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

The Cosgriffs reside in South Beloit, Roscoe Township, Winnebago County, Illinois. They installed a $50,000 pool at their home. When township employees came to the home to reassess its property value after the pool addition, one of the Cosgriffs’ dogs bit one of the employees. That employee and Roscoe Township sued the Cosgriffs. The Cosgriffs started a petition campaign encouraging taxpayers to notify the township that its employees should not trespass on private property. The Cosgriffs’ next property assessment was significantly higher than their last. The Cosgriffs challenged the increased assessment before the Winnebago County Board of Review, which ruled in favor of the Cosgriffs and substantially reduced the assessment. The Cosgriffs then sued Winnebago County and individual defendants, alleging that the defendants acted unconstitutionally when they increased the Cosgriffs’ property assessment because the Cosgriffs spoke out against township employees trespassing on private property. The district court dismissed the Cosgriffs’ 42 U.S.C. 1983 claims, reasoning that comity principles barred federal courts from hearing these claims. The Seventh Circuit affirmed. Because the Cosgriffs challenge the administration of a local tax system under section 1983, their claims fall outside the scope of the statute. Available state remedies are plain, adequate, and complete. View "Cosgriff v. Winnebago County" on Justia Law

Fadden earned over $100,000 per year but did not submit tax returns. After an audit, the IRS garnished his wages. Fadden filed for bankruptcy, triggering an automatic stay. Fadden claimed that he had no interest in any real property nor in any decedent’s life insurance policy or estate. Fadden actually knew that he would receive proceeds from the sale of his mother’s home (listed by the executor of her estate for $525,000) and would receive thousands of dollars as a beneficiary on his mother’s life insurance policies. A week later, Fadden mentioned his inheritance to a paralegal in the trustee’s office and asked to postpone his bankruptcy. When Fadden finally met with his bankruptcy trustee and an attorney, he confirmed that his schedules were accurate and denied receiving an inheritance. The Seventh Circuit affirmed his convictions under 18 U.S.C. 152(1) for concealing assets in bankruptcy; 18 U.S.C. 152(3) for making false declarations on his bankruptcy documents; and 18 U.S.C. 1001(a)(2) for making false statements during the investigation of his bankruptcy. Counts 1 and 2 required proof of intent to deceive. Fadden proposed a theory-of-defense instruction based on his assertion that his conduct was “sloppiness.” The Seventh Circuit upheld the use of pattern instructions, including that “knowingly means that the defendant realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake or accident.” View "United States v. Fadden" on Justia Law

El-Bey, a "Moorish national," created an EIN for the Trust, naming himself as the trustee and fiduciary. El-Bey filed six tax returns for the Trust, each seeking a $300,000 refund, signing each return, identifying himself as the fiduciary, and listing his date of birth as the date of trust creation. The IRS flagged these returns as frivolous and notified El-Bey that he would be assessed a $5,000 penalty per return if he failed to file a corrected return. El-Bey returned the letters to the IRS, including vouchers and tax forms bearing no relation to the returns. Based on the fourth and fifth tax returns, the IRS mailed two $300,000 refund checks, which El-Bey deposited, using the funds to purchase vehicles and to buy a house. After the sixth return, El-Bey was indicted on two counts of mail fraud, 18 U.S.C. 1341, and six counts of making false claims to the IRS, 18 U.S.C. 287. The district court allowed El-Bey to proceed pro se and appointed standby counsel over El-Bey’s objection. El-Bey advanced irrelevant arguments, interrupted the judge, and made it challenging to manage the trial. The court expressed frustration, but later instructed the jurors, who indicated that they could continue to be impartial. The Seventh Circuit remanded for a new trial. Statements by the court in the presence of the jury conveyed that El-Bey was guilty or dishonest and impaired El-Bey’s credibility in the eyes of the jury. View "United States v. El-Bey" on Justia Law

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

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

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

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

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

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

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