Articles Posted in Tax Law

by
The Ninth Circuit affirmed the tax court's decision on a petition for redetermination of federal income tax deficiencies that turned on whether an investment by HP could be treated as equity for which HP could claim foreign tax credits. In this case, HP wanted its investment in a foreign entity to be treated as equity, so that HP would be entitled to the foreign tax credits that the entity—a so-called "FTC generator"—produces. FTC generators are entities that churn out foreign credits for U.S. multinationals, which companies typically desire if they pay foreign taxes at a lower average rate than domestic taxes. The panel held that its test was "primarily directed" at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like, and the tax court did not err in finding that HP's investment was best characterized as a debt. The panel also held that the tax court did not err in considering HP's put, purchased from ABN, as part of the "overall transaction" in characterizing HP's interest in the entity as debt or equity. Finally, the tax court's judgment—that HP's purported capital loss was really a fee paid for a tax shelter—was certainly based on a permissible view of the evidence. View "Hewlett-Packard Co. v. CIR" on Justia Law

Posted in: Tax Law

by
District courts have discretion to award the equitable relief of a "gross-up" adjustment to compensate for increased income-tax liability resulting from a plaintiff's receipt of a back-pay award in one lump sum. In this case, the Ninth Circuit vacated the district court's order denying plaintiff a tax adjustment of a damages award in a Title VII case. The jury awarded damages for back pay and emotional distress, as well as punitive damages. The district court refused to consider adjusting plaintiff's lump sum back-pay award to account for the corresponding increse in his tax liability. The panel reversed and remanded for further proceedings, and addressed other issues in a concurrently filed memorandum disposition. View "Clements, Jr. v. CenturyLink Inc." on Justia Law

by
Plaintiff, for 22 years, contested in administrative proceedings a California Franchise Tax Board ruling that he owed close to $7.4 million in taxes, penalties, and interest. The Ninth Circuit affirmed the district court's dismissal of plaintiff's action under 42 U.S.C. 1983, which arose from his administrative proceedings. The panel held that the Tax Injunction Act, 28 U.S.C. 1341, barred plaintiff's suit because plaintiff could either pay now and litigate later, or the pay-then-protest remedy provided plaintiff a speedy remedy, even if the protest-then-pay remedy had not. The court also held that, if plaintiff pays and then protests, the California state courts would likely allow plaintiff to add constitutional claims to a state court action challenging the tax. View "Hyatt v. Yee" on Justia Law

Posted in: Civil Rights, Tax Law

by
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

by
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

by
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

by
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

by
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

by
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

by
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