Justia U.S. 6th Circuit Court of Appeals Opinion Summaries

An involuntary Chapter 11 bankruptcy petition was filed against Quality Stores, which eventually closed operations and terminated all employees. Under the Pre-Petition Plan, severance pay was based on job grade. Payments were made on the normal payroll schedule, not tied to receipt of unemployment compensation, and not attributable to particular services. The Post-Petition Plan was designed to encourage employees to defer their job searches; the lump-sum payments were not tied to receipt of unemployment compensation, nor attributable to provision of particular services. Quality reported the payments as wages and withheld income tax, paid the employer’s share of FICA tax, and withheld each employee’s share of FICA. Of $1,000,125 at issue, $382,362 is attributed to the Pre-Petition Plan, $214,000 for the employer share and $168,362 for the employee share; $617,763 is attributed to the Post- Petition Plan, $357,127 for the employer share and $260,636 for the employee share. Quality argued that the payments were not wages but supplemental unemployment compensation benefits, not taxable under FICA, and sought a refund of the employer share and the shares of consenting employees. When the IRS did not act, Quality filed an adversary action in the bankruptcy court, which ordered a full refund. The district court and Sixth Circuit affirmed.View "United States v. Quality Stores, Inc." on Justia Law

Barbara, an analyst at the Cleveland Clinic, and Anthony, a stay-at-home father for two-year-old triplets and ten-year-old, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. 701. On Schedule B listing assets, they included a joint interest in “Anticipated 2009 Income Tax Refund,” value “unknown.” On their joint returns for 2009, they listed: adjusted gross income: $59,402; total tax liability: $2,934; total credits: $2,934; payroll taxes withheld: $6,777; and total federal tax refund: $8,542. On line 51, “Tax and Credits,” they listed $2,903 for the Child Tax Credit (CTC). On line 65, “Payments,” they listed $1,097 for additional CTC. They amended Schedule B, changing the unknown value of their tax refund. They specified $4,000 as the portion of their refund due to the CTC and $4,542 for the portion not due to the CTC. They amended Schedule C of the bankruptcy petition, to list the $4,000 portion as exempt pursuant to Ohio Rev. Code 2329.66(A)(9)(g). The Trustee objected, arguing that $2,903 of the CTC, the so-called “non-refundable portion,” was not exempt. The bankruptcy court sustained the Trustee’s objection, reducing the exemption to $1,907. The Bankruptcy Appellate Panel affirmed. The Sixth Circuit affirmed View "Zingale v. Rabin" on Justia Law

Federal tax assessments against husband arose out of his failure to file returns, report income, or pay tax, 1986 through 1993. Unpaid taxes, penalties, and interest totaled $901,052.17 as of January 2010. Wife paid $40,227.30 in full satisfaction of a separate assessment based on an audit of her 2000 return, resulting in dismissal of claims against her personally. The district court granted summary judgment to the government with respect to the assessment against husband and reduced the tax liability to judgment. The government moved for foreclosure of the lien and sale of the entire property. Since the property was held by the couple as tenants by the entirety, husband’s individual tax lien attached to his partial contingent survivorship interest in the property, which would have minimal value if sold separately. The court found that the property would bring $160,000 at a foreclosure sale and was subject to a mortgage of $14,572.36. Wife, age 60, testified to her limited income and sentimental attachment to the home where she had lived for 29 years. The court declined to force a sale (26 U.S.C. 7403). The Sixth Circuit reversed and remanded for reconsideration under the "Rodgers" factors.

The National Association of Insurance Commissioners helps to coordinate the state-based regulations of insurance, creating model statutes and regulations and releasing actuarial guidelines. Actuarial Guideline 33 (1995), describing how insurance companies should handle accounting questions connected to annuities sold after 1980. The new guidance prompted plaintiff to change the way it calculated financial reserves for roughly 200,000 annuity contracts it had issued over the prior 15 years, increasing its reserves by approximately $59 million—about 1.2 percent. The company’s parent claimed a deduction for part of that increase on its federal taxes for the following year and sought to do the same for the next nine years, 26 U.S.C. 807(f) The IRS concluded that insurers could not use Guideline 33 in calculating reserves for annuity contracts issued before its effective date. The company paid the disputed taxes under protest and sought to recover $11 million in overpayments and several million more in interest. The district court concluded that Guideline 33 clarified the pre-1995 requirements rather than changing them, granting the company summary judgment. The Sixth Circuit affirmed.

The debtor filed a voluntary bankruptcy petition and her Chapter 13 plan. A few weeks later, she filed her Michigan state income tax return, showing that she owed $4,900 for the 2008 tax year. She did not make payment, but later filed a proof-of-claim on behalf of the Michigan Department of Treasury, which meant that the tax debt would be paid through her Chapter 13 plan. Treasury objected, arguing that this was a post-petition claim under 11 U.S.C. 1305, which gives only a creditor the option of filing; debtor responded that the claim was permitted under section 501(c). The bankruptcy court overruled the objection; the district court affirmed The Sixth Circuit affirmed. The tax debt is entitled to priority under section 507(a)(8), (i) and (iii), so the post-petition protective claim on behalf of Treasury is treated under section 502(i) as a prepetition claim. A debtor is permitted to file a prepetition claim on behalf of a creditor that fails to timely file.

In 2008, the Eastern District of Michigan ranked 79th of 90 judicial districts in successful completion of Chapter 13 bankruptcy cases. To improve the situation, the judges began entering orders in Chapter 13 plans that required the IRS to send tax refunds directly to the Chapter 13 trustees, not to the individuals as the Internal Revenue Code contemplates. 26 U.S.C. 6402(a). Chapter 13 plans repay creditors over three to five years, requiring the IRS to track debtors’ returns during several tax cycles. The burden became unmanageable when there were 4,966 affected returns in April 2009. The IRS obtained a declaratory judgment preventing the trustees from enforcing existing refund redirection provisions and a writ of mandamus prohibiting the bankruptcy court from including these provisions in future Chapter 13 plans. The Sixth Circuit remanded with instructions to dismiss, finding that the court lacked jurisdiction. The government sued the wrong parties, a group of bankruptcy trustees, but the harm it suffered flows from the bankruptcy court's orders. A judgment against the trustees will not eliminate the problem.

Taxpayer took business and individual tax deductions for the cost of "Loss of Income" insurance policies. The policies were back-dated, had a high premium to coverage ratio, were described as tax-savings products, and allowed taxpayer access to and control over the funds. A significant part of the premium was invested for later distribution to the policy holder. He was convicted of: subscribing a false tax return, 26 U.S.C. 7206(1); attempting to evade taxes, 26 U.S.C. 7201; and conspiracy to defraud the government, 18 U.S.C. 371. The Sixth Circuit affirmed, holding that the government presented sufficient evidence of the crimes. The court rejected a challenge to prior bad acts evidence and an argument that the government was required by the nature of the charges to forgo charging him under the general crime of conspiracy to defraud the U.S. The district court properly ordered payment of restitution for the personal income taxes of his co-conspirator.

From 2005 to 2008, debtor, the owner of Waffle House Ffranchises, periodically failed to make all federal income tax withholding, social security, and unemployment payments due to the IRS and to timely file returns. The IRS assessed penalties in excess of $1.5 million; debtor made payments of $637,000 toward the penalty. In 2009 a chapter 11 reorganization plan was confirmed; the business continued to operate until its assets were sold. In 2010 debtor sued the IRS under 11 U.S.C. 548, 550 and the Tennessee Uniform Fraudulent Transfer Act, Tenn. Code Ann. 66-3-301, asserting that the penalty payments provided no value to debtor and were made at a time when the debtor was incurring debt beyond its ability to pay. The bankruptcy court dismissed. The Sixth Circuit affirmed, noting that the payments resulted in a dollar-for-dollar reduction of debtor's undisputed tax debt. Payment of a fine or penalty is not an avoidable transfer, regardless of whether the penalty is a noncompensatory penalty.

Defendant, convicted under 18 U.S.C. 371 of conspiracy to defraud the United States while serving as in-house general counsel to the company involving the company's filing of false tax returns with the IRS. He was sentenced to 41 months of imprisonment, followed by three years of supervised release, and ordered to pay restitution to the IRS. The Sixth Circuit affirmed. The jury instructions adequately addressed the elements of conspiracy. There was no need for mention of the attorney-client privilege or of an attorney's potential obligation to report illegal activity. The government’s theory of liability was not dependent on whether defendant had an affirmative duty to inform, yet failed to do so; conviction did not turn on whether defendant's actions were governed by the attorney-client privilege. There was sufficient evidence to support the conviction.

The Chapter 7 debtors' federal tax return listed: withholding of $6,777; total tax liability of $2,934, a non-refundable child tax credit of $2,903, an additional child tax credit of $1,097, and a total federal tax refund of $8,542. The credit allows some taxpayers to claim a tax credit of $1,000 for each qualifying child. If the taxpayers have tax liability, the non-refundable portion is applied to satisfy the tax liability. If the taxpayer qualifies, a portion of the refundable amount of the credit, not used to offset tax liability, is sent as an income tax refund. The refundable portion, unlike the non-refundable portion, is treated as an overpayment. The bankruptcy court sustained the trustee's objection that the $2,903 credit was not exempt. The Sixth Circuit affirmed. Under 26 U.S.C. 24(a) and (d), the non-refundable portion of the credit is not property of the estate cannot be exempted as a payment under Ohio Rev. Code 2329.66(A)(9)(g). The entire tax refund of $8,542 is property of the estate from which the debtors may exempt $1,097 as the refundable portion of the credit.