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

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

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

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

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

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

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

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

After the Polskys attempted to claim the child tax credit for the 2010 and 2011 tax years, the IRS issued a notice disallowing the credit because their daughter was older than 17. They submitted amended returns, specifically requesting that the IRS review whether their permanently disabled daughter qualified for the tax credit. According to the Polskys, the IRS refused to rule on the amended returns because they were substantially the same as the original returns. The Tax Court dismissed their petition because the IRS had not issued a notice of deficiency. In 2014, the Polskys, pro se, filed in the district court, alleging that the IRS erroneously disallowed the credit and violated their due process rights by preventing them from challenging the disallowance in Tax Court. The district court dismissed, holding that the credit is unavailable when the child has attained age 17 and that the Polskys failed to state a due process claim. The Third Circuit affirmed, rejecting an argument that that the tax credit’s definition of “qualifying child,” 26 U.S.C. 24, which has an age cap, incorporates section 152(c), which has no age cap for a person who is permanently disabled and that the second definition of “qualifying child” overrides the age cap in the tax credit. View "Polsky v. United States" on Justia Law

To stimulate economic development, Jersey City, New Jersey offers tax exemptions and abatements to private developers of projects in certain designated areas. Those tax benefits are conditioned on the developers’ entry into agreements with labor unions that bind the developers to specified labor practices. Employers and a trade group challenged that law, alleging that it is preempted by the National Labor Relations Act (NLRA) and Employee Retirement Income Security Act (ERISA) and barred by the dormant Commerce Clause of the U.S. Constitution. The district court dismissed the complaint, concluding that Jersey City acts as a market participant, not a regulator, when it enforces the law, so that NLRA, ERISA, and dormant Commerce Clause claims were not cognizable. The Third Circuit reversed, holding that Jersey City was acting as a regulator in this context. The city lacks a proprietary interest in Tax Abated Projects. The Supreme Court has recognized a government’s proprietary interest in a project when it “owns and manages property” subject to the project or it hires, pays, and directs contractors to complete the project; when it provides funding for the project; or when it purchases or sells goods or services. This case fits none of these categories. View "Assoc. Builders & Contractors, Inc. v. City of Jersey City" on Justia Law

Nichols is a resident, property owner, and taxpayer in the City of Rehoboth Beach, Delaware. Rehoboth Beach held a special election, open to residents of more than six months, for approval of a $52.5 million bond issue to finance an ocean outfall project. The resolution passed. Nichols voted in the election. She then filed suit challenging the election and the resultant issuance of bonds. The district court, reasoning that Nichols was not contesting the expenditure of tax funds, but the legality of the Special Election; found that Nichols, having voted, lacked standing; and dismissed. The Third Circuit affirmed, stating that because Nichols failed to show an illegal use of municipal taxpayer funds, she cannot establish standing on municipal taxpayer grounds. The court rejected her claims of municipal taxpayer standing on the basis of two expenditures by Rehoboth Beach: the funds required to hold the special election and the funds used to purchase an advertisement in a local newspaper. View "Nichols v. City of Rehoboth Beach" on Justia Law