Justia U.S. 8th Circuit Court of Appeals Opinion Summaries

A U.S.-based multinational corporation filed a consolidated federal tax return for 2006, reporting royalty income received from its Brazilian subsidiary for the use of intellectual property. Brazilian law limited the amount the subsidiary could pay in royalties to its foreign parent, so the subsidiary paid and the parent reported only the amount permitted under Brazilian law. Years later, the Internal Revenue Service (IRS) issued a Notice of Deficiency, reallocating nearly $23.7 million in additional royalty income to the parent company, arguing that this reflected what an unrelated party would have paid for the intellectual property, notwithstanding the Brazilian legal restriction.The corporation challenged the IRS’s determination in the United States Tax Court. The Tax Court, in a closely divided decision, upheld the IRS’s position. A plurality of judges deferred to the IRS regulation that allowed such reallocation, finding the statute ambiguous and the regulation reasonable. Two concurring judges agreed with the result but believed the statute itself required the reallocation, regardless of the regulation. The dissenting judges argued that the statute unambiguously prohibited the IRS from reallocating income that the parent could not legally receive, and some also found the regulation procedurally invalid.On appeal, the United States Court of Appeals for the Eighth Circuit reviewed the case in light of recent Supreme Court precedent clarifying that courts must independently interpret statutes without deferring to agency interpretations. The Eighth Circuit held that the relevant statute does not permit the IRS to reallocate income that the taxpayer could not legally receive due to foreign law restrictions. The court concluded that the IRS’s authority to allocate income under the statute is limited to amounts over which the taxpayer has dominion or control. The Eighth Circuit reversed the Tax Court’s decision and remanded for redetermination of the taxes owed. View "3M Company v. Commissioner of Internal Revenue" on Justia Law

Medtronic, a medical device company, allocated profits from its class III devices and leads among its U.S. and Puerto Rico subsidiaries through intercompany licensing agreements. The dispute centers on the appropriate method for determining arm’s length royalty rates for intangible property transferred between Medtronic US and Medtronic Puerto Rico for the 2005 and 2006 tax years. The Internal Revenue Service (IRS) challenged Medtronic’s use of the comparable uncontrolled transaction (CUT) method and instead applied the comparable profits method, resulting in a tax deficiency. Medtronic contested the IRS’s adjustment, leading to litigation.The United States Tax Court initially rejected both parties’ proposed methods and conducted its own valuation, ultimately favoring a modified CUT method based on a patent-licensing agreement with Siemens Pacesetter, but with adjustments. The Tax Court’s decision was vacated by the United States Court of Appeals for the Eighth Circuit in Medtronic, Inc. & Consolidated Subsidiaries v. Commissioner, 900 F.3d 610 (8th Cir. 2018), which remanded for additional factual findings regarding the best transfer pricing method. On remand, the Tax Court abandoned the CUT method, rejected the Commissioner’s comparable profits method, and adopted a three-step unspecified method, resulting in a new profit allocation and tax deficiencies for Medtronic.The United States Court of Appeals for the Eighth Circuit reviewed the Tax Court’s decision, holding that the Tax Court erred in using the Pacesetter Agreement under both the CUT and unspecified methods because the intangible property involved did not have similar profit potential. The Eighth Circuit also found that the Tax Court applied incorrect legal standards and made insufficient factual findings regarding the comparable profits method, asset bases, functions, and product liability risks. The Eighth Circuit vacated the Tax Court’s order and remanded for further proceedings consistent with its opinion. View "Medtronic, Inc, etc. v. CIR" on Justia Law

Charles Sorensen, a retired airline pilot, engaged in a series of actions from 2016 to 2021 to evade federal income taxes for the years 2015 through 2019. His conduct included failing to file tax returns, submitting false returns, making fraudulent refund claims, concealing income and assets, and refusing to cooperate with the IRS. Sorensen used shell companies, such as LAWTAM and LAMP, to hide assets and income, transferred funds to avoid IRS levies, and ultimately converted assets into cryptocurrency to further shield them from collection. He also filed frivolous documents and lawsuits challenging the IRS’s authority. The total tax loss attributed to his actions was $1,861,722.A jury in the United States District Court for the District of Minnesota convicted Sorensen on seven counts, including filing false tax returns, tax evasion, failing to file tax returns, and making a false claim against the United States. The district court sentenced him to 41 months in prison. Sorensen appealed, arguing that the district court improperly admitted testimony from several witnesses who were not qualified as experts and erred in applying a sentencing enhancement for sophisticated means.The United States Court of Appeals for the Eighth Circuit reviewed the evidentiary rulings for abuse of discretion and the sentencing enhancement de novo. The appellate court held that the challenged witness testimony was properly admitted as lay testimony under Federal Rule of Evidence 701, as it was based on firsthand knowledge and personal experience, not specialized expertise. The court also found that the sophisticated means enhancement was appropriately applied, given Sorensen’s use of shell companies, cryptocurrency, and other complex methods to conceal his tax evasion. The Eighth Circuit affirmed the judgment of the district court. View "United States v. Sorensen" on Justia Law

Mayo Clinic, a Minnesota nonprofit corporation and tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code, sought a refund of unrelated business income tax (UBIT) imposed by the IRS for tax years 2003, 2005-2007, and 2010-2012. The IRS assessed Mayo $11,501,621 in unpaid UBIT, concluding that Mayo was not a qualified educational organization under IRC § 170(b)(1)(A)(ii) because its primary function was not the presentation of formal instruction, and its noneducational activities were not merely incidental to its educational activities. Mayo paid the assessed amount and filed a refund action.The United States District Court for the District of Minnesota granted Mayo summary judgment, holding that Mayo is an educational organization as defined in § 170(b)(1)(A)(ii) and invalidating Treasury Regulation § 1.170A-9(c)(1) for adding requirements not present in the statute. The United States appealed, and the Eighth Circuit reversed the invalidation of the regulation and remanded for further proceedings. On remand, the district court concluded that Mayo had a substantial educational purpose and no substantial noneducational purpose, granting Mayo judgment for the full refund amount plus interest.The United States Court of Appeals for the Eighth Circuit affirmed the district court's decision. The court held that "primary" in this context means "substantial" and that Mayo's substantial patient care activities are not noneducational due to the integration of education and clinical practice. The court concluded that Mayo qualifies as an educational organization under § 170(b)(1)(A)(ii) and that its patient care function does not disqualify it from this status. The judgment of the district court was affirmed. View "Mayo Clinic v. United States" on Justia Law

Conmac Investments, Inc., an Arkansas company, owns, leases, and manages farms. Between 2004 and 2013, Conmac purchased farmland and negotiated to receive rights to "base acres," which entitle the owner to subsidy payments from the USDA. Initially, Conmac did not claim deductions for amortization of these base acres on its tax returns from 2004 to 2008. In 2009, Conmac began amortizing its base acres without filing an "Application for Change of Accounting Method" and claimed amortization deductions for the years 2009 through 2014. The Commissioner of Internal Revenue disallowed these deductions, leading Conmac to petition the Tax Court.The United States Tax Court ruled in favor of the Commissioner, determining that Conmac's decision to amortize base acres constituted a change in the method of accounting, which required IRS approval. Conmac appealed this decision.The United States Court of Appeals for the Eighth Circuit reviewed the case de novo. The court affirmed the Tax Court's decision, holding that Conmac's initiation of amortization for base acres in 2009 was indeed a change in the method of accounting. According to Treasury Regulation § 1.446-1(e)(2)(ii)(d)(2), changing the treatment of an asset from nonamortizable to amortizable is a change in the method of accounting. The court rejected Conmac's argument that the change was due to a change in underlying facts, noting that Conmac's realization about the amortization of base acres did not constitute a change in underlying facts but rather a change in the timing of cost recovery.The court also addressed the Section 481 adjustment, concluding that the "year of the change" was 2013, when the Commissioner changed Conmac's method of accounting, thus triggering the adjustment to prevent duplicated deductions or omitted income. The judgment of the Tax Court was affirmed. View "Conmac Investments, Inc. v. Commissioner of Internal Revenue" on Justia Law

Ronald E. Byers owes the United States for unpaid income taxes, interest, and penalties. The government filed a suit to enforce its federal tax liens through the judicial sale of Ronald’s home, which he solely owns but shares with his wife, Deanna L. Byers. The Byerses agreed to the sale but argued that Deanna is entitled to half of the proceeds because the property is their marital homestead. The district court granted the government’s motion for summary judgment, ruling that Deanna lacked a property interest in the home and was not entitled to any sale proceeds.The United States District Court for the District of Minnesota found that Deanna did not have a property interest in the home under Minnesota law, which only provides a contingent interest that vests upon the owner's death. The court concluded that Deanna’s interest did not rise to the level of a property right requiring compensation under federal law. The court ordered that Ronald is liable for the tax debt, the government’s liens are valid, and the property can be sold with proceeds applied to Ronald’s tax liabilities.The United States Court of Appeals for the Eighth Circuit reviewed the case and affirmed the district court’s decision. The appellate court held that Minnesota’s homestead laws do not provide Deanna with a vested property interest in the home that would entitle her to compensation from the sale proceeds. The court distinguished this case from United States v. Rodgers, noting that Minnesota law does not afford the same level of property rights to a non-owner spouse as Texas law does. Therefore, the court upheld the summary judgment in favor of the government, allowing the sale of the property to satisfy Ronald’s tax debt. View "United States v. Byers" on Justia Law

The case involves William Phillip Jackson, who owes unpaid federal taxes to the United States. Following a jury trial and post-trial proceedings, the United States District Court for the Western District of Missouri entered a judgment against Jackson for $2,396,800.47 and ordered the foreclosure and sale of four properties owned by Jackson and his wife. Jackson filed multiple motions to amend or vacate the sale, which were denied, and his appeals to the Eighth Circuit Court of Appeals were unsuccessful. Jackson then filed for Chapter 13 bankruptcy relief, but the United States proceeded with evictions and seized personal property before being notified of the bankruptcy filing.The United States Bankruptcy Court for the Western District of Missouri heard Jackson's motion for contempt and turnover of property and the United States' motion to lift the automatic stay nunc pro tunc. The bankruptcy court denied Jackson's motion and granted the United States' motion, annulling the automatic stay retroactively to the date of Jackson's bankruptcy filing. Jackson appealed this decision but did not seek a stay of the order pending appeal. While the appeal was pending, the United States sold the properties at auction, and the district court confirmed the sales and approved the disbursement of proceeds.The United States Bankruptcy Appellate Panel for the Eighth Circuit reviewed the case and determined that the appeal was constitutionally moot. The court held that since the properties had been sold and Jackson did not obtain a stay pending appeal, there was no effective relief that could be granted. Consequently, the appeal of the bankruptcy court's order annulling the stay and denying Jackson's motion for contempt and turnover was dismissed for lack of jurisdiction. View "Jackson v. United States" on Justia Law

Frank Bibeau, a member of the Minnesota Chippewa Tribe, argued that his self-employment income from his law practice on the Leech Lake Reservation was exempt from federal taxation. For the 2016 and 2017 tax years, Bibeau reported his income on a joint federal income tax return with his wife, claiming a net operating loss carryforward that shielded his income from taxes but not from self-employment taxes. After receiving a notice from the IRS regarding his tax debts, Bibeau requested a Collection Due Process (CDP) hearing, arguing his income was exempt. The IRS disagreed and issued a notice of determination to collect the tax.Bibeau petitioned the United States Tax Court, asserting that Indians are generally exempt from federal taxes or that treaties between the U.S. and the Chippewa exempted his income. The Tax Court ruled against him, stating that Indians are subject to federal tax laws unless a specific law or treaty provides otherwise. The court found that neither the Indian Citizenship Act of 1924 nor the 1837 Treaty between the U.S. and the Minnesota Chippewa Tribe contained a specific exemption from federal taxation.The United States Court of Appeals for the Eighth Circuit reviewed the case de novo. The court held that as U.S. citizens, Indians are subject to federal tax requirements unless specifically exempted by a treaty or act of Congress. The court found that Bibeau failed to point to any statute or treaty that specifically exempted his self-employment income from taxation. The court also noted that the Indian Citizenship Act of 1924 and the 1837 Treaty did not provide such an exemption. Consequently, the Eighth Circuit affirmed the Tax Court’s decision, holding that Bibeau’s self-employment income is subject to federal self-employment taxes. View "Bibeau v. CIR" on Justia Law

The case revolves around a request for disclosure of certain redacted contents of the Internal Revenue Manual under the Freedom of Information Act (FOIA) by T. Keith Fogg. The redacted contents pertain to the IRS's unique authentication procedures used in special situations to prevent unauthorized disclosure of sensitive taxpayer information, identity theft, and criminal fraud. The IRS claimed these redacted contents were exempt from FOIA disclosure under Exemption 7(E) as they were records or information compiled for law enforcement purposes.The District Court for the District of Minnesota initially granted summary judgment to the IRS, holding that Exemption 7(E) applied to the redacted contents. Fogg appealed to the United States Court of Appeals for the Eighth Circuit, which reversed the grant of summary judgment and remanded the case to the district court for an in-camera inspection of the redacted contents.Upon inspection, the district court again concluded that Exemption 7(E) applied to the redacted contents as they served a law enforcement purpose and involved exceptional situations of a heightened risk of fraud or identity theft. The court granted summary judgment to the IRS once more.On appeal, the United States Court of Appeals for the Eighth Circuit affirmed the district court's decision. The court found that the redacted contents were techniques and procedures used for law enforcement investigations, akin to background checks. The court also concluded that the IRS had met its burden under the foreseeable harm requirement, showing that disclosure of the redacted contents would foreseeably harm the IRS's interest in preventing circumvention of the law. View "Fogg v. IRS" on Justia Law

Meyer, Borgman & Johnson, Inc. (MBJ), a structural engineering firm, sought research tax credits for expenses incurred in creating designs for building projects. MBJ claimed approximately $190,000 in tax credits for the years ending September 30, 2010, 2011, and 2013. The Commissioner of Internal Revenue denied these credits.The United States Tax Court affirmed the Commissioner's decision, ruling that MBJ's research was "funded" within the meaning of 26 U.S.C. § 41(d)(4)(H), and therefore, MBJ did not qualify for the credits. The Tax Court's decision was based on a summary judgment.The United States Court of Appeals for the Eighth Circuit reviewed the Tax Court's decision de novo. MBJ argued that the Tax Court erred because its right to payment was contingent on the success of its research, and its contracts had inspection, acceptance, and quality assurance provisions. MBJ claimed that its payments were contingent on the success of its research because it was required to create a design that met all the owner's requirements, complied with all pertinent codes and regulations, and was sufficiently detailed for a contractor to successfully construct it.However, the Court of Appeals disagreed with MBJ's arguments. It found that MBJ's contracts did not expressly or by clear implication make payment contingent on the success of MBJ’s research. The court distinguished between "successful performance"—meeting detailed, barometers of success—and "proper performance"—providing deliverables pursuant to a general professional standard of care and promising work free from negligence, error, or defects. The court found that MBJ's contracts fell into the latter category.The Court of Appeals affirmed the Tax Court's ruling that MBJ’s research did not merit the research tax credit. View "Meyer, Borgman & Johnson, Inc. v. CIR" on Justia Law