by
The Culps each received $8,826.30 to settle a lawsuit and reported their payments as “Other income,” “PRIZES, AWARDS” in their 2015 tax return. In 2017 the IRS proposed to increase their taxes owed for 2015 to reflect a perceived underpayment, giving the Culps 30 days to respond and stating it would send a notice of deficiency if they failed to do so. The Culps did not respond. The IRS mailed a notice of deficiency, informing the Culps of their right to file a petition in the Tax Court within 90 days. In May 2018, the IRS sent the Culps another letter stating they owed only $2,087 in 2015 taxes, penalties, and interest—less than the amount previously assessed. Again they failed to respond. The IRS levied on their property, collecting approximately $1,800 from the Culps’ Social Security payments and 2018 tax refund.The Culps filed a petition in the Tax Court, which dismissed their petition for lack of jurisdiction, reasoning its “jurisdiction depends upon the issuance of a valid notice of deficiency and the timely filing of a petition,” 26 U.S.C. 6212, 6213, 6214. It found the petition untimely because the Culps did not file it within 90 days of the date the IRS sent the second notice of deficiency. The Third Circuit reversed. Congress did not clearly state that section 6213(a)’s deadline is jurisdictional; non-jurisdictional time limits are presumptively subject to equitable tolling. That presumption was not rebutted. View "Culp v. Commissioner of Internal Revenue" on Justia Law

by
Upshur and Thompson operated a trust; people wired fees to Upshur and allowed the defendants to file tax forms representing that the Trust had withheld income tax on their behalf, hopefully yielding sizable refunds. The defendants themselves also participated. Though this scheme was largely unsuccessful, the IRS issued one $1.5 million refund but, realizing, its mistake, froze the payment. In another scheme, they made large fraudulent tax overpayments, hoping to generate refunds. This scheme apparently did not generate any payments from the IRS, but the two schemes, together, resulted in over $325 million in fraudulent tax claims.Upshur was convicted of conspiracy to defraud the United States and eight counts of aiding and assisting in the preparation of false tax returns, 18 U.S.C. 371, 26 U.S.C. 7206(2). The court recognized there was no actual loss to the U.S. Treasury, and calculated Upshur’s base offense level under U.S.S.G. 2T1.4 using the intended-loss figure of $325 million, for a Guidelines range of 324-348 months. The Third Circuit affirmed his 84-month sentence. The court acknowledged its 2022 “Banks” holding that for theft offenses, absent Guideline text extending “loss” to intended loss, U.S.S.G. 2B1.1’s loss table reached only actual loss. However. the texts of sections 2T1.1 and 2T1.4, applicable to tax fraud, indicated that 2T4.1’s loss table covers the loss the perpetrator intended. View "United States v. Upshur" on Justia Law

by
The IRS investigated the companies to determine whether they are liable for penalties for promoting abusive tax shelters. Summonses led to the production of documents in 2014, including email chains involving the Delaware Department of Insurance, relating to the issuance of certificates of authority to the companies' clients and to a meeting with the Department’s Director of Captive and Financial Insurance Products. The IRS issued an administrative summons to the Department for testimony and records relating to filings by and communications with the companies. “Request 1” seeks all e-mails between the Department and the companies related to the Captive Insurance Program. The Department raised confidentiality objections under Delaware Insurance Code section 6920. The IRS declined to abide by section 6920's confidentiality requirements. The Department refuses to produce any response to Request 1.The government filed a successful petition to enforce the summons. The Sixth Circuit affirmed, rejecting the Department’s argument that, under the McCarran-Ferguson Act (MFA), 15 U.S.C. 1011, Delaware law embodied in section 6920 overrides the IRS’s statutory authority to issue and enforce summonses. While the MFA does protect state insurance laws from intrusive federal action when certain requirements are met, before any such reverse preemption occurs, the conduct at issue (refusal to produce summonsed documents) must constitute the “business of insurance” under the MFA. That threshold requirement was not met here. View "United States v. State of Delaware Department of Insurance" on Justia Law

by
Ahmed was President of Aspen Construction, which failed to pay the IRS federal income, Social Security, and Medicare taxes withheld from employees' wages, 26 U.S.C. 7501, 3102(a), 3402(a). Aspen owed more than $600,000 in withheld taxes. Without recourse against Aspen’s individual employees (who were credited with withheld taxes when their net wages were paid), the IRS shifted liability to Ahmed, 26 U.S.C. 6672. Whether Ahmed received notification of proposed penalties is unclear. The IRS assessed the penalties and later filed liens against Ahmed’s property to secure the penalties. Ahmed immediately sought a Collection Due Process review with the IRS Independent Office of Appeals.While Ahmed’s petition was pending, he sent the IRS $625,000, with instructions that it be treated as a “deposit” to freeze the running of interest on his disputed penalties. The IRS instead applied the money as a direct payment to the tax bill, thereby ending the matter. Without any remaining tax liability to dispute, the Tax Court dismissed Ahmed’s petition. The Third Circuit vacated. Ahmed’s petition was moot only if the IRS properly treated his remittance as a payment, which depends on whether he sent money to the IRS after it validly assessed his penalties. There is ambiguity in the record on that issue. View "Ahmed v. Commissioner of Internal Revenue" on Justia Law

by
In 2005-2013, Nocito, president and CEO of AHS, characterized his personal expenses as deductible AHS business expenses and “shuffled” AHS’s untaxed profits between shell companies he owned that “performed no significant business purpose.” In 2013, Sundo, AHS’s secretary and CFO, provided documents to government investigators under a cooperation agreement, including Exhibit J, later determined by the court to be a privileged document in which Sundo conveyed legal advice to Nocito.After his indictment for tax fraud (18 U.S.C. 371), Nocito moved for pre-trial discovery of all the documents provided by Sundo to support a possible motion to suppress based on government misconduct. The court denied the motion, concluding that Exhibit J did not offer a “colorable basis” for his governmental misconduct claim. A subsequent motion to intervene, brought by the shell companies, attached a Federal Rule 41(g) motion for the return of property, in an attempt to prevent the government from using Exhibit J in future proceedings.The court permitted the companies to intervene but denied their Rule 41(g) motion. It found the Intervenors—even assuming they could establish Exhibit J’s privilege was “a property interest” of which they were deprived—were attempting to use Rule 41(g) improperly to suppress Exhibit J from the evidence against Nocito. The Third Circuit dismissed an appeal for lack of jurisdiction. The Rule 41(g) motion was part of an ongoing criminal process; its denial did not constitute a final order. View "United States v. Nocito" on Justia Law

by
During the tax years at issue, 2010–2013, the Taxpayers owned a New Jersey horse farm. Their Company employed several employees, none of whom had a budget. The Company paid the Taxpayers' personal expenses and lost more than $3.5 million during the years at issue and more than $11.4 million between 1998-2013. The Taxpayers contributed capital and made loans to the Company. In 2016, the Company sold a horse for nearly $1.2 million, enabling it to report a modest overall profit.In 2016, the IRS sent notices of income tax deficiencies. The Tax Court sustained the deficiency determinations, holding that the Taxpayers could not deduct Company losses because their horse breeding activity was not engaged in for profit under Internal Revenue Code section 183 and that the Taxpayers failed to substantiate net operating loss carryforwards that allegedly arose from Company activity. The Third Circuit affirmed. The Tax Court did not clearly err when it found that adverse market conditions did not explain the Company’s sustained unprofitability and correctly considered the Taxpayers’ substantial income from other sources. The profit generated from the 2016 horse sale was tempered by the fact that it occurred after the tax years at issue and after the notices of deficiency. The expertise of the Taxpayers and their advisors was the only factor that favored the Taxpayers. View "Skolnick v. Commissioner of Internal Revenue" on Justia Law

by
From 1986-1991, Weiss did not pay federal income taxes. In 1994, Weiss late-filed returns for those years, self-reporting a $299,202 liability. The IRS made tax assessments against him, triggering a 10-year limitations period for collecting unpaid taxes through a court proceeding or a levy. Weiss’s subsequent bankruptcies tolled that limitations period three times: In July 2009, the IRS began the process of a levy. It mailed a Final Notice to Weiss in February 2009, informing Weiss that it intended to levy his unpaid taxes and that he could request a Collection Due Process hearing. The notice was not sufficient to make a levy, so the limitations period continued to run. Weiss timely requested a Collection Due Process hearing, which suspended the statute of limitations for the period during which the hearing “and appeals therein” were “pending,” 26 U.S.C. 6330(e)(1); no less than 129 days remained in the limitations period. Weiss did not prevail at the hearing or in any of his review-as-of-right federal court challenges. As a last resort, Weiss filed a petition for certiorari with the Supreme Court in October 2018. On December 3, 2018, the Court denied that petition. Instead of proceeding to levy Weiss’s property, the government initiated an action in the district court on February 5, 2019.The Third Circuit found the action timely. Petitions for writs of certiorari are “appeals therein.” An appeal remains “pending” until the time to file such a petition expires. View "United States v. Weiss" on Justia Law