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

Before 2008, Cook County ordinances required the Assessor to assess single-family residential property at 16%, commercial property at 38%, and industrial property at 36% of the market value. In 2000-2008, the Assessor actually assessed most property at rates significantly lower than the ordinance rates. In 2008, the Assessor proposed to “recalibrate” the system. The plaintiffs claim that their assessment rates may have been lawful but were significantly higher than the actual rates for most other property owners and that they paid millions of dollars more in taxes in 2000-2008 than they would have if they were assessed at the de facto rates. The taxpayers exhausted their remedies with the Board of Review, then filed suit in state court, citing the Equal Protection Clause, Illinois statutory law and the Illinois Constitution. Years later, their state suit remains in discovery.Claiming that Illinois law limits whom they can name as a defendant, what evidence they can present, and what arguments they can raise, the taxpayers filed suit in federal district court, which held that the Tax Injunction Act barred the suit. The Act provides that district courts may not “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State,” 28 U.S.C. 1341. The Seventh Circuit reversed, noting the County’s concession that Illinois’s tax-objection procedures do not allow the taxpayers to raise their constitutional claims in state court. This is the “rare case in which taxpayers lack an adequate state-court remedy.” View "A.F. Moore & Associates, Inc. v. Pappas" on Justia Law

Insurance executive Menzies sold over $64 million in his company’s stock but did not report any capital gains on his 2006 federal income tax return. He alleges that his underpayment of capital gains taxes (and related penalties and interest imposed by the IRS) was because of a fraudulent tax shelter peddled to him and others by a lawyer, law firm, and financial services firms. Menzies brought claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and Illinois law. The district court dismissed all claims. The Seventh Circuit affirmed in part. Menzies’s RICO claim falls short on the statute’s pattern-of-racketeering element. Menzies failed to plead not only the particulars of how the defendants marketed the same or a similar tax shelter to other taxpayers, but also facts to support a finding that the alleged racketeering activity would continue. A fraudulent tax shelter scheme can violate RICO; the shortcoming here is one of pleading and it occurred after the district court authorized discovery to allow Menzies to develop his claims. Menzies’s Illinois state law claims were untimely as to the lawyer and law firm defendants. The claims against the remaining financial services defendants can proceed. View "Menzies v. Seyfarth Shaw LLP" on Justia Law

Chapter 70 of the Wisconsin Tax Code governs the taxation of manufacturing and commercial companies aside from railroads and utilities. Chapter 76 governs the taxation of railroads and utilities, including air carriers, pipeline companies, and water conservation and regulation companies. The Code contains exemptions from the general property tax, including an exemption for “all intangible personal property,” which covers custom computer software. Manufacturing and commercial taxpayers generally qualify for the intangible personal property exemption; railroads and utilities do not and are the only taxpayers that Wisconsin requires to pay taxes on intangible property, including custom software. Union Pacific claimed the value of its custom software as exempt. The Department of Revenue audited Union Pacific and concluded that for the years 2014 and 2015, it owed $2,631,104.77 in back taxes and interest after disallowing that deduction. Union Pacific filed suit, arguing that the tax singles out railroads as part of an isolated and targeted group in violation of the Railroad Revitalization and Regulatory Reform Act of 1976, 49 U.S.C. 11501(b)(4). The Seventh Circuit affirmed summary judgment in favor of Union Pacific. The intangible property tax exempts everyone except for an isolated and targeted group of which railroads are a part. View "Union Pacific Railroad Co. v. Wisconsin Department of Revenue" on Justia Law

In March 2009 Truitt joined the Moorish Science Temple of America, which calls itself a sovereign “ecclesiastical government” and teaches that neither the states nor the federal government have authority over its members. Members purport to hold something akin to diplomatic immunity. In late 2009, Truitt filed seven nearly identical tax returns, each falsely claiming that she was entitled to a $300,000 refund. The IRS identified six returns as fraudulent, but for unknown reasons, approved one and sent her a check for the full amount. Within weeks the IRS demanded that she return the funds. She did not respond but spent the money on jewelry, a condominium, tickets to sporting events, and an investment. Truitt was convicted of making false claims against the United States, 18 U.S.C. 287 and theft of government funds, 18 U.S.C. 641. The Seventh Circuit affirmed, rejecting Truitt’s challenge the exclusion of her expert witness, psychologist Dr. Fogel, who proposed to testify that Truitt was a member of a “charismatic group”—a cult-like organization that indoctrinates its members. Truitt argued that she lacked the requisite mens rea for the crimes. The judge properly excluded the testimony under “Daubert” and Federal Rules of Evidence 702 and 704(b), reasonably concluding that Fogel lacked the relevant expertise and his methods were not reliable. View "United States v. Truitt" on Justia Law

Carroll and Lizzie Raines purchased their Mundelein home in 1975 as joint tenants. When Raines’ wife died, he became the sole owner until his 2009 death. Raines died intestate with six heirs. In 2007, Raines had filed federal income taxes for tax years 2000, 2001, 2003, and 2004. The IRS assessed taxes, penalties, and interest that remained unpaid. In 2010, the government recorded a notice of a $115,022.42 federal tax lien with the Lake County Recorder of Deeds. The Notice incorrectly identified “Carrol V. Raines” as the debtor, omitting the second “l” from his first name, and failed to include a legal description or permanent index number, but did correctly identify the property address. Raines’ heirs conveyed their interest in the property to Chicago Title Land Trust, which made improvements and capital investments in the property. In 2017, the government instituted proceedings to foreclose the tax lien, naming Chicago Title, other financial institutions, and municipal entities. The district court found that the defendants had adequate notice of the lien, which conformed to 26 U.S.C. 6323, so the government could enforce the lien. The Seventh Circuit affirmed, upholding a determination that the Affidavit of Bond, a title insurance executive who has conducted thousands of title searches and prepared thousands of title reports, commitments, and insurance policies, was inadmissible because it consisted of undeclared expert testimony and improper legal conclusions. The errors did not make the Lien undiscoverable. View "United States v. Z Investment Properties, LLC" on Justia Law

Freedom From Religion Foundation (FFRF), a nonprofit organization, “[t]akes legal action challenging entanglement of religion and government, government endorsement or promotion of religion.” FFRF paid its co-presidents a portion of their salaries in the form of a housing allowance, seeking to challenge 26 U.S.C. 107, which provides: In the case of a minister of the gospel, gross income does not include— (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home. Having unsuccessfully sought refunds from the IRS based on section 107 they sued. The district court granted FFRF and its employees summary judgment, finding that the statute violates the Establishment Clause of the First Amendment. The Seventh Circuit reversed, applying the “Lemon” test. The law has secular purposes: it is one of many per se rules that provide a tax exemption to employees with work-related housing requirements; it is intended to avoid discrimination against certain religions in favor of others and to avoid excessive entanglement with religion by preventing the IRS from conducting intrusive inquiries into how religious organizations use their facilities. Providing a tax exemption does not “connote[] sponsorship, financial support, and active involvement of the [government] in religious activity.” FFRF offered no evidence that provisions like section 107(2) were historically viewed as an establishment of religion. View "Gaylor v. Peecher" on Justia Law

Rogers is a tax lawyer. The Seventh Circuit previously characterized as an “abusive scam” a scheme Rogers implemented for the 2003 tax year. He implemented a similar scheme for later tax years: Rogers forms a partnership (Sugarloaf) that he uses to acquire severely-distressed accounts receivables from Brazilian retailers. For tax purposes, the partnership carries the receivables at their face amount, not at fair value. The partnership then conveys the receivables to U.S. taxpayers, who deem them uncollectible and deduct from their income the associated “loss.” A 2004 Tax Code amendment prohibits such partnerships from transferring built-in-losses on uncollectible receivables to U.S. taxpayers in this manner, 118 Stat.1589. Rogers modified his scheme to involve a trust in which Sugarloaf was both the grantor and beneficiary and additional maneuvering. Under the IRS’s sham determination, the Brazilian retailers’ purported contribution of receivables to Sugarloaf was recharacterized as a sale of assets; Sugarloaf’s original basis in the receivables was reduced to fair value—nearly nothing. The Tax Court and Seventh Circuit affirmed that Sugarloaf was a sham partnership; even if Sugarloaf were a legitimate partnership, the Brazilian retailers’ redemptions of their interest in the partnership was, in substance, a sale of receivables. A 40% penalty applied (26 U.S.C. 6662(h)(1); (2)(A)(1)) to Sugarloaf’s tax underpayment resulting from its gross misstatement of the 2004 cost-of-goods-sold expense, and a 20% penalty applied (section 6662(a), (b)(1) & (2)) to underpayments attributable to its negligence when failing to include certain income and taking disallowed business expense deductions. View "Sugarloaf Fund, LLC v. Commissioner of Internal Revenue" on Justia Law

Frances and her husband John filed a joint return for 2004. The IRS subsequently found the return deficient and informed them that they owed an additional $488,177 in income taxes and underreporting penalties of $138,732. The couple filed suit. John, a Harvard-educated tax lawyer, represented them at trial. Frances, a former teacher with an MBA, doctorate, and a law degree, attended the trial. The Tax Court ruled against the couple, finding them jointly and severally liable, 26 U.S.C. 6013(d), Three years later, Frances sought innocent spouse relief, 26 U.S.C. 6015. The Tax Court rejected the claim. The Seventh Circuit affirmed, finding that her meaningful participation in the trial precluded Frances from after-the-fact seeking to avoid responsibility for those liabilities. Such relief is available only if the petitioner has not “participated meaningfully in [the] prior proceeding”—in this case, the 2012 trial. Mrs. Rogers’s contention that she lacked knowledge of business and financial matters, including complex tax matters, and otherwise did not understand what transpired during the 2012 trial lacked credibility and she had every opportunity to raise her claim during the 2012 trial. Her testimony was self-serving and at odds with her education and experience. View "Rogers v. Commissioner of Internal Revenue" on Justia Law

The Seventh Circuit affirmed the district court's dismissal of an action alleging the violation of the Equal Protection Clause of the Fourteenth Amendment because the county placed a disproportionate tax on commercial and industrial properties in Mattoon Township. The court analyzed plaintiffs' claim solely on comity principles and held that the district court appropriately abstained from hearing the action. View "Perry v. Coles County, Illinois" on Justia Law

In 1999, after deregulation of the energy industry in Illinois, Exelon sold its fossil-fuel power plants to use the proceeds on its nuclear plants and infrastructure. The sales yielded $4.8 billion, $2 billion more than expected. Exelon attempted to defer tax liability on the gains by executing “like-kind exchanges,” 26 U.S.C. 1031(a)(1). Exelon identified its Collins Plant, to be sold for $930 million, with $823 of taxable gain, and its Powerton Plant, to be sold for $870 million ($683 million in taxable gain) for exchanges. Exelon identified as investment candidates a Texas coal-fired plant to replace Collins and Georgia coal-fired plants to replace Powerton. In “sale-and-leaseback” transactions, Exelon leased an out-of-state power plant from a tax-exempt entity for a period longer than the plant’s estimated useful life, then immediately leased the plant back to that entity for a shorter sublease term. and provided to the tax-exempt entity a multi-million-dollar accommodation fee with a fully-funded purchase option to terminate Exelon’s residual interest after the sublease. Exelon asserted that it had acquired a genuine ownership interest in the plants, qualifying them as like-kind exchanges.The Commissioner disallowed the benefits claimed by Exelon, characterizing the transactions as a variant of the traditional sale-in-lease-out (SILO) tax shelters, widely invalidated as abusive tax shelters. The tax court and Seventh Circuit affirmed, applying the substance over form doctrine to conclude that the Exelon transactions failed to transfer to Exelon a genuine ownership interest in the out-of-state plants. In substance Exelon’s transactions resemble loans to the tax-exempt entities. View "Exelon Corp. v. Commissioner of Internal Revenue" on Justia Law