Justia U.S. 9th Circuit Court of Appeals Opinion Summaries

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

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

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

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

This case arose from a complaint filed in 2011, by the late Al Davis and his wife, against the United States, seeking a refund of income taxes. Davis, a Pro Football Hall of Famer and the principal owner of the Oakland Raiders, argued that the IRS assessed the taxes outside the statue of limitations and in breach of a Closing Agreement between the IRS and the partnership that formally owned the Raiders. The district court entered judgment for Davis. In this case, the court held that, although the IRS admits that it breached Paragraph Q of the Closing Agreement by making the September 2007 assessments without giving Davis a second opportunity to review its calculations, the IRS's breach did not invalidate the assessments. Even though the breach denied Davis an opportunity to comment on the amounts of the assessments before they were made, it did not prevent him from challenging the assessed amounts by seeking an administrative refund claim or a refund action. Under the plain language of I.R.C. 6231(b)(1)(C), the court concluded that the IRS does not “enter into a settlement agreement with the partner” when it enters into a settlement agreement with the tax matters partner (TMP) and the individual partner is bound merely by operation of the tax court’s decision to which the partner is a party. Because the Closing Agreement and stipulations were not a “settlement agreement with” Davis within the scope of I.R.C. 6231(b), the assessments made on September 4, 2007 were timely, as they occurred within one year after the Tax Court decision became final. Accordingly, the court reversed and remanded for further proceedings. View "Davis v. United States" on Justia Law

The district court held that temporary foreign workers in the Commonwealth of the Northern Mariana Islands (CNMI) and their employers are required to pay FICA taxes, which fund Social Security and Medicare. Concorde and more than 4,000 temporary, nonresident former employees of Concorde, appealed the district court's entry of judgment on the pleadings in favor of the United States. The court concluded that, because FICA is a law that imposes an excise tax to support the Social Security system, it applies to the CNMI as it applies to Guam; FICA applies to all workers and their employers in Guam, regardless of their citizenship; and FICA also applies to all workers and their employers in the CNMI, including appellants, regardless of their citizenship. Accordingly, the court affirmed the judgment. View "Fang Lin Ai v. United States" on Justia Law

Taxpayers received and then sold stock derived from the demutualization of five mutual life insurance companies from which they had purchased policies. At issue was whether a life insurance policyholder has any basis in a mutual life insurance company’s membership rights. The court held that taxpayers who sold stock obtained through demutualization cannot claim a basis in that stock for tax purposes because they had a zero basis in the mutual rights that were extinguished during the demutualization. The district court skipped a critical step by examining the value of the mutual rights without evidence of whether the taxpayers paid anything to first acquire them. The district court also erred when it estimated basis by using the stock price at the time of demutualization rather than calculating basis at the time the policies were acquired. Consequently, the court concluded that the IRS properly rejected taxpayers' refund claim in this case where they offered nothing to show payment for their stake in the membership rights, as opposed to premium payments for the underlying insurance coverage. Accordingly, the court reversed the district court's denial of the government's motion for summary judgment. View "Dorrance v. United States" on Justia Law

WCI was owned by WB Acquisition, which was owned by WBPartners, which in turn was owned by Daren Barone’s and Gregory Watkins’s holding corporations. WCI and WB Partners formed a joint venture called the NTC Joint Venture. The joint venture’s structure had significant federal income tax consequences. While the NTC project was ongoing, WCI sold its assets to Kuranda. WB Partners, WB Acquisition, and Barone's holding corporation (collectively, Taxpayers) challenged certain tax deficiencies identified by the Commissioner. In three consolidated decisions, the Tax Court found that the NTC Joint Venture was not a valid partnership for tax purposes, and therefore that all of the joint venture’s profits were taxable income to WCI. The Tax Court determined that all of the proceeds from the noncompetition agreement were income to WCI as well. Because WCI had substantially understated its income, the Tax Court upheld the Commissioner’s assessment of accuracy-related penalties. The court concluded that income from the NTC Project attributed to WB Partners was in fact income to WCL; proceeds from the noncompetition agreement were income to WCI rather than WB Partners; and the Tax Court properly assessed accuracy-related penalties. Accordingly, the court affirmed the judgment. View "DJB Holding Corp. v. Commissioner" on Justia Law

Guam taxpayers filed a class action suit against Guam and its officers, alleging that Guam violated the tax provisions of the Organic Act of Guam, 48 U.S.C. 1421i, by failing timely to refund overpayments, and, via a claim brought under 42 U.S.C. 1983, the taxpayers also challenged the arbitrary expedited refund program as a violation of equal protection. The district court granted summary judgment to the taxpayers on both claims, entered a permanent injunction both ending the expedited refund program and requiring Guam to pay approved refunds in a timely manner, and awarded substantial attorney’s fees and costs. The court concluded that Guam's section 1983 arguments did not implicate subject matter jurisdiction, but nonetheless, the court exercised its discretion in considering Guam's section 1983 arguments; the official-capacity defendants in this case are “persons” within the meaning of section 1983 for purposes of prospective relief; even if the territorial officials had been obliged by federal law to institute the arbitrary expedited refund process - which they most certainly were not - they were empowered to act only in their capacities as territorial officers; and the district court did not abuse its discretion in requiring that Guam pay refunds within six months once Guam determines that the requests are valid and not subject to investigation or audit. Accordingly, the court affirmed the judgment. View "Paeste v. Government of Guam" on Justia Law

Taxpayers took out a $400,000 loan secured by an undeveloped plot of land intending to use the funds to develop the land. Taxpayers donated a conservation easement on parts of the plot that would not be developed. Despite warranties in the easement agreement to the contrary, the land was still subject to the mortgage. The mortgage had not been subordinated to the easement. The Tax Court held that Taxpayers were deficient in taxable years 2007 and 2008, affirming the Commissioner’s disallowance of the charitable deduction for those years because of Taxpayers’ failure to ensure the subordination of the mortgage held by U.S. Bank at the time of the gift. The court held that, in order for the donation of a conservation easement to be protected “in perpetuity,” any prior mortgage on the land must be subordinated at the time of the gift. Accordingly, the court affirmed the judgment. View "Minnick v. Commissioner" on Justia Law