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

The Bank Secrecy Act, 31 U.S.C. 5311, and its implementing regulations require certain individuals with foreign financial interests to file annual disclosures, subject to penalties. In 2008, Bedrosian filed an inaccurate Report of Foreign Bank and Financial Accounts (FBAR), omitting from the report the larger of his two Swiss bank accounts. If this omission was accidental, the IRS could fine Bedrosian up to $10,000; if he willfully filed an inaccurate FBAR, the penalty was the greater of $100,000 or half the balance of the undisclosed account at the time of the violation. Believing Bedrosian’s omission was willful, the IRS imposed a $975,789.17 penalty—by its calculation, half the balance of Bedrosian’s undisclosed account. Following Bedrosian’s refusal to pay the full penalty, the IRS filed a claim in federal court.The Third Circuit affirmed the district court in finding Bedrosian’s omission willful and ordering him to pay the IRS penalty in full. While the IRS failed to provide sufficient evidence at trial showing its $975,789.17 penalty was no greater than half his account balance, Bedrosian admitted this fact during opening statements and thus relieved the government of its burden of proof. View "Bedrosian v. United States Department of the Treasury" on Justia Law

The Bank Secrecy Act requires U.S. citizens to report interests in foreign accounts with a value exceeding $10,000, 31 U.S.C. 5314. Collins, a dual citizen of the U.S. and Canada, has lived in the U.S. since 1994 and has bank accounts in the U.S., Canada, France, and Switzerland. In 2007, the balance of his Swiss account exceeded $800,000. Collins did not report any of those accounts until he voluntarily amended his tax returns in 2010. The IRS accepted Collins into its Offshore Voluntary Disclosure Program (OVDP). His amended returns for 2002-2009 yielded modest refunds stemming from large capital losses in 2002. Collins then withdrew from the OVDP, prompting an audit. Because Collins invested in foreign mutual funds, his Swiss holdings were subject to an additional tax on passive foreign investment companies, 26 U.S.C. 1291, which he failed to compute in his amended returns. The IRS audit determined that Collins owed an additional $71,324 plus penalties. In 2015 the IRS determined that since he withdrew from the OVDP, Collins was liable for civil penalties for “willful failure” to report foreign accounts. The IRS assessed a civil penalty of $308,064.The district court and Third Circuit affirmed, citing a “decades‐long course of conduct, omission, and scienter” by Collins in failing to disclose his foreign accounts. The disparity between Collins’s putative income tax liability and his penalty is stark but is consistent with the statute. View "United States v. Collins" on Justia Law

The Debtors filed a Chapter 13 bankruptcy petition. The IRS filed a proof of claim for unpaid taxes and interest, including a $927.00 shared responsibility payment the Debtors owed for failing to maintain health insurance in 2018 as required by the Patient Protection and Affordable Care Act’s (ACA) “Individual Mandate,” 26 U.S.C. 5000A(a). The IRS’s proof of claim characterized the payment as an “EXCISE” tax entitled to priority. The Debtors argued that the shared responsibility payment was a penalty not entitled to priority. The Bankruptcy Court confirmed the Debtors’ repayment plan and subsequently held that the shared responsibility payment is a tax, not a penalty, for bankruptcy purposes and is entitled to priority under 11 U.S.C. 507(a)(8), as either an income or an excise tax.The district court and Third Circuit affirmed. The shared responsibility payment is a tax “measured . . . by income” entitled to priority under Section 507(a)(8)(A). The court noted that the statute describes the payment as a “penalty,” but it is collected by the IRS along with one’s federal income tax return. In 2012, the Supreme Court held that the shared responsibility payment is a tax for constitutional purposes but is not a tax for purposes of the Anti-Injunction Act. View "In re: Szczyporski" on Justia Law

Desu co-owned Heights Pharmacy with Desai. Desai collected Heights' cash earnings and deposited a small portion of that cash into the pharmacy’s bank account, leaving the rest undeposited. After paying for certain items from the undeposited cash, such as part of Desai’s salary, Desai split the undeposited cash between herself and Desu. Desai kept the cash earnings off the general ledger. The underreporting on Heights Pharmacy’s tax returns led to underreported net income on Desu’s individual tax returns. Following a government investigation, Desai pleaded guilty and testified against Desu. Desu also co-owned Arthur Avenue Pharmacy, with Pujara. Desu and Pujara also kept the cash earnings off Arthur’s general ledger. Pujara testified against Desu, who was convicted under 18 U.S.C. 371 for conspiracy to impede the lawful government functions of the IRS and willfully assisting in the preparation and presentation of materially false tax returns.The Third Circuit affirmed, rejecting arguments that the jury received a faulty government exhibit for use in its deliberations; two counts in the indictment fail to state an offense; the district court erred in excluding testimony regarding the Desais’ cash transactions on relevancy grounds; the district court erred in denying a “Franks” evidentiary hearing; the government constructively amended the indictment; and the district court erred at sentencing by failing to account for certain deductions and exclusions in Desu’s income when calculating the tax loss. View "United States v. Desu" on Justia Law

In 2011, Folajtar pled guilty to a federal felony: willfully making a materially false statement on her tax returns, which is punishable by up to three years’ imprisonment and a fine of up to $100,000, 26 U.S.C. 7206(1). She was sentenced to three years’ probation, including three months of home confinement, a $10,000 fine, and a $100 assessment. She also paid the IRS over $250,000 in back taxes, penalties, and interest. Folajtar was then subject to 18 U.S.C. 922(g)(1), which prohibits those convicted of a crime punishable by more than one year in prison from possessing firearms.Folajtar sued, asserting that applying section 922(g)(1) to her violated her Second Amendment right to possess firearms. The district court dismissed, finding that Folajtar did not state a plausible Second Amendment claim because she was convicted of a serious crime. The Third Circuit affirmed, noting the general rule that laws restricting firearm possession by convicted felons are valid. There is no reason to deviate from this long-standing prohibition in the context of tax fraud. View "Folajtar v. Attorney General of the United States" on Justia Law

The New Jersey Business Employment Incentive Program provides cash grants for companies willing to relocate or expand to New Jersey. A company receiving the grant must maintain a minimum number of employees and remain at the new location for a certain time period but there are no restrictions on how the company can use the grant, which is calculated as a percentage of state income taxes withheld from the wages of the company’s employees at the new location. In 2011, Garban’s offices in the World Trade Center were destroyed, and First Brokers’ nearby offices were rendered uninhabitable. Both companies, subsidiaries of BrokerTec, entered into agreements for 10-year Incentive Program grants. From about 2004-2013, the state paid BrokerTec about $170 million, which was used to purchase stock to expand into other trading markets.In 2010-2013, the companies' consolidated tax returns excluded $56 million in grant payments as non-taxable, non-shareholder contributions to capital under 26 U.S.C. 118. The IRS issued a deficiency notice. The Tax Court held that the grants were capital contributions. The Third Circuit reversed. Because the state did not restrict how BrokerTec could use the cash and because the grants were calculated based on the amount of income tax revenue that the new jobs would generate—the grants were taxable income, not contributions to capital. View "Commissioner of Internal Revenue v. Brokertec Holdings Inc" on Justia Law

Mostoller owned the Debtor, a business that serviced oil and gas wells. The Debtor owed the Trust $3 million, secured by a blanket lien on most of the Debtor’s assets and a personal guarantee by Mostoller. The Debtor petitioned for Chapter 11 reorganization. To entice the Trust to lend more money, Mostoller agreed to assign his anticipated federal tax refund. The taxable income and losses of the Debtor, an S Corporation, passed through to Mostoller, who had paid millions of dollars in federal taxes on that income. He could file amended 2013 and 2014 tax returns to carry back the Debtor’s 2015 losses, which would offset his taxable income for those two years and trigger a refund. 26 U.S.C. 172(a), (b)(1)(A)(i). Mostoller pledged “any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor. The bankruptcy court approved the agreement The Debtor defaulted on the emergency loan and converted to a Chapter 7 liquidation. Mostoller first refused to file the tax returns. When the tax refund came, Mostoller tried to keep it.The district court and Third Circuit affirmed in favor of the Trust, rejecting Mostoller’s argument that he pledged his refund on taxes that he paid for 2015 alone, excluding any refund on his 2013 and 2014 taxes. That reading would make the collateral worthless, so the Trust would never have made the loan. View "In re: Somerset Regional Water Resources, LLC" on Justia Law

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

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

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