Articles Posted in Tax Law

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DiCosola started a business that produced compact discs in novelty shapes, for use as promotional items. The business morphed into a full‐service printing business, reaching about $1 million in gross annual sales and employing up to 10 people, including DiCosola’s immigrant father, who invested his retirement savings. In 2005, DiCosola started a side business for producing music, which sapped cash from the printing business. DiCosola’s 2007 loan application was rejected. He reapplied in 2008, providing fabricated tax returns that inflated his income by hundreds of thousands of dollars. Citibank issued DeCosola a loan of $273,500. DiCosola similarly used fabricated tax returns to obtain loans from Amcore, for $450,000 and $300,000. In 2009, after a few payments, DiCosola defaulted on the loans. In 2009, DiCosola falsified IRS forms to claim a refund of $5.5 million. In 2012, DiCosola was indicted for bank fraud, 18 U.S.C. 1344; making false statements to a bank, 18 U.S.C. 1014; wire fraud affecting a financial institution, 18 U.S.C. 1343; filing false statements against the United States, 18 U.S.C. 287. DiCosola was found guilty, sentenced to 30 months’ imprisonment, and ordered to pay restitution of $822,088.00. The Seventh Circuit affirmed, rejecting challenges relating to the testimony of DiCosola’s accountant. View "United States v. DiCosola" on Justia Law

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McGaugh has a Merrill Lynch Individual Retirement Account (IRA). In 2011, he requested that Merrill Lynch use money from that IRA to purchase 7,500 shares of FPFC stock. Merrill Lynch refused. McGaugh initiated a $50,000 wire transfer from his IRA directly to FPFC, on October 7, 2011. On November 28, FPFC issued a stock certificate titled “Raymond McGaugh IRA FBO Raymond McGaugh,” which it mailed to Merrill Lynch. Merrill Lynch says it received the certificate in early 2012, but did not retain it, believing McGaugh’s transaction to have exceeded the 60‐day window for IRA rollovers, 26 U.S.C. 408(d)(3). Merrill Lynch attempted to send the certificate to McGaugh twice, but the Postal Service returned it. The second time, it was marked “refused.” Merrill Lynch then sent the certificate to McGaugh via FedEx; it was not returned. The shares were never deposited into McGaugh’s IRA. The IRS contends that McGaugh possesses the certificate; McGaugh denies that allegation. Merrill Lynch characterized the wire transfer as a taxable distribution and issued Form 1099R. McGaugh claims he never received that form. In March 2014 the IRS issued a deficiency notice and assessed $13,538 tax due and a $2,708 substantial‐tax‐understatement penalty. The Tax Court held that McGaugh did not take a taxable distribution from his IRA. The Seventh Circuit affirmed, finding that McGaugh was never in actual or constructive receipt of the IRA funds. View "McGaugh v. Commissioner Internal Revenue" on Justia Law

Posted in: Tax Law

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Employee stock options, when exercised, constitute compensation, on which the employer must remit taxes under the Railroad Retirement Tax Act. Beginning in 1996, the railway began including stock options in the compensation plans of some employees, taking the position that income from the exercise of those stock options was not a form of “money remuneration” that would be taxable to the railway under the Act, 26 U.S.C. 3231(e)(1), which defines “compensation” as “any form of money remuneration paid to an individual for services rendered as an employee.” The Act requires the railroad to pay an excise tax equal to a specified percentage of its employees’ wages, and to withhold a percentage of employee wages as their share of the tax. The railroad retirement tax rates are much higher than social security tax rates. The IRS, the district court, and the Seventh Circuit concluded that the exercise of the stock options was compensation. The equivalence of stock to cash is actually signaled in the statutory exceptions for qualified stock options and for other forms of noncash employee benefits. View "Grand Trunk Western Railroad Co. v. United States" on Justia Law

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Unreliable corporate meeting minutes were properly excluded in tax fraud trial. Petrunak was the sole proprietor of Abyss, a fireworks business regulated by ATF. In 2001, ATF inspectors inspected Abyss and reported violations. An ALJ revoked Abyss’s explosives license. Abyss went out of business. Five years later, Petrunak mailed the inspectors IRS W-9 forms requesting identifying information and then sent them 1099s, alleging that Abyss had paid each of them $250,000. Because the inspector’s tax return did not include the fictional $250,000, the IRS audited her and informed her that she owed $101,114 in taxes; she spent significant time and energy unraveling the situation. Petrunak submitted those sham “payments” as business expenses; he reported a loss exceeding $500,000 in his personal taxes. Petrunak admitted to filing the forms and was charged with making and subscribing false and fraudulent IRS forms, 26 U.S.C. 7206(1). He sought to introduce corporate meeting minutes under the business records exception, claiming that the records would have demonstrated his state of mind in preparing the forms. The minutes included statements bemoaning that the IRS was not more helpful, and declarations that the ATF agents perjured themselves. The Seventh Circuit upheld exclusion of the records, noting that the records contained multiple instances of hearsay and had no indicia of reliability. View "United States v. Petrunak" on Justia Law

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Taxpayer, having challenged a penalty in a pre-assessment hearing, may not again contest its liability in a CDP hearing. The employer had an employee‐benefit plan with one employee-participant and took tax deductions for its payments into the plan. The employee claimed no income. The IRS proposed a section 6707A penalty for the company’s failure to report its participation in the plan; deficiency penalties; a section 6662(a) penalty, for making a substantial understatement and acting with negligence or disregard of the rules or regulations; and a section 6662A penalty, for making an understatement related to a reportable transaction that was disclosed inadequately. An appeals officer sustained a $200,000 penalty. After the IRS assessed the penalty and issued a final notice of intent to levy, the company requested a Collection Due Process (CDP) hearing. An appeals officer reviewed transcripts from the earlier pre-assessment hearing and determined that the Appeals Office had already considered a liability challenge to the same penalty, so that section 6330(c)(2)(B) precluded another liability challenge. The Federal Circuit affirmed summary judgment for the government. Under section 6330(c)(4)(A)’s plain language, because the company raised the issue of its liability in a prior hearing before the Appeals Office, and participated meaningfully in that hearing, the company could not contest its liability again in its CDP hearing. View "Our Country Home Enterprises, Inc. v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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Musa owns and operates a restaurant in Milwaukee. The IRS determined that Musa made misrepresentations on his tax returns, including underreporting his federal income taxes by more than $500,000 for the years 2006-2010. The Tax Court upheld that determination, plus a civil fraud penalty of more than $380,000. The Seventh Circuit affirmed, rejecting, as “heavy on chutzpah but light on reasoning or any sense of basic fairness,” Musa’s argument that after his fraud was discovered, the Commissioner should have allowed him additional deductions on his individual tax returns based on amended employment tax returns in which Musa had corrected earlier false underreporting of wages. The court noted that he made those corrections after the statute of limitations had run on the Commissioner’s ability to collect the correct amounts of employment taxes that Musa’s amended returns admitted were due. The court also rejected Musa’s argument that the Tax Court erred by permitting the Commissioner to amend his answer to add the affirmative defense of the duty of consistency under tax law, and then erred by granting partial summary judgment to the Commissioner on that defense. View "Musa v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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Medical College of Wisconsin, a nonprofit corporation, received a refund of Social Security (FICA) taxes after the IRS ruled that medical residents were exempt from them until April 2005. The IRS added to the refund approximately $13 million in interest but later demanded $6.7 million back, claiming to have used too high a rate. Medical College returned the money and filed suit under 28 U.S.C. 1346(a)(1), asking to have the disputed sum restored. The district court and Seventh Circuit denied the request, rejecting Medical College’s argument that, under 26 U.S.C. 6621, a nonprofit is not the sort of corporation to which a lower rate in paragraph (a)(1)(B) refers. View "Medical College of Wisconsin v. United States" on Justia Law

Posted in: Tax Law

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After the IRS assessed tax deficiencies and penalties, the taxpayers filed a pro se petition for review. Acting on advice from Niehus, a lawyer who was not authorized to practice in Illinois, the couple stipulated that only half of the tax relief they sought was appropriate. Upon discovering that Niehus was not a member of the Illinois bar, they asked the court to set aside the stipulation. The Tax Court refused and entered judgment against the couple. On remand, with the couple represented by a CPA, Drobny, who was authorized to practice before the Tax Court, the court held that the couple had not been prejudiced by Niehus’s ineligibility to practice and that the advice he had given them had been valid. The Seventh Circuit affirmed, agreeing that Niehus provided “competent, valuable, diligent, and effective” assistance, and noting that there is no right to counsel in a Tax Court proceeding. View "Shamrock v. Commissioner of Internal Revenue" on Justia Law

Posted in: Legal Ethics, Tax Law

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Bey, a self-described “Aboriginal Indigenous Moorish-American,” sought to enjoin state and county officials from taxing his Marion County real estate, a refund of taxes he has paid, and $11.5 billion in compensation. The Seventh Circuit affirmed dismissal, rejecting Bey’s claim to be a “sovereign citizen” who cannot lawfully be taxed by Indiana or its subdivisions in the absence of a contract between them and him. The court explored the history of the “sovereign citizen” movement and its connection to some members the Moorish Science Temple of America (MSTA). Proponents argue, “without any basis in fact,” that as a result of eighteenth-century treaties the United States has no jurisdiction over its Moorish inhabitants, who are therefore under no obligation to pay taxes. Bey “is a U.S. citizen and therefore unlike foreign diplomats has no immunity from U.S. law … his suit is frivolous and … he was lucky to be spared sanctions.” View "Bey v. Indiana" on Justia Law

Posted in: Tax Law

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Tilden received an IRS notice of deficiency covering his tax years 2005, 2010, 2011, and 2012. The last day to seek review (26 U.S.C. 6213(a)) was April 21, 2015. The Tax Court received Tilden’s petition on April 29, 2015, and dismissed it as untimely. Although section 6213(a) requires petitions to be filed within 90 days, 26 U.S.C. 7502(a) makes the date of the postmark dispositive. Tilden’s lawyer’s staff did not put a stamp on the envelope, and the Postal Service did not apply a postmark. Staff purchased postage from Stamps.com, which supplies print‑at-home postage. The purchase was dated April 21, 2015, and a staff member states that she delivered the envelope to the Postal Service on that date. The Seventh Circuit reversed, finding that the IRS properly conceded error. The parties cannot stipulate to jurisdiction, but can stipulate to facts underlying jurisdiction. The court expressed "astonishment" at the law firm's risk-taking. View "Tilden v. Commissioner of Internal Revenue" on Justia Law