Articles Posted in Tax Law

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Detroit residents voted to allow the school district to increase property taxes “for operating expenses.“ In 2013, the Downtown Development Authority (DDA) announced its intent to capture some of that tax revenue to fund the construction of Little Caesars Arena for the Red Wings hockey team. In 2016, the DDA revised its plan to allow the Pistons basketball team to relocate to Arena. The Detroit Brownfield Redevelopment Authority (DBRA) agreed to contribute to the $56.5 million expenditure, including reimbursing construction costs that private developers had already advanced. The project is largely complete. Plaintiffs requested that the school board place on the November 2017 ballot a question asking voters to approve or disapprove of the agencies' use of tax revenue for the Pistons relocation. The board held a special meeting but did not put the question on the ballot. Plaintiffs filed suit. Count VIII sought a declaratory judgment that the board had authority to place the question on the ballot. Count IX sought a writ of mandamus ordering the board to place it on the ballot. The court dismissed Counts VIII and IX, noting that Plaintiffs could have filed suit in 2013. The Sixth Circuit affirmed. Plaintiffs lack Article III standing. Failure to place Plaintiffs’ question on the ballot affects all Detroit voters equally; they raised only a generally available grievance about government. Michigan statutes do not give Detroit residents the right to void a Tax Increment Financing plan by public referendum, so a referendum would not redress Plaintiffs’ injury. View "Davis v. Detroit Public School Community District" on Justia Law

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Hartman and Ott co-founded Spectrum Tool & Design and divided management responsibilities. Ott was supposed to handle the company’s payroll taxes, which required him to withhold federal taxes from employees’ wages and send the money to the IRS. When Spectrum encountered financial difficulties, however, Ott failed to pay the taxes several times in 2004 and 2005. Hartman continued to rely on Ott to pay the taxes even after discovering the delinquency. After Spectrum went bankrupt, the government sued Hartman to recover the unpaid taxes. The district court granted the government summary judgment. The Sixth Circuit affirmed, noting that Hartman “willfully” failed to pay Spectrum’s taxes. The government imposes personal liability for outstanding payroll taxes on anyone who was “required to” pay these taxes and “willfully” failed to pay the funds to the IRS, 26 U.S.C. 6672(a). Hartman acted willfully by repeatedly claiming to believe that Ott paid the taxes when he no longer had any plausible basis for thinking that was so. He knew of Ott’s past failures and had ample means to identify and remedy Ott’s misconduct. View "United States v. Hartman" on Justia Law

Posted in: Business Law, Tax Law

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The IRS issued two “John Doe” summonses to Chase Bank without first obtaining approval in a federal district court as required by Internal Revenue Code section 7609(f), to obtain financial records relating to two limited liability companies. Those LLCs alleged that the IRS’s use of the John Doe summonses to obtain their financial records violated the Right to Financial Privacy Act, 12 U.S.C. 3401-3422. The district court dismissed for lack of subject matter jurisdiction after determining that sovereign immunity barred the LLC’s claims. The Sixth Circuit affirmed, first holding that Congress intended to provide a remedy for violations in the collection of tax, but not in the assessment and determination of tax, so the LLCs do not have a monetary remedy under the Internal Revenue Code. An LLC does not fall under the Privacy Act’s waiver of sovereign immunity and the district court correctly held that it lacked jurisdiction over the claims. View "Hohman v. Eadie" on Justia Law

Posted in: Business Law, Tax Law

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The United States charged Hall with unlawful gambling and money laundering and obtained a preliminary criminal forfeiture order for 18 parcels in Knox County. The County determined that Hall owed substantial delinquent real property taxes, giving it a first lien under Tennessee law. Under 21 U.S.C. 853(n)(2), a party asserting an interest in property that is subject to criminal forfeiture may seek a hearing on his alleged interest within 30 days. Knox County filed an untimely claim. The court amended the preliminary forfeiture order to cover three more Knox County properties. Knox County filed a timely second claim and requested an interlocutory sale and delay of forfeiture. The United States stated that accrued taxes and interest would be paid, regardless of whether the taxing authority filed a claim, but argued that Knox County would have no legal interest in accruing taxes once title passes, citing the Supremacy Clause, and objected to delaying a final forfeiture order. The Sixth Circuit vacated the forfeiture order. Knox County has a legal interest in the property (tax lien), so the district court erred in dismissing its claim for lack of standing but it is not necessarily entitled to a hearing. The court may ascertain the scope of Knox County’s interest on summary judgment but must account for that interest before entering a final forfeiture order. The court did not abuse its discretion in denying Knox County’s motion for an interlocutory sale. View "United States v. Hall" on Justia Law

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Worldwide Equipment, a Mack Truck dealer, remitted a 12% federal excise tax collected from purchasers of its heavy-duty trucks, and sought a refund, claiming that the trucks, designed for use in the Appalachian coalfields, qualified as exempted, “off-highway” vehicles under 26 U.S.C. 7701(a)(48). The statute, 26 U.S.C. 6416(a), requires a refund claimant to show that it has made arrangement to avoid double payments and unjust enrichment by submitting written customer consent forms. Worldwide did not supply such consents to the IRS. In its denial, the IRS did not refer to the failure to supply consents. The district court, relying on long-standing Supreme Court and Sixth Circuit precedents applying predecessor statutory provisions, dismissed Worldwide’s refund claims on nonwaivable sovereign immunity grounds because the consent forms were statutorily required as part of a “duly filed” claim under 26 U.S.C. 7422(a). The Sixth Circuit affirmed. Worldwide’s failure to file its customer consent forms at the administrative stage violated section 6416(a); therefore, the claims had not been “duly filed with the Secretary, according to the provisions of law in that regard,” violating section 7422(a), so that federal courts are without jurisdiction to consider Worldwide’s refund claims. View "Worldwide Equipment of Tennessee, Inc. v. United States" on Justia Law

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ICN, a religious nonprofit, operates a Nashville mosque and a school. In 2008, it began building a new school building, financed by an ijara agreement, to avoid “running afoul of the Islamic prohibition on the payment of interest.” The bank essentially bought the property, leased it back to ICN, and then sold it back to ICN, with the lease payments substituting for interest payments. The agreement lasted until October 2013; the property was “continuously occupied by [ICN] and physically used solely for exempt religious educational purposes.” The transfer of title prompted the tax assessor to return the property to the tax roll. In February 2014, ICN applied for a property tax exemption, seeking retroactive application. The Tennessee State Board of Equalization’s designee regranted ICN's exemption, but not for the time during which the bank had held title. An ALJ and the State Board’s Assessment Appeals Commission upheld the decision. ICN did not seek review in the chancery court, but filed suit in federal court under the federal Religious Freedom Restoration Act; the federal Religious Land Use and Institutionalized Persons Act; the federal Elementary and Secondary Education Act; and the Establishment Clause. The court dismissed for lack of subject-matter jurisdiction, citing the Tax Injunction Act, 28 U.S.C. 1341. The Sixth Circuit affirmed. Tennessee’s statutory provision for state-court appeal provides a plain, speedy, and efficient alternative to federal-court review, so the Tax Injunction Act bars ICN’s suit in federal court. View "Islamic Center of Nashville v. State of Tennessee" on Justia Law

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Owners, having relied on an external audit, did not “willfully” fail to pay trust fund taxes. Four investors bought Eagle Trim, which produced automobile interior-trim parts. Byrne (president) and Kus (CEO) were responsible for Eagle’s income tax returns, but Fuller, as controller, had wide discretion over financial activities. Eventually, Byrne signed Eagle's bankruptcy petition. Eagle liquidated. The IRS assessed against Byrne and Kus $855,668.35 in penalties under 26 U.S.C. 6672 for Eagle’s outstanding trust-fund tax (taxes withheld from employees’ wages) liability. Byrne paid $1,000 and then unsuccessfully sought a refund and an abatement of the penalty and of the entire assessment. Byrne filed suit. On remand, the district court found that Byrne and Kus willfully failed to pay and were liable under section 6672. The Sixth Circuit vacated. Byrne and Kus did not have actual knowledge that the taxes were not being paid until after a Forbearance Agreement was executed with a creditor. The issue of recklessness was a “close call,” but the men directed their independent accounting firm to instruct Fuller on how to timely deposit trust-fund taxes, added an assistant controller to help Fuller in his duties, created a new management spot to review Fuller’s financial management, and relied on a professional clean audit report. View "Byrne v. United States" on Justia Law

Posted in: Tax Law

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The Internal Revenue Service classified Ballard, a securities broker, as a non-filer in 2008 and investigated. Ballard lied about his income, hid money in family members’ bank accounts, and filed then dismissed several Chapter 13 bankruptcy petitions, attempting to avoid paying $848,798 in taxes arising from his income between 2000 and 2008. He eventually pled guilty to violating 26 U.S.C. 7212(a), which prohibits “corruptly . . . obstruct[ing] or imped[ing] . . . administration of [the tax laws].” Ballard urged the court to use the U.S.S.G. for obstruction of justice. The district court rejected Ballard’s argument that he never intended to evade paying his taxes but was merely delaying the payments and used the tax evasion guideline to calculate a higher offense level and an increase in the sentencing range from eight–14 months to 24–30 months. Ballard was sentenced to 18 months’ incarceration. The Sixth Circuit affirmed. What matters in the choice between guidelines sections is which section is more precisely tailored to reflect offense characteristics—like tax evasion and tax loss—and which section covers a more closely related group of crimes. What Ballard did, and what the government charged, was a lie to the tax collector about his earnings. View "United States v. Ballard" on Justia Law

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Bratt filed for Chapter 13 bankruptcy, proposing to pay overdue taxes to Nashville, which held a $5,136 over-secured lien on Bratt’s real property. Under 11 U.S.C. 511(a), the interest rate for tax claims should “enable a creditor to receive the present value of the allowed amount of a tax claim” and be “determined under applicable nonbankruptcy law.” The Code does not allow assessment of post-petition penalties. Tennessee Code 67-5-2010 set an interest rate of 12% per year for overdue taxes, with a 6% per year penalty. A Tennessee bankruptcy court held that only the post-petition interest and not the penalty portion could be collected for over-secured claims in bankruptcy proceedings. In response, the Tennessee legislature added subsection (d): For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to this section constitutes the assessment of interest. Bratt argued that the amendment should not apply. Tennessee admitted that the 18% rate exceeded what was required to maintain the tax claim's present value. The bankruptcy court held that subsection (d) violated the Supremacy Clause. The Bankruptcy Appellate Panel affirmed that 12% was the appropriate interest rate, reasoning that subsection (d) is not a “nonbankruptcy law” and is not applicable for determining the interest rate under section 511(a). The Sixth Circuit affirmed, adopting the BAP’s reasoning. View "Tennessee v. Corrin" on Justia Law

Posted in: Bankruptcy, Tax Law

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After receiving notices of federal tax lien and of intent to levy, the taxpayers requested that the IRS hold a Collection Due Process hearing. The IRS took five months to process the request. At the hearing, the presiding agent refused to discuss multiple issues. The taxpayers were still dissatisfied after a second hearing before a different agent and sued the government for the agents’ alleged misbehavior under 26 U.S.C. 7433. They also requested a temporary restraining order against further tax-collection efforts. The district court dismissed, finding that the challenged activity did not fall within the scope of section 7433, and the Tax AntiInjunction Act, 26 U.S.C. 7431(a) precluded a restraining order. The Sixth Circuit affirmed. The government has not consented to being sued in this case, so the district court lacked jurisdiction. A person may sue the federal government for damages under 26 U.S.C. 7433 “[i]f, in connection with any collection of Federal tax with respect to [the] taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of” the tax code or any regulation promulgated thereunder. This suit falls outside this waiver of sovereign immunity because the challenged conduct did not occur in connection with tax collection. View "Agility Network Services, Inc. v. United States" on Justia Law

Posted in: Tax Law