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

At age 56, plaintiff left his position as a partner in a law firm and enrolled in school. Employees who depart at age 55 or older may withdraw money from the employer's retirement plan. They must pay income tax, but a 10 percent additional tax imposed on most withdrawals before age 59½ does not apply to distributions "made to an employee after separation from service after attainment of age 55," 26 U.S.C. 72(t)(1), (2)(A)(v). Plaintiff moved the funds from the plan to an individual retirement account then withdrew about $240,000. A rollover is not taxable 26 U.S.C. 402(c). Plaintiff paid income tax. The IRS claimed he owed the 10 percent additional tax, plus a penalty for substantial underpayment of taxes. The Tax Court held that he owed the tax on money not used for tuition. The Seventh Circuit affirmed; the distribution was made to an IRA, not to the employee. Section 6662 excuses the taxpayer if there was substantial authority for the tax return's treatment, but there was no authority for plaintiff's position.

Defendant owned tobacco stores. Currency sales accounted for roughly half of the revenue. He directed employees to separate currency from credit-card and check receipts. He used currency to pay employees and suppliers and failed to report currency receipts on federal and state tax forms from 2002 to 2009. He channeled much of the currency (more than $60 million) to bank accounts in Lebanon, his homeland. He pleaded guilty to mail fraud, 18 U.S.C. 1341, and impeding administration of the Internal Revenue Code, 26 U.S.C. 7212(a). With an upward adjustment of 2 levels for using sophisticated means, U.S.S.G. 2B1.1(b)(10)(C), 2T1.1(b)(2), he was sentenced to 76 months. The Seventh Circuit affirmed. Although defendant did not create phony corporations, use fake names to open accounts, or employ technology to conceal assets, his conduct was sophisticated because he directed employees to separate currency receipts, he withheld funds from corporate bank accounts, and concealed the magnitude of his sales. He secreted money into foreign accounts by carrying currency and cashier’s checks during his travels, avoided reporting by depositing currency in multiple transactions (structuring or smurfing) 31 U.S.C. 5324; and washed money through the accounts of relatives and associates.

Taxpayers purchased a three-acre lakefront property in Chenequa, Wisconsin, demolished the house and built another. They donated the house to the local fire department to be burned down in a firefighter training exercise and claimed a $76,000 charitable deduction on their 1998 tax return for the value of the house. The IRS disallowed the deduction. The decision was upheld by the Tax Court. The Seventh Circuit affirmed, finding that the taxpayers did not show a value for their donation that exceeded the substantial benefit they received in return. When a gift is conditional, the conditions must be taken into account in determining fair market value of the donated property. Proper consideration of the economic effect of the condition that the house be destroyed reduces fair market value of the gift so much that no net value is ever likely to be available for a deduction.

Defendant was convicted of 14 counts of willfully assisting in preparation of tax returns containing materially false and fraudulent claims, including phony medical and business expenses and charitable donations. The evidence at trial proved tax loss of $31,849. At sentencing, the government proposed a tax loss figure of $1.6 million by identifying 662 returns that contained materially false claims similar to those proven at trial and eliminating contested returns. The district court discounted the loss to $400,000- to $1-million to compensate for possible selection bias in a sample of 100 returns and imposed a sentence of 42 months. The Seventh Circuit affirmed. The tax loss figure was not outside the realm of permissible computations. The district court considered defendant's family circumstances as well as substantial aggravating circumstances, including her education, financial and intellectual abilities, knowledge of the tax code and duty to provide truthful information, and that her actions caused the IRS to audit her clients. Defendant also failed to appear for a sentencing hearing, was dishonest to the court, frivolously denied the court had jurisdiction over her, and similarly asserted she was an independent sovereign protected by the Eleventh Amendment.

Defendant, an immigrant, cleaned houses. She formed a cleaning service in 1992. Defendant would deposit customers' checks in the business checking account, keep some money as a fee, and withdraw the remaining amount to pay individual cleaners. The bank informed her of the requirement (31 C.F.R. 103.22(b)(1)) that it document and report transactions involving withdrawals of cash greater than $10,000. After being informed of the requirement, defendant would often withdraw more than $10,000 over the course of two days, but less than 24 hours; she withdrew amounts over $9,000 and less than $10,000 on 244 occasions in about six years. She was convicted of 23 counts of structuring transactions to avoid bank reporting, 31 U.S.C. 5324(a)(3). The court gave an "ostrich" instruction, concerning defendant's knowledge. The jury returned a special verdict subjecting $279,500 to forfeiture; the court imposed a sentence of three years of probation as well as an additional judgment of $4,800. The Seventh Circuit affirmed, finding no constitutional violation in weighing the forfeiture against the severity of the crime. Any error in giving the ostrich instruction was harmless.

A tax employee of defendant, terminated after reporting an alleged tax fraud scheme to the company and federal enforcement agencies, filed suit asserting claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1962(c) and 1962(d). The district court dismissed, finding that the predicate acts alleged were either unrelated or did not proximately cause plaintiff's injuries. The Seventh Circuit reversed. The retaliatory actions were related to the alleged tax fraud scheme, under the Supreme Court's "continuity plus relationship" test. Since enactment of the Sarbanes-Oxley Act, 18 U.S.C. 1513(e) retaliation against an employee constitutes racketeering. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower, even though they occur after the coverup is exposed. In this case, the retaliatory acts were not isolated events, separate from the tax fraud. Plaintiff properly alleged that his termination was proximately caused by a RICO predicate act of retaliation.

Illinois law permits purchasers of tickets to sporting contests, concerts, and similar events to resell tickets via auction sites on the Internet. Chicago, which imposes an amusement tax on the original ticket price, contends that the websites through which tickets are resold must collect and remit an additional tax on the difference between the original price and the resale price. In parallel cases, the Supreme Court of Illinois decided that Illinois law does not allow Chicago to collect its tax from the auction sites. In a case involving another online site, the Seventh Circuit affirmed judgment against the city and denied the city's motion for an extension to allow petition for rehearing to the Illinois Supreme Court.

Defendant was convicted of eight counts of filing a false income tax return (26 U.S.C. 7206(1)). The Seventh Circuit affirmed. Although the district court applied the wrong standard in determining whether defendant could assert good faith, the error was harmless given overwhelming evidence of a lack of good faith. The court properly held that he could not present evidence of good faith unless he waived his Fifth Amendment rights and testified and relied on acquitted conduct concerning his sisters' tax returns in determining the sentence to be imposed.

Defendant was convicted of tax evasion, a felony (26 U.S.C. 7201), and failure to file a tax return for the 2004 tax year, a misdemeanor (26 U.S.C. 7203). The Seventh Circuit affirmed in part. Defendant waived his claim under the Speedy Trial Act (18 U.S.C. 3162) by failing to move to dismiss the indictment prior to trial. Defendant presented no support for arguing a Sixth Amendment violation caused by the pretrial delay and waived a multiplicity challenge to his indictment. The convictions were supported by substantial evidence and the sentence was reasonable. The district court has authority to impose restitution as a condition of supervised release; the court vacated and remanded for a determination of whether it had done so.

A sausage manufacturer brought claims against its former business partner, Pizza Hut, in 1993. In 2002 the manufacturer agreed to drop its last remaining claim, trade secret misappropriation, in exchange for a $15.3 million payment. When it received its $6.12 million take-home portion of the settlement, C&F, a shareholder and an S corporation, reported the income as long-term capital gain. Its shareholders reported their passed-through pro rata shares the same way. The IRS concluded that the settlement income should have been taxed as ordinary income and issued each of the shareholders a deficiency notice. The tax court and Seventh Circuit affirmed. The tax court found that Pizza Hut paid for lost profits, lost opportunities, operating losses and expenditures and rightly concluded that the settlement did not represent the final phase of a 13-year-long transfer of a capital asset. Because there was not a complete transfer of all substantial rights, there was no sale of a capital asset or long-term capital gain resulting therefrom.