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

José Mireles was involved in a drug distribution conspiracy that transported large quantities of cocaine and heroin from Los Angeles to Chicago. Mireles's role included retrieving drug shipments, delivering them to customers, and laundering the proceeds back to Los Angeles. The Drug Enforcement Agency eventually dismantled the network, arresting Mireles and other conspirators. Mireles escaped custody while being transported to court but was re-arrested 18 months later. He was convicted and sentenced to 342 months in prison.The United States District Court for the Northern District of Illinois handled the initial trial. Mireles challenged the admission of certain evidence and the calculation of his sentence. The district court admitted evidence of Mireles's failure to file tax returns, his escape from custody, and a conversation about procuring a firearm. The court also calculated the drug quantity attributable to Mireles and applied sentencing enhancements for obstruction of justice and reckless endangerment.The United States Court of Appeals for the Seventh Circuit reviewed the case. The court affirmed Mireles's conviction, finding no abuse of discretion in the admission of the challenged evidence. However, the court ordered a limited remand for resentencing. The appellate court could not discern the factual basis for one of the sentencing enhancements related to obstruction of justice. The court upheld the enhancement for reckless endangerment but required further proceedings to clarify the obstruction enhancement. The court vacated Mireles's sentence and remanded the case for further proceedings consistent with its opinion. View "United States v. Mireles" on Justia Law

Scott and Gayla Moore, a married couple, claimed a tax credit under Section 41 of the Internal Revenue Code for research expenses for the 2014 and 2015 tax years. The Moores treated the salary and bonus of Gary Robert, the President and COO of Nevco, Inc., as Section 41 expenses. Nevco, a Subchapter S corporation, was solely owned by Gayla Moore, and thus all of its tax attributes flowed to her. The Moores argued that Robert spent a significant amount of time conducting or supervising research.The United States Tax Court held a trial and found that the record did not support the Moores' claim that Robert spent any given fraction of his time conducting or directly supervising "qualified" research. The court noted that Robert lacked written records of how he spent his time, which is a requirement under 26 C.F.R. §1.41–4(d). Furthermore, Robert could not estimate how much of his time was devoted to "qualified" research, as defined by Section 41(d)(1). The court also found that Robert did not engage in either "direct supervision" or "direct support" of Nevco’s director of engineering, whose salary the Commissioner of Internal Revenue was willing to treat as a "qualified research" expense.The United States Court of Appeals for the Seventh Circuit affirmed the Tax Court's decision. The Court of Appeals found that the Tax Court's inability to answer the questions of whether Robert's research was "qualified" and how much time he devoted to it was not a legal error, but a factual finding. The Court of Appeals reviewed this finding for clear error and found none. The Court of Appeals also noted that the Moores bore the burdens of production and persuasion, and thus the Tax Court's conclusion was dispositive against them. View "Moore v. Commissioner of Internal Revenue" on Justia Law

The case involves a dispute between Direct Supply, Inc., and the United States of America regarding tax deductions. Direct Supply, a company that assists nursing homes in purchasing equipment, medical supplies, and furniture through a system it calls "Direct Supply DSSI" (DSSI), filed for deductions under §199 of the Internal Revenue Code. This section allowed for deductions based on revenues from the "disposition" of "qualifying production property," which includes software. However, the Internal Revenue Service (IRS) disallowed these deductions, prompting Direct Supply to sue for a refund.Direct Supply argued that DSSI is the "disposition" of the software that runs the system. However, the IRS and the district court viewed DSSI as a service based on software, not a disposition of software. The court noted that Direct Supply's customers did not possess the software code or a license to use any of DSSI’s software. Furthermore, the majority of the revenue flowing to Direct Supply came from fees that were a percentage of the vendors' sales, rather than anything that measured the value of software.The United States Court of Appeals for the Seventh Circuit agreed with the district court and the IRS. The court noted that while DSSI depended on software, it did not "dispose" of that software. The court also pointed out that Direct Supply's receipts were not "directly derived" from the software, as required by the governing regulation, but were instead derived from the goods the vendors sold to the customers. The court affirmed the district court's decision that Direct Supply's deductions under §199 of the Internal Revenue Code were correctly disallowed. View "Direct Supply, Inc. v. United States" on Justia Law

LaTonya Foxx, along with two others, was charged and convicted for engaging in a fraudulent tax scheme. Foxx pleaded guilty to one count of wire fraud and was sentenced to 18 months’ imprisonment, one year of supervised release, and ordered to pay $1,261,903 in restitution. The scheme involved filing fraudulent tax returns to generate improper refunds for clients and the defendants. The United States Court of Appeals for the Seventh Circuit heard Foxx's appeal of the restitution order.The court noted that any power to award restitution must come from a statute. In this case, the Mandatory Victims Restitution Act authorizes restitution for wire fraud offenses. The court noted that restitution is limited to the actual losses caused by the specific conduct underlying the offense, and the government must establish those losses by a preponderance of the evidence.Foxx argued that the district court failed to adequately delineate the scheme and make specific findings that the losses included in the restitution derived from the same scheme for which she was convicted. The court found no fatal deficiency in the district court's findings and concluded that Foxx failed to demonstrate a plain error. The court held that Foxx could be ordered to pay restitution for all the losses she caused during the scheme, not just those relating to the specific wire transactions to which she pleaded guilty. The court affirmed the restitution order. View "United States v. Foxx" on Justia Law

Hoops, which owned an NBA franchise sought a $10.7 million tax deduction for deferred compensation that it owed to two of its players at the close of the 2012 tax year, based on their performance during previous seasons. Under 26 U.S.C. 404(a)(5), an accrual-based taxpayer like Hoops can only deduct deferred compensation expenses in the tax years when it pays its employees or contributes to certain qualified plans, such as a trust or pension fund. Hoops did not do either. In 2012 the firm sold substantially all its assets and liabilities. As part of the transaction, the buyer assumed Hoops’s $10.7 million deferred compensation liability. Hoops viewed this $10.7 million amount as a deemed payment to the buyer to compensate it for assuming the deferred compensation obligation and took a tax deduction, claiming the buyer’s assumption of the $10.7 million liability as an ordinary business expense deductible at the time of sale.The IRS denied the deduction. The Tax Court and Seventh Circuit affirmed. Section 404(a)(5) barred Hoops from claiming a deduction for deferred compensation in the 2012 tax year because the firm did not pay the employees during that year; the statute precluded Hoops from taking the deduction until the players were paid. View "Hoops, LP v. Commissioner of Internal Revenue" on Justia Law

Dr. Xiao taught mathematics for many years at Southern Illinois University. He also did academic work based in China, for which he received more than $100,000 in payments. An investigation of Xiao's grant applications led FBI agents to examine his finances. Xiao was charged with wire fraud, making a false statement, failing to disclose his foreign bank account on his income tax returns, and failing to file a required report with the Department of the Treasury. Xiao was acquitted of wire fraud and making a false statement, but convicted of filing false tax returns and failing to file a report of a foreign bank account, 31 U.S.C. 5314(a).The Seventh Circuit affirmed, rejecting arguments that the evidence was insufficient, primarily on the question of willfulness, that the tax return question was ambiguous, and that the foreign-account reporting regulation is invalid. The evidence permitted the jury to find beyond a reasonable doubt that Xiao acted willfully in choosing not to disclose his foreign bank account. The tax return form was not ambiguous as applied to Xiao’s situation. The government proved beyond a reasonable doubt that he engaged in reportable transactions. In 2019 he received deposits to the Chinese account and made withdrawals and investments using that account. View "United States v. Xiao" on Justia Law

Under the Tax Equity and Fiscal Responsibility Act, TEFRA, 26 U.S.C. 6221–6234, a partnership’s tax liabilities were assessed on individual partners in proportion to their ownership interest. Partners reported their share of that income on their individual tax returns; the partnership supplied information on Schedule K-1. Determinations made at the partnership level were binding on all partners. Partners could opt out of partnership-level proceedings and could challenge partnership-level determinations during ongoing proceedings. Partners were entitled to receive a “notice of beginning of administrative proceedings,” NBAP, and a notice of a “final partnership administrative adjustment,” FPAA, by mail.Goldberg was a partner in two firms. The IRS began auditing the partnerships in 2001-2002 and believes it timely sent the required NBAPs and FPAAs to Ronald by certified mail. Goldberg later denied receiving the NBAPs. In 2010, while the Tax Court’s review of the FPAAs was underway, Goldberg challenged his tax liability for both partnership items, arguing that three-year statute of limitations for the assessments had expired. The IRS suggested raising the challenges in the Tax Court proceedings before the adjustments became final. Goldberg took no action. In 2013 the Tax Court entered judgment. The resulting liability determinations became final. The IRS notified Goldberg of the adjustments and initiated proceedings to collect $500,000. The Seventh Circuit affirmed. Goldberg received notice and had an opportunity to contest the partnership tax liabilities independent of any alleged failing on the IRS’s part. View "Goldberg v. Commissioner of Internal Revenue" on Justia Law

To claim the research tax credit under Section 41 of the Internal Revenue Code, a taxpayer must demonstrate that at least 80 percent of its research activities for a business component constituted elements of a process of experimentation. The Taxpayer, the parent of a shipbuilding company, claimed expenses for building 11 new vessels under the tax credit. The IRS disallowed the credit and assessed a tax deficiency.The Tax Court and the Seventh Circuit upheld the IRS determination. Although the Taxpayer never built a drydock before and the vessels were first-in-class, the Taxpayer claimed more tax credit than it could prove; it did not offer a principled way to determine what portion of the employee activities for each vessel constituted elements of a process of experimentation or research activities. The Taxpayer relied on arbitrary estimates and the newness of the vessels. To claim the credit, a taxpayer must adequately document that substantially all of such activities were research activities that constitute elements of a process of experimentation. Generalized descriptions of uncertainty, assertions of novelty, and arbitrary estimates of time spent performing experimentation are not enough. View "Little Sandy Coal Co., Inc v. Commissioner of Internal Revenue" on Justia Law

Wisconsin assessed property taxes on lands within four Ojibwe Indian reservations. The tribal landowners have tax immunity under an 1854 Treaty, still in effect, that created the reservations on which they live. Supreme Court cases recognize a categorical presumption against Wisconsin’s ability to levy its taxes absent Congressional approval. The parcels in question are fully alienable; their current owners can sell them at will because the parcels were sold by past tribal owners to non-Indians before coming back into tribal ownership. Wisconsin argued that the act of alienating reservation property to a non-Indian surrendered the parcel’s tax immunity. No circuit court has considered whether the sale of tax-exempt tribal land to a non-Indian ends the land’s tax immunity as against all subsequent tribal owners, nor does Supreme Court precedent supply an answer.The district court ruled in favor of the state. The Seventh Circuit reversed. Once Congress has demonstrated a clear intent to subject land to taxation by making it alienable, Congress must make an unmistakably clear statement to render it nontaxable again but these Ojibwe lands have never become alienable at Congress’s behest. Congress never extinguished their tax immunity. The relevant inquiry is: who bears the legal incidence of the tax today--all the relevant parcels are presently held by Ojibwe tribal members. View "Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers" on Justia Law

Witkemper was the president and sole shareholder of Maximum, which had employees, but in 2004-2006 never withheld and remitted federal income and insurance contribution taxes (FICA taxes). Maximum went bankrupt. Unable to fully collect the unpaid taxes during the bankruptcy proceedings, the IRS lodged an assessment totaling $385,705.54 and recorded a notice of a federal tax lien against Witkemper, who sent the IRS a signed Offer in Compromise. The IRS accepted the Offer. Witkemper began making the required monthly minimum payments, $500. Witkemper successfully sought to rescind the settlement after it had been in effect only 205 days. Witkemper then began making property transfers to his wife and children without any consideration.The IRS viewed the transactions as fraudulent conveyances and filed suit. The Witkempers had no response to the merits of the government’s position but argued that the government could not prove that its initial assessment of the FICA tax penalties fell within the statutory deadline, citing “unreliable government records” containing clerical errors. They claimed that because the government filed its complaint more than 10 years after it assessed the FICA recovery penalties the lawsuit was outside the limitations period, which was not tolled by the Offer, which had “forged signatures.” The Seventh Circuit affirmed a $385,705.54 judgment in the government’s favor, finding the case “not close," the Witkempers’ counsel never should have pressed the appeal. View "United States v. Witkemper" on Justia Law