Justia U.S. 2nd Circuit Court of Appeals Opinion Summaries

Articles Posted in Tax Law

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The Second Circuit affirmed the district court's dismissal of plaintiff's second amended complaint (SAC) for failure to state a claim. The SAC alleged that Costco charged its customers sales tax on the full price of items subject to a manufacturer's discount in situations where New York law provided that Costco, rather than the customer, was liable for the tax. The court held that these claims must be brought in a New York administrative proceeding under New York Tax Law 1139, which provided the exclusive remedy for claims that a tax, penalty, or interest was erroneously, illegally or unconstitutionally collected. Likewise, the district court properly dismissed plaintiff's unjust enrichment claims and his claim under New York General Business Law 349. View "Guterman v. Costco Wholesale Corp." on Justia Law

Posted in: Tax Law

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Petitioner challenged the tax court's denial of her petition seeking a refund of her overpayment of 2012 income taxes. Although the Commissioner did not dispute that petitioner was overpaid or the amount of overpayment, the Commissioner argued -- and the tax court agreed -- that the tax court lacked jurisdiction to order a refund or credit of the overpayment. The Second Circuit agreed with petitioner's interpretation of the look back period in 26 U.S.C. 6512(b)(3) and held that "third year after the due date (with extensions)" refers in this case to the third year after the return due date, plus a six‐month extension period. The court held that "(with extensions)" has the same effect as does the similar language that existed in 26 U.S.C. 6511(b)(2)(A) at the time of section 6512(b)(3)'s amendment‐‐that is, the language expands the tax court's jurisdiction to order refunds and credits. Therefore the notice of deficiency in this case, mailed 26 months after the due date, was mailed during the third year and thus the tax court had jurisdiction to look back three years, which would reach the due date and allow petitioner to recover her overpayment. Accordingly, the court reversed and remanded for entry of judgment for petitioner. View "Borenstein v. Commissioner" on Justia Law

Posted in: Tax Law

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The Second Circuit reversed the tax court's decision upholding 2008 tax deficiencies identified by the Commissioner upon application of the substance‐over‐form doctrine to recharacterize various lawful tax‐avoiding transactions as tax‐generating events for petitioners, their adult sons, a family trust, and a family‐controlled corporation. Specifically, petitioners challenged the tax court's decision to uphold a tax deficiency against them based on the Commissioner's recharacterization of Summa's tax‐deductible commission payments to a DISC as taxable dividends to Summa shareholders. The court held that the Commissioner was not precluded from defending the challenged recharacterization, but the substance‐over‐form doctrine did not support recharacterization of Summa's DISC commission payments as constructive dividends to its shareholders. Therefore, the court reversed the portion of the judgment holding petitioners liable for $77,850 in 2008 income taxes. View "Benenson v. Commissioner" on Justia Law

Posted in: Business Law, Tax Law

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The Second Circuit reversed the tax court's decision rejecting the Commissioner's claim that the Estate of Andrew J. McKelvey owed $41 million in taxes with respect to McKelvey's 2008 income tax return for omitting what the Commissioner alleged were short‐ and long‐term capital gains arising from the execution of new contracts extending the valuation dates of two variable prepaid forward contracts. The court remanded for determination of whether the termination of obligations that occurred when the new contracts were executed resulted in taxable short‐term capital gains, and calculation of the amount of long‐term capital gains that resulted from the constructive sales of the collaterized shares. View "Estate of Andrew J. McKelvey v. Commissioner" on Justia Law

Posted in: Tax Law

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Section 6511(d)(3)(A) of the Internal Revenue Code, which establishes an elongated ten-year limitations period on refund claims resulting from foreign tax credits, was applicable only to overpayments attributable to foreign taxes for which the taxpayer elects to claim, but was not applicable to claims resulting from deductions for foreign taxes paid or accrued. The Second Circuit affirmed the district court's denial of taxpayer's claim for a deduction of foreign taxes under section 6511(d)(3)(A), holding that taxpayer's refund claim was time-barred. In this case, taxpayer's claim for refund was filed in December 2011 for an overpayment of taxes in 1995, that was attributable to its election to deduct foreign taxes paid in 2002. View "Trusted Media Brands, Inc. v. United States" on Justia Law

Posted in: Tax Law

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Larson was involved with—and later convicted of crimes related to—the organization of fraudulent tax shelters. The IRS then required organizers/promoters to register tax shelters not later than the day of the first offering for sale, 26 U.S.C. 6111(a). Organizers/promoters who failed to register were subject to a penalty of the greater of one percent of the aggregate amount invested in the tax shelter, or $500. Eight years after the IRS notified Larson that he was under investigation, it informed him that it considered him an organizer with a duty to register and was subject to penalties of $160,232,0261 for failure to do so. The IRS Office of Appeals reduced the penalties to $67,661,349, stating that Larson would need to pay the remaining penalty and file a Claim for Refund if he wanted to contest the assessment. Larson paid $1,432,735 and filed his Refund Claim. The IRS rejected Larson’s claim for failure to pay the entire amount. Larson filed suit. The government moved to dismiss, arguing that because Larson had not paid the assessed penalties in full, the court lacked jurisdiction. The court agreed, concluding that application of the full-payment rule did not violate Larson’s due process rights. The Second Circuit affirmed, holding that the full‐payment rule applies to Larson’s section 6707 penalties and that his tax refund, due process, Administrative Procedure Act, and Eighth Amendment claims were properly dismissed. View "Larson v. United States" on Justia Law

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The Second Circuit affirmed the district court's dismissal of a petition for innocent spouse relief based on lack of jurisdiction and from an order denying petitioner's motion to vacate the order of dismissal. The court held that petitioner's failure to file the petition within the statutorily prescribed period deprived the Tax Court of jurisdiction to review her claim. View "Matuszak v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law

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Plaintiffs filed suit under 26 U.S.C. 7431 against the IRS, after the IRS sent a report containing plaintiffs' names, social security numbers, and financial information to the wrong person. The government conceded liability and acknowledged that plaintiffs were entitled to $1,000 each in statutory damages for the disclosure of the report. Plaintiffs argued, however, that they were entitled to statutory damages of $1,000 not just for the disclosure of the report but for the disclosure of each item of information contained in the report. Plaintiffs also sought punitive damages. The district court granted the government's motion for summary judgment. The court found no ambiguity in the statute, and held that the statute clearly provided an aggrieved taxpayer $1,000 in statutory damages for ʺeach actʺ of unauthorized disclosure, not for each item of information disclosed. To the extent that there was any doubt, the court explained that it must resolve the matter in favor of the government. In regard to punitive damages, the court agreed with the district court that no reasonable jury could find, on the record presented, that the disclosure resulted from anything other than ordinary negligence. Accordingly, the court affirmed the judgment. View "Minda v. United States" on Justia Law

Posted in: Tax Law

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Petitioner and the Government cross-appealed the tax court's orders relating to petitioner's underreporting of income in his 2003 tax return, principally in connection with a $2 million payment he received from Delta Currency Trading for his role in a now-defunct tax shelter scheme. While petitioner's deficiency proceeding was pending losses reported by Mercato - a partnership of which petitioner was a member - were disallowed in a partnership tax proceeding. The tax court held that it lacked jurisdiction over the added income tax deficiency because I.R.C. 6230 required the Commissioner to apply the results of the Mercato proceeding to petitioner by computational adjustment, rather than in his deficiency proceeding. The tax court also held that petitioner owed the self-employment tax and corresponding penalty. The court held that the tax court erred in concluding that it lacked jurisdiction over the additional income‐tax deficiency attributable to the $2 million Delta payment; section 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty; and compliance with section 6751(b) is part of the Commissioner's burden of production and proof in a deficiency case in which a penalty is asserted. Therefore, the court vacated the tax court's jurisdictional ruling; remanded to the tax court to enter a revised decision upholding the additional income-tax deficiency, because petitioner concedes that the $2 million payment was fully taxable; affirmed the portion of the tax court's order upholding the self-employment tax deficiency; and reversed the portion of the tax court's order upholding the accuracy-related penalty. View "Chai v. Commissioner" on Justia Law

Posted in: Tax Law

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Defendant, the owner and operator of a freight service that couriered items to and from the United States and Canada, was found guilty of nine counts of tax-related offenses. Defendant was charged with violating 26 U.S.C. 7212(a), which imposes criminal liability on one who ʺcorruptly or by force or threats of force . . . endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title.” Another portion of the statute, often referred to as the ʺomnibus clause,ʺ imposes criminal liability on one who ʺin any other way corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title.ʺ On appeal, defendant argued that the court, like the Sixth Circuit, should construe the phrase ʺthe due administration of this titleʺ in the omnibus clause to include only a pending IRS action of which a defendant was aware. The court rejected defendant's argument and joined three of its sister circuits in concluding that section 7212(a)ʹs omnibus clause criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation. The court also concluded that an omission may be a means by which a defendant corruptly obstructs or impedes the due administration of the Internal Revenue Code under section 7212(a). Finally, the court concluded that the district court did not commit procedural error by using the manner of calculating the tax loss and restitution amounts that it did, or by deciding not to apply a two‐level reduction to defendant's base offense level for acceptance of responsibility. Accordingly, the court affirmed the judgment. View "United States v. Marinello" on Justia Law