Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

Articles Posted in Tax Law

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After auditing the 2008-2010 returns filed by Integra, the IRS concluded that they owed more taxes. Integra hired Bastian, a lawyer and CPA. As the three-year limitations deadline, 26 U.S.C. 6501(a) for the 2008 tax year approached (February 15, 2012), Bastian signed a waiver. Negotiations failed. In November 2012 the IRS sent notices of deficiency, seeking nearly $800,000 for the three years, including a 20% penalty for filing substantially inaccurate returns. More negotiations ensued; the taxpayers did not contest revised calculations for 2009 and 2010, but contended that they owed nothing for 2008 because the notice was untimely. They argued that the waivers applied to the 2011 tax year, based on language that: “Federal Income tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended February 15, 2012 may be assessed at any time on or before December 31, 2012.” The IRS had typed the wrong year, overlooking that Integra’s 2008 tax “period ended” in November 2008. The Tax Court reformed the document to cure a mutual mistake, stating that Bastian is knowledgeable about tax law and had been dealing with the IRS about specific years. The Seventh Circuit affirmed. If the IRS believed that Bastian had tried to "hoodwink it," he might lose his credentials as a tax representative; everyone simply missed the error. View "Kunkel v. Comm'r of Internal Revenue" on Justia Law
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In 2014 the Tax Court held that Roberts had deducted expenses from his horse‐racing enterprise on his federal income tax returns for 2005 and 2006 erroneously because the enterprise was a hobby rather than a business, 26 U.S.C. 183(a), (b)(2)..The court assessed tax deficiencies of $89,710 for 2005 and $116,475 for 2006, but ruled that his business had ceased to be a hobby, and had become a bona fide business, in 2007. The IRS has not challenged Roberts’ deductions since then and Roberts continues to operate his horse‐racing business. The Seventh Circuit reversed the Tax Court’s judgment upholding the deficiencies assessed for 2005 and 2006. A business is not transformed into a hobby “merely because the owner finds it pleasurable; suffering has never been made a prerequisite to deductibility.” The court noted instances demonstrating Roberts’ intent to make a profit. View "Roberts v. Comm'r of Internal Revenue" on Justia Law

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Vee’s is a Subchapter S corporation wholly owned by Vee, who reports its income on his own tax returns. Vee sought a refund of $40,000 in penalties that the IRS had assessed because he took deductions for contributions to a benefit plan from 2004-2007 but did not file a Form 8886. In a separate Tax Court suit, the government is arguing that the deductions were improper. Contributions to multi-employer benefit plan, like the Vee's, are deductible unless the plan “maintains experience-rating arrangements with respect to individual employers,” 26 U.S.C. 419A(f)(6). Experience rating means that rather than pooling the risks and contributions of all the employees of the different employer-members to determine benefits, benefits are determined separately for each employer according to that employer’s contributions. If contributions go to purchase life insurance policies that accumulate cash value, the contributions are not tax deductible; such a plan is mainly an investment vehicle rather than insurance. Vee’s plan included no medical benefits. Vee’s contribution in ithe first year was $165,000, but the cost of the term life insurance purchased was only $5,400. The difference was invested to earn interest for and is the property of Vee. The district judge denied a refund. The Seventh Circuit affirmed. Vee’s plan was enough like the plan described in the IRS notice to require lForm 8886. View "Vee's Mktg., Inc. v. United States" on Justia Law

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In 2014, the IRS issued an administrative summons to Titan, to inspect its 2009 records in connection with an audit of the company’s 2010 tax return. Titan had taken an operating-loss carryforward in the 2010 tax year for a loss that occurred in 2009. Titan had claimed this same loss in 2009; the IRS had already audited its return for that tax year. Titan refused to comply with the 2014 summons, citing 26 U.S.C. 7605(b), which provides that “only one inspection of a taxpayer’s books of account shall be made for each taxable year unless … the [Treasury] Secretary … notifies the taxpayer in writing that an additional inspection is necessary.” Because the Secretary had not issued this notice, Titan asserted that the reinspection of its 2009 records was not permitted. The district court ordered Titan to comply with the summons. The Seventh Circuit affirmed. Section 7605(b) applies if the IRS seeks to inspect a taxpayer’s records when auditing a tax liability for a given year when the agency has already inspected the records in auditing the taxpayer’s liability for that same tax year. It does not apply when the IRS seeks already-inspected records for an audit of a different tax year. View "United States v. Titan Int'l, Inc." on Justia Law

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Wilma Stuller and her late husband bred Tennessee Walking Horses. They incorporated the operation and claimed its substantial losses as deductions on their tax returns. The IRS determined that the horse-breeding was not an activity engaged in for profit, assessed taxes and penalties, and penalized them for failing to timely file their 2003 return. After paying, the Stullers and LSA, sued the government for a refund. The district court excluded the Stullers’ proposed expert. It determined that his expertise did not extend to the financial or business aspects of horse-breeding and he lacked a reliable methodology to opine on the Stullers’ intent. The court found that the corporation was not run as a for-profit business under 26 U.S.C. 183, and determined that the Stullers lacked reasonable cause for failing to timely file their 2003 tax return. The court also denied a request to amend the judgment and effectively refund taxes paid by the Stullers on rental income received from the corporation. The Seventh Circuit affirmed. The district court followed Daubert in excluding the expert and applied each factor of the regulations to the facts. Only the expectation of asset appreciation weighed in the Stullers’ favor; almost every other consideration pointed to horse-breeding as a hobby or personal pleasure. View "Estate of Stuller v. United States" on Justia Law

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The Smiths lived in a Joliet home, title to which passed to wife in 2004 as an inheritance. Real estate taxes had gone unpaid in 2000, resulting in a tax lien. At a 2001 auction, SIPI purchased the tax lien and paid the delinquent taxes—$4,046.26—plus costs and was awarded a Certificate of Purchase. Smith did not redeem her tax obligation. SIPI recorded its tax deed in 2005 and sold the property to Midwest for $50,000. In 2007, the Smiths filed for Chapter 13 bankruptcy relief and sought to avoid the tax sale. The bankruptcy judge and the Seventh Circuit found a fraudulent transfer (11 U.S.C. 548(a)(1)(B)) because the property was not transferred for reasonably equivalent value, but found Midwest a subsequent transferee in good faith. The 1994 Supreme Court decision, BFP v. Resolution Trust, that a mortgage foreclosure sale that complies with state law is deemed for “reasonably equivalent value” as a matter of law, does not apply in Illinois. Unlike mortgage foreclosure sales and some other states’ tax sales, Illinois tax sales do not involve competitive bidding where the highest bid wins. Instead, bidders bid how little money they are willing to accept in return for payment of the owner’s delinquent taxes. The lowest bid wins; bid amounts bear no relationship to the value of the real estate. View "Smith v. Sipi, LLC" on Justia Law

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In 2009, Clarke submitted 2006-2008 tax returns for a trust, each claiming $900,000 in income and $900,000 in fiduciary fees; they did not identify the income’s source. Each reported $300,000 of tax paid to the IRS and requested $300,000 in refunds. Clarke identified the trust’s fiduciary as “Timothy F. Geither” (an apparent misspelling of the name of then-Treasury Secretary, Geithner), which raised a red flag. The IRS notified Clarke that the returns would not be processed. Clarke resubmitted, but did not name “Geither.” The IRS mailed Clarke three $300,000 checks. Clarke opened a bank account, deposited the checks, and, within months, spent all of the funds. In 2013 Clarke was indicted on seven counts of presenting false claims. The manager of the check cashing company where Clarke tried to cash his first check, testified that Clarke told him that he had the check because of “a trust fund because his dad had passed.” Clarke argued that the government had not proven that he knew the claim was false. The court did not include a good faith jury instruction requested by Clarke. Though barred from trial, a psychiatric report explained that Clarke believed that the U.S. is a business front designed to regulate commerce and has established bank accounts for its citizens. The Seventh Circuit affirmed Clarke’s conviction. View "United States v. Clarke" on Justia Law

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Anzaldi, DeSalvo, and Latin concocted an $8 million fraudulent tax scheme based on a sovereign citizen-type theory that the U.S. government holds hidden bank accounts for its citizens that can be accessed through various legal maneuvers. By filing false tax returns, the three requested more than $8 million for themselves and others in tax refunds. The IRS accepted five of their returns, paying out more than $1 million in refunds before catching onto the scheme. A jury convicted all three of conspiracy to file false claims, 18 U.S.C. 286 and filing false claims upon an agency of the United States, 18 U.S.C. 287. Anzaldi and Latin appealed their convictions. The Seventh Circuit affirmed, rejecting Anzaldi’s claim that the court should have ordered a competency examination pursuant to 18 U.S.C. 4241(a) before allowing her to represent herself pro se; upholding admission of evidence of how Anzaldi structured her fees to be under $10,000; and rejecting a claim that the court erred by not instructing the jury that willfulness was required to convict, and instead instructing that the defendants had to have acted “knowingly.” View "United States v. Latin" on Justia Law

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Patrick discovered a Medicaid fraud scheme in which the government paid more than $75 million in phony billings. Patrick and an associate filed a qui tam suit under the False Claims Act against Kyphon, alleging that the company induced hospitals to file claims for Medicare reimbursement “for unnecessary inpatient hospital stays.” The United States intervened and settled the case. For his role in initiating the suit Patrick received a relator’s share of the government’s recovery, totaling $5.9 million. Patrick also received $900,000 from the settlement of related qui tam actions against hospitals that overbillled Medicare. Patrick filed tax returns for 2008 and 2009 reporting his share of the qui tam recoveries as capital gains. The IRS issued deficiency notices, notifying Patrick that the relator’s shares must be reported as ordinary income. The Tax Court upheld that determination. The Seventh Circuit agreed that the relator’s share of a qui tam recovery is not the result of a “gain from the sale or exchange of a capital asset.” Patrick’s relator’s shares are a reward for filing the suit against Kyphon and the hospitals and must be treated as ordinary income. View "Patrick v. Comm'r of Internal Revenue" on Justia Law
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Black repeatedly tried to pay off a more than $5 million tax debt with checks drawn on checking accounts that he knew were closed to prevent the IRS from collecting taxes from him. A jury convicted Black of one count of obstructing and impeding the IRS from collecting taxes and four counts of passing and presenting fictitious financial instruments with intent to defraud. The district court sentenced Black to 71 months in prison. The Seventh Circuit vacated and remanded for resentencing, agreeing that the district court erred in determining his sentencing range under U.S.S.G. 2T1.1, by improperly calculating the tax loss by aggregating the face value of the fraudulent checks and by including penalties and interest in the calculation. The court upheld refusal to consider audit errors and apply available deductions because Black could not establish that he was entitled to any reduction in taxes owed. View "United States v. Black" on Justia Law