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

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

The target witness learned in 2009 that the IRS had opened a file on him, and that an IRS special agent and DOJ tax division prosecutor were assigned to investigate whether he used secret offshore bank accounts to evade income taxes. Two years later, a grand jury issued a subpoena requiring that he produce all records required to be maintained pursuant to 31 C.F.R. 1010.420 relating to foreign financial accounts that he had a financial interest in, or signature authority over. The requested records are required under the Bank Secrecy Act of 1970. The Government argued that the Required Records Doctrine overrides the Fifth Amendment privilege. The district court quashed the subpoena, concluding that the required records doctrine did not apply because the act of producing the required records was testimonial and would compel the witness to incriminate himself. The Seventh Circuit reversed, finding the Doctrine applicable. View "In re: February 2011-1 Grand Jury Subpoena" on Justia Law

McKinney and his brother own a construction business. In 2003, the IRS filed notice of tax liens and pursued collection. McKinney avoided payment by transferring money from the business into accounts used for personal expenses. He made false statements about his ability to pay. He failed to pay taxes during 1999, 2000, 2002, 2003, 2004, 2005, and 2006. Because of the tax liens, McKinney was unable to obtain a residential mortgage. His wife obtained a loan to purchase a home, falsely stating that she was a full-time manager of the construction business with a gross monthly income of $15,374.23. Her husband signed a false employment verification; he earned the income used to pay the mortgage. His brother and his brother’s wife acted similarly. McKinney entered a plea to charges of conspiracy to defraud, impede, impair, obstruct, and defeat functions of the IRS in collection of income taxes, 18 U.S.C. 371; tax evasion, 26 U.S.C. 7201; and false statements to revenue agents, 26 U.S.C. 1001. He received a two-level enhancement to his base offense level for failing to report income exceeding $10,000 from criminal activity, U.S.S.G. 2T1.1(b)(1), and a two-level enhancement for obstruction of justice, U.S.S.G. 3C1.1. The Seventh Circuit affirmed. View "United States v. McKinney" on Justia Law

Collins served as a city councilman and vice-mayor of East St. Louis. In 2002 he moved to the suburbs, but continued to use his previous address to vote East St. Louis and to establish residency for election to as precinct committeeman for the Democratic Party. Federal agents checked tax filings to verify his residency and discovered that Collins had not filed federal or state income tax returns for almost two decades. Convicted of multiple counts of tax evasion, willful failure to file tax returns, and voter fraud, he was given a within-guidelines sentence of 50 months. The Seventh Circuit affirmed. The district court used pattern jury instructions for tax evasion, which properly define the required element of willfulness and need no clarification to distinguish tax evasion from negligent failure to file. It is not “remotely plausible” to attribute tax delinquency of almost two decades to negligence. The court properly stated Illinois law regarding requirements for establishing voting residency. The evidence was “easily sufficient” to support the verdict. Collins did not file tax returns, and to hide his income, commingled personal and business accounts, used a false Employer Identification Number, and misappropriated the Social Security Number of his deceased business partner. View "United States v. Collins" on Justia Law

Hill and his wife incorporated a tax service business, run out of their apartment, then obtained the names, birth dates, and social security numbers of real individuals and filed approximately 121 false tax returns for the tax year 2005, amounting to approximately $525,460 in false filings. In total, the IRS issued approximately $353,500 in tax refunds, which were electronically transferred to value cards which Hill was able to redeem for cash. Hill pled guilty to conspiracy to defraud the U.S.,18 U.S.C. 286 and one of 20 charged counts of fraud in connection with identity theft, 18 U.S.C. 1028(a)(7) and was sentenced to 92 months in prison. The Seventh Circuit affirmed, finding the sentence reasonable. View "United States v. Hill" on Justia Law

Defendant owned three restaurants, kept two sets of books, and underreported gross receipts. The government discovered the fraud when he listed a restaurant for sale. A fact sheet prepared by the broker calculated average monthly gross receipts at $170,000 and an average yearly operating profit of $554,840. IRS undercover agents posed as buyers. During meetings, defendant explained how he tracked actual receipts. Agents executed a warrant at the restaurants and seized weekly summary sheets and envelopes detailing nightly sales and cash payouts. The IRS concluded that additional taxes due on defendant’s personal tax returns were: $226,752 for 2001, $244,799 for 2002, $213,186 for 2003, and $152,987 for 2004, for a total tax loss of $837,724. Charged with eight counts, defendant pled guilty to four counts of making false statements in a tax return, but claimed that the government’s figure did not account for deductible expenses, such as costs of DJ/promoters, cash wages, complimentary drinks and food, and transfers to his other restaurants for supplies. He claimed the IRS lost $22,292.27. The district court held that it could not consider unclaimed deductions and imposed a sentence of 24 months (bottom of the guideline range) and ordered restitution in the amount of $837,724. The Seventh Circuit affirmed.

Aegis sold sham “trusts,” promising asset protection and reduced tax liability. Clients paid initially paid $20,000 to $40,000 and an annual fee of $3,000 to $7,000. Defendants continued the scheme, despite a 2000 search of their office, investigation by the IRS and FBI, and participants receiving audit requests. Defendants received over $350,000 in fees and caused tax loss of about $6 million. Wasson was charged in 2006 with aiding in filing a false tax return, 26 U.S.C. 7206(2). The grand jury twice superseded the indictment to add Starns and Wolgamot, add counts under 7206(2), and charge all defendants with conspiracy to defraud the IRS, 18 U.S.C. 371. The third indictment was returned May 2, 2007. The district court made an unopposed finding that the case was complex and warranted excluding time until May 1, 2007, 18 U.S.C. 3161(h)(7)(A). Additional delays were attributable to new defense counsel, Starns’s death, Wolgamot’s plea, and government counsel’s participation in Guatanamo litigation. The district court rejected Wasson’s motion to dismiss under the Speedy Trial Act, 18 U.S.C. 3161-74, found him guilty in December 2009, calculated his advisory guideline range using the 2008 Guidelines, and sentenced Wasson to 180 months, (middle of the range). The Seventh Circuit affirmed on all issues.

The taxpayer, a C-corporation with about 40 employees, claimed that its revenues ($5 million to $7 million a year) were offset by deductions for business expenses, primarily compensation paid to owner-employees, three of the firm's accountants. These founding shareholders owned more than 80 percent of the firm's stock in 2001 and received salaries from the firm that year that totaled $323,076. The firm reported taxable income of only $11,279 that year and, in the following year reported a loss of $53,271. The IRS did not question the salary deductions, but disallowed more than $850,000 in consulting fees paid in each of the three years to three entities owned by the founding shareholders, which passed the money on to the founding shareholders. The IRS reclassified the fees as dividends, resulting in a deficiency in corporate income tax of more than $300,000 for 2001 and similar deficiencies for the following two years. The Tax Court added the 20 percent statutory penalty for substantial understatement of income tax, 26 U.S.C. 6662(a),(b)(2). The Seventh Circuit affirmed, stating: "That an accounting firm should so screw up its taxes is the most remarkable feature of the case."