Articles Posted in Tax Law

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Plaintiffs, tax preparation and refund-advance businesses, filed suit against the IRS under the Federal Tort Claims Act (FTCA), alleging several causes of action stemming from plaintiffs' cooperation in a federal criminal investigation. The district court granted the government's motion to dismiss, concluding that the IRS was immune from liability for its conduct under 28 U.S.C. 2680(c). The Ninth Circuit held that section 2680(c) did not confer absolute immunity on the IRS, and, construing the facts in the light most favorable to plaintiffs, the IRS's sting operation did not arise in respect of the assessment or collection of any tax. Accordingly, the panel reversed and remanded for further proceedings. View "Snyder & Associates Acquisitions LLC v. United States" on Justia Law

Posted in: Tax Law

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An entity's disregarded status did not preclude its classification as a pass-thru partner under the Tax Equity and Fiscal Responsibility Act (TEFRA), 26 U.S.C. 6231. In this case, Robert Kotick and his father formed Seaview Trading. Kotick filed a petition challenging a notice of Final Partnership Administrative Adjustment (FPAA). The Ninth Circuit affirmed the tax court's dismissal of the petition, holding that Seaview provided no compelling reason to contravene the consistent stance of the IRS and the tax courts, which have uniformly treated disregarded single-member LLCs as pass-thru partners. The panel also held that, because a party (Kotick) other than Seaview's tax matters partner filed a petition for readjustment of partnership items after AGK had done the same and within 90 days of the IRS's mailing of the FPAA, the tax court lacked jurisdiction under 26 U.S.C. 6226. View "Seaview Trading v. CIR" on Justia Law

Posted in: Tax Law

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Consents to extend the statute of limitations for the assessment of tax attributable to a partnership item, signed by the taxpayer-partner, are not invalid in this case because of a third party’s alleged conflict of interest or duress. This case arose out of an elaborate tax sheltering scheme that resulted in a massive IRS investigation, multiple criminal indictments and convictions, and a U.S. Senate investigation and hearing. The Ninth Circuit held that, an alleged third-party conflict of interest, without more, did not vitiate the individual consent personally executed by the taxpayer. Even crediting Intervenor Gonzales' allegations, the alleged actions by the IRS agent did not constitute legal duress warranting relief. Accordingly, the panel affirmed the district court's grant of summary judgment to the government. View "Birch Ventures v. United States" on Justia Law

Posted in: Tax Law

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The parties' dispute arose out of transactions originating from the savings and loan crisis during the 1970's and 1980's. Washington Mutual appealed a judgment entered in favor of the Government after a bench trial in a tax refund action. The Ninth Circuit affirmed, holding that Washington Mutual did not meet its burden of establishing a cost basis for its intangible assets. The panel concluded that the district court held Washington Mutual to the correct burden; did not make any clearly erroneous factual findings; permissibly determined that the cumulative fundamental flaws underlying the Grabowski Model rendered it incapable of producing a reliable value for the Missouri Branching Right; and was thus not required to sua sponte assign a value to that Right. Even assuming the Missouri Branching Right could be valued, Washington Mutual nonetheless failed to show reversible error as to the denial of its abandonment deduction. View "Washington Mutual v. United States" on Justia Law

Posted in: Banking, Tax Law

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Taxpayers argue that they did not earn taxable income and are exempt from paying taxes because they have taken vows of poverty. The Bethal Aram Ministries (BAM) is a church formed by taxpayers that provides maintenance to taxpayers. The court concluded that the tax court's determinations are supported by substantial evidence. In this case, the payments were quid pro quo payments for services in setting up corporations sole and limited liability companies and not contributions to BAM. Furthermore, taxpayers have complete dominion and control over BAM and its accounts. Accordingly, the court affirmed the tax court's decision that payments received by taxpayers are taxable and that they are subject to self-employment tax. View "Gardner v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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Plaintiffs, three former baristas, filed a class action against Starbucks, challenging the legality of Starbucks’ practice of withholding state and federal taxes from baristas’ paychecks based on the cash tips they receive. As a general practice, the baristas do not report to Starbucks how much they receive in tips. Instead, for tax withholding purposes, the company simply imputes 50 cents per hour in estimated tip income to each barista and withholds state and federal taxes from the baristas’ paychecks based on that amount. The district court granted Starbucks' motion to dismiss. The court concluded that, under the Tax Injunction Act, 28 U.S.C. 1341, and the Anti-Injunction Act, 26 U.S.C. 7421(a), the district court lacks subject matter jurisdiction over plaintiffs’ claims for declaratory and injunctive relief. The court also concluded that the federal-state comity doctrine bars the district court from awarding statutory damages on the state-tax component of plaintiffs’ claims, from which the federal-tax component cannot be severed. Because all of the claims are jurisdictionally barred or foreclosed by the comity doctrine, the court concluded that the entire action must be remanded to state court. Accordingly, the court reversed and remanded. View "Fredrickson v. Starbucks Corp." on Justia Law

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The Commissioner appeals the Tax Court's decision in these consolidated cases that SHI did not have deficiencies for the tax years under consideration and that SHLP and Vistancia had no adjustments to partnership items for their tax years which were under consideration. The tax court determined that the Taxpayers had used an accounting method that clearly reflected their income during the tax years under consideration. The court affirmed the tax court's decision that on the record before it, the Taxpayers used a permissible method of accounting and that method of accounting clearly reflected their income. The Tax Court determined that, as a matter of fact, the subject matter included the house, the lot, “the development . . . and its common improvements and amenities.” In this case, the Tax Court did not clearly err when it determined the subject matter of the Taxpayers’ home construction contracts; the Taxpayers’ application of the 95 percent test and the CCM logically flows from that determination. View "Shea Homes v. CIR" on Justia Law

Posted in: Tax Law

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I.R.C. 469 restricts taxpayers’ ability to reduce their taxable income using passive rental losses. At issue is whether section 469 entitles real estate professionals like petitioner to deduct rental losses without showing material participation in the rental property. The court held that section 469’s text, regulations, and relevant case law all point in one direction: though taxpayers who qualify as real estate professionals are not subject to section 469(c)(2)’s per se rule that rental losses are passive, they still must show material participation in rental activities before deducting rental losses. Congress endeavored to narrow the scope of permissible deductions for passive losses in real estate investments, in part by requiring material participation before losses may be deducted. The court concluded that real estate professionals were not exempted from this requirement. Accordingly, the court affirmed the grant of summary judgment for the government. View "Gragg v. United States" on Justia Law

Posted in: Tax Law

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Plaintiff failed to timely file his 2001 tax forms and filed a Form 1040 seven years after it was due, and three years after the IRS assessed a deficiency against him. Plaintiff later filed for bankruptcy and sought to discharge his 2001 tax liability. The bankruptcy court permitted the discharge, but the district court reversed. In In re Hatton, the court adopted the Tax Court’s widely-accepted definition of “return.” The court held that plaintiff's tax liabilities are nondischargeable under 11 U.S.C. 523(a)(1)(B)(i). The court also held that Hatton applies to the bankruptcy code as amended, and that plaintiff’s tax filing, made seven years late and three years after the IRS assessed a deficiency against him, was not an “honest and reasonable” attempt to comply with the tax code. Accordingly, the court affirmed the district court's judgment. View "Smith v. IRS" on Justia Law

Posted in: Tax Law

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Marcus Katz contributed stock to MK Hillside, a partnership between him and his wholly owned corporation. After the IRS issued a Final Partnership Administrative Adjustment (FPAA) to MK Hillside on January 2, 2008, finding that MK Hillside was a sham, lacked economic substance, and was formed and used principally to avoid taxes, Katz petitioned the tax court contesting the finding and asserting the statute of limitations. The IRS determined that 26 U.S.C. 6501(e)(1)'s six-year statute of limitations applied because Katz’s omission of the $198,000 credit from a collar termination on his 1999 return constituted more than 25% of the gross income reported on the return. The tax court denied summary judgment, holding that a trial would be necessary to determine whether Katz in fact omitted substantial income from his 1999 return. To avoid a trial, the parties agreed to a Stipulation of Facts and a Second Stipulation of Settled Issues. Based on those stipulations, the tax court held that the period for assessing tax on the 1999 MK Hillside partnership items was open as to Katz. The court concluded that, because the tax court had jurisdiction to consider Katz's argument, it necessarily had jurisdiction to reject it, at least for purposes of the partnership proceeding. Accordingly, the court affirmed the judgment. View "MK Hillside Partners v. Commissioner" on Justia Law

Posted in: Business Law, Tax Law