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

The 1987 Public Utilities Act, 220 ILCS 5/8-403.1, was intended to encourage development of power plants that convert solid waste to electricity. Local electric utilities were required to enter into 10-year agreements to purchase power from such plants designated as “qualified” by the Illinois Commerce Commission, at a rate exceeding that established by federal law. The state compensated electric utilities with a tax credit. A qualified facility was obliged to reimburse the state for tax credits its customers had claimed after it had repaid all of its capital costs for development and implementation. Many qualified facilities failed before they repaid their capital costs, so that Illinois never got its tax credit money back. The Act was amended in 2006, to establish a moratorium on new Qualified Facilities, provide additional grounds for disqualifying facilities from the subsidy, and expand the conditions that trigger a facility’s liability to repay electric utilities’ tax credits. The district court held that the amendment cannot be applied retroactively. The Seventh Circuit affirmed. The amendment does not clearly indicate that the new repayment conditions apply to monies received prior to the amendment and must be construed prospectively. View "Illinois v. Chiplease, Inc." on Justia Law

Retirement accounts are exempt from creditors’ claims in bankruptcy, 11 U.S.C. 22(b)(3)(C) and (d)(12). The debtor inherited, from her mother, a non-spousal individual retirement account worth about $300,000. The bankruptcy court held that the inherited IRA was not exempt from claims by the debtor’s creditors. The district court reversed. Noting a conflict with other circuits, the Seventh Circuit reversed, reinstating the bankruptcy court holding. The court noted that while it remains sheltered from taxation until the money is withdrawn, many of the account’s other attributes changed. No new contributions can be made, and the balance cannot be rolled over or merged with any other account. 26 U.S.C. 408(d)(3)(C); instead of being dedicated to the debtor/heir’s retirement years, the inherited IRA must begin distributing its assets within a year of the original owner’s death. 26 U.S.C. 402(c)(11)(A). View "Rameker v. Clark" on Justia Law

After years of paying taxes on wages he received for his work as a carpenter, Scheuneman stopped paying federal income tax in 1998. In 1999, in an effort to prevent the IRS from discovering his income, Scheuneman purchased a sham tax avoidance system from an Arizona company, Innovative Financial , and formed a limited liability corporation, Larch, and two illegitimate trusts, Soned and Jokur. Scheuneman retained complete control of all three. Scheuneman was eventually convicted of three counts of tax evasion, 26 U.S.C. 7201 and one count of interference with the Internal Revenue laws, 26 U.S.C. 7212(a). The Seventh Circuit affirmed, first rejecting arguments that that a clerical error in the indictment’s description of the relevant date rendered two counts legally insufficient and that the government constructively amended the indictment by introducing proof regarding dates other than those described in the indictment. Schueneman also claimed that the district court improperly ordered restitution for losses that are unrelated to his tax evasion offenses. The court rejected the argument; although those losses were not caused by the conduct underlying his tax evasion offenses, they are properly included as restitution because they were attributable to his interference with the Internal Revenue laws. View "United States v. Scheuneman" on Justia Law

Plaintiffs, American citizens, had bank accounts in UBS, Switzerland’s largest bank, in 2008 when the UBS tax-evasion scandal broke. The accounts were large and the plaintiffs had not disclosed the existence of the accounts or the interest earned on the accounts on their federal income tax returns, as required. Pursuant to an IRS amnesty program, they disclosed the interest and paid a penalty. They brought a class action to recover from UBS the penalties, interest, and other costs, plus profits they claim UBS made from the class as a result of the fraud and other wrongful acts. The Seventh Circuit affirmed dismissal, noting that the “plaintiffs are tax cheats,” and rejecting an argument that UBS was obligated to give them accurate tax advice and failed to do so. Plaintiffs did not argue that they asked UBS to advise them on U.S. tax law or that the bank volunteered advice. The court stated that: “This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes.” The court noted, but did not decide, choice of law issues. View "Thomas v. UBS AG" on Justia Law

The pharmaceutical consulting group failed to pay taxes. By 2005, it accumulated over $1 million in unpaid liabilities. Revenue Officer Johnson pursued collection efforts, levied the group’s accounts, and sought to recover taxes withheld from employees (trust fund taxes) from Gessert personally. Gessert was the group’s creator, sole shareholder, and CEO, and presumably behind the refusal to pay. The group and Gessert sued, seeking refunds and abatements, and pursued damages under I.R.C. 7433 for improper collection efforts. They claimed that the group directed Johnson to apply a few voluntary payments toward its trust fund liability, but that Johnson applied the payments to the non-trust fund portion, increasing Gessert’s personal liability; that Johnson violated Internal Revenue Code and Treasury provisions; and that she improperly levied the accounts. The district court rejected the claims. The Seventh Circuit affirmed. Gessert lacked standing under I.R.C. 7433 because Johnson sought collection from the group. The group failed to allege economic harm, prerequisite to standing under I.R.C. 7433. Concerning the refund claim, the district court properly concluded the group filed its administrative claim too late. Gessert’s refund-and-abatement claim failed because the group did not provide specific written direction to the IRS effectuating a directed payment. View "Gessert v. United States" on Justia Law

Preacely pleaded guilty in 2009 to tax fraud, 26 U.S.C. 7206(2). The district court sentenced him to 18 months’ imprisonment to be followed by three years of supervised release, with a special condition, prohibiting him from participating in his former occupation of tax preparer. When the district court imposed the special condition, counsel asked: “may he own the business if he himself does not prepare any taxes himself?” The court responded, “No … you should not engage in the business of tax preparation directly or indirectly.” After his release from prison, Preacely transferred ownership of his business to his wife, but when an undercover IRS agent asked to speak to the vice-president, he was directed to Preacely. The IRS also executed a search warrant at the business and interviewed a number of employees. The district court revoked Preacely’s supervised release. The Seventh Circuit affirmed, rejecting arguments that the condition was unconstitutionally vague and that Preacely was involved only administratively with the business by doing things such as dropping off food, office supplies, and signing paychecks. View "United States v. Preacely" on Justia Law

Four defendants were convicted of conspiring to defraud the U.S. by impeding the functions of the IRS and of related fraud and tax offenses in connection with abusive trusts promoted by two Illinois companies. Although the system of trusts was portrayed as a legitimate, sophisticated means of tax minimization grounded in the common law, the system was in essence a sham, designed solely to conceal a trust purchaser’s assets and income from the IRS. It was promoted through a network of corrupt promoters, managers, attorneys, and accountants, but prospective customers who sought independent advice were routinely warned of its flaws. Defendants were sentenced to prison terms of 120 to 223 months. The Seventh Circuit affirmed. View "United States v. Vallone" on Justia Law

The tax court found underpayment of $8,553 on Brown’s 2005 income tax and assessed a penalty of $1,171, based on failure to include income realized upon cancellation of a $100,000 whole life insurance policy, issued in 1982. Brown did not receive any cash upon cancellation; he had already used policy dividends and taken loans to pay premiums. The IRS took the policy’s cash value, $37,356.06 and subtracted Brown’s “investment” of $8,271.76 to arrive at $29,093.30 in taxable income. The Seventh Circuit affirmed. The cash value of a surrendered (whether or not voluntarily surrendered) life insurance policy is includable in gross income to the extent it exceeds the taxpayer’s investment. The fact that this income was used to pay a debt to the insurance company is irrelevant, because it was a personal rather than a business debt and therefore was not deductible. It is also irrelevant that no money changed hands. By surrendering the policy (albeit involuntarily) Brown gave up the prospect of receiving $100,000 if he died but at the same time freed himself from having to pay $1,837 each year to maintain that prospect. View "Brown v. Comm'r of Internal Revenue" on Justia Law

During tax years at issue, State Farm filed consolidated returns for life insurance and non-life subgroups. The IRS determined deficiencies. State Farm responded that, using a revised method for calculating alternative minimum tax, rather than owing $75 million in additional taxes, it was entitled to $500 million in additional refunds. State Farm also raised a loss reserve issue. The Tax Court ruled that State Farm should not have included a $202 million award of compensatory and punitive damages for bad faith in its insurance loss reserve for 2001 and 2002 returns. The Seventh Circuit affirmed, regarding punitive damages. Pending clearer guidance from the National Association of Insurance Commissioners (to whom Congress has commanded deference), punitive damages should be treated as regular business losses that are deductible when actually paid rather than deducted earlier as part of insurance loss reserves. With regard to the compensatory damages portion of the award, the court reversed. Extra-contractual obligations like compensatory damages for bad faith have long been included in insurance loss reserves; NAIC guidance supports that result. The court affirmed rejection of State Farm’s recalculation of alternative minimum tax, which would result in “creation from thin air of a virtual tax loss some $4 billion larger than” actual loss. View "State Farm Mut. Auto. Ins. Co. v. Comm'r of Internal Revenue" on Justia Law

Chapman was convicted of six counts of forging checks (18 U.S.C. 513(a)) that were made payable to the IRS and given to him by a client who had hired Chapman to resolve a tax dispute. The Seventh Circuit affirmed, rejecting challenges to the sufficiency of the evidence and to the district court’s admission of a previous forgery conviction. View "United States v. Chapman" on Justia Law