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

About five hours prior to filing for bankruptcy, debtor received an income tax refund for her federal and state income taxes, including an earned income tax credit (EIC). The bankruptcy court exempted some of debtor’s 2012 income tax refund, but denied her claimed exemption of the EIC under Mo. Rev. Stat. 513.430.1(10)(a), requiring her to turn over the nonexempt portion. The court determined that the language of section 513.430.1(10)(a) does not exempt “public assistance benefit[s]” received by the debtor prior to filing for relief in bankruptcy court. In this case, the parties do not dispute that debtor received the EIC prior to filing for bankruptcy. Therefore, the district court correctly affirmed the bankruptcy court's judgment. View "Dittmaier v. Sosne" on Justia Law

In 1966, DeBough purchased a Minnesota residence and surrounding 80 acres for $25,000. In 2006, DeBough sold the property for $1.4 million under an installment contract, secured by the property. Because the property was his principal residence,DeBough excluded $500,000 of gain from income on his 2006 tax return, 26 U.S.C. 121. DeBough received $505,000 from the buyers and reported $56,920 as taxable installment sale income for tax years 2006, 2007, and 2008. In 2009, the buyers defaulted. DeBough reacquired the property, incurring $3,723 in costs. DeBough kept the $505,000 previously received from the buyers as liquidated damages. On his 2009 tax return, DeBough treated this event as a reacquisition of property in full satisfaction of indebtedness under 26 U.S.C. 1038. In calculating his realized gain, DeBough again applied the $500,000 principal-residence exclusion. DeBough reported $97,153 as long-term capital gains related to the reacquisition for tax year 2009. The Commissioner sent DeBough a notice of deficiency, having determined DeBough had underreported $448,080 in long-term capital gain for tax year 2009 by applying the principal-residence exclusion in his calculation. The Tax Court and Eighth Circuit agreed that DeBough was not entitled to the principal-residence exclusion because he had not resold the property within one year. View "DeBough v. Shulman" on Justia Law

Poynter operated an Original Issue Discount (OID) scheme, under which taxpayers falsely list large amounts of OID interest income from municipal bonds and certificates of deposit and corresponding amounts of withholding and claim large tax refunds. Johnson recruited clients and paid Poynter 50 percent of the fee. Her contract included a statement that Poynter’s material was not legal or tax advice. By signing the contract, Johnson agreed that she was not affiliated with the IRS. Clients signed a contract that listed a $20 million penalty for disclosure and certified that the client was not affiliated with any government agency. Johnson completed Kennedy’s 2008 return stating that Kennedy had earned $89,605 in OID income, that $87,492 was withheld, and that Kennedy was entitled to a $61,959 refund. Kennedy was unemployed and received only disability income, none of which was withheld. Kennedy paid Johnson $4117 by deposit into a third party’s bank account. Poynter submitted Gray’s 2007 tax return, listing income of $401,068 and withholding of $401,067. The IRS deposited a $278,874 refund; Gray paid Poynter $15,000. Gray filed additional fraudulent returns for other tax years. After Poynter’s scheme was uncovered, 14 defendants were indicted. Johnson and Gray were each convicted of making a false claim for a tax refund, 18 U.S.C. 287. Johnson was sentenced to 48 months’ imprisonment; Gray to 60 months. The Eighth Circuit affirmed, rejecting challenges to the sufficiency of the evidence; to calculation of the intended amount of loss; and to application of an increase for an offense that involved sophisticated means. View "United States v. Johnson" on Justia Law

Kaplan operated an illegal sports-booking business in New York that moved to Costa Rica in the 1990s. In 2004, the company went public on the London Stock Exchange. Before going public, Kaplan placed $98 million in trusts off the coast of France. Kaplan neglected to pay federal income or capital gains tax for the trusts for 2004 and 2005. In 2006, Kaplan was indicted for operating an illegal online gambling business within the U.S. Kaplan accepted a plea agreement, which stated: [N]othing contained in this document is meant to limit the rights and authority of the United States … to take any civil, civil tax or administrative action against the defendant. The court asked: Do you understand … that there is a difference between a criminal tax proceeding and a civil tax proceeding … that [this] doesn't preclude the initiation of any civil tax proceeding or administrative action against you? Kaplan replied, "I understand." The court sentenced Kaplan to 51 months of imprisonment, and ordered forfeiture of $43,650,000. Later, the IRS issued Kaplan a notice of deficiency with penalties, totaling more than $36,000,000. The Eighth Circuit affirmed: since Kaplan failed to file a return, the period to assess taxes never began to run; the plea agreement was unambiguous; and the government's failure to object to the Presentence Report did not prevent the government from bringing a civil tax proceeding. View "Kaplan v. Comm'r of Internal Revenue" on Justia Law

Lumber, a tax-exempt insurance trust (26 U.S.C. 501(c)(9)), purchased life insurance issued by GAMHC. GAMHC converted from an insurer owned by policyholders to one owned by stockholders. In 2003, Lumber received a $1,474,442.30 liquidating distribution and a statement that the entire “initial distribution . . . will constitute long-term capital gain.” Lumber reported the gain on its return for fiscal year 2004 and paid capital gains tax of $200,686. Lumber received additional distributions of $285,647 and $213,567, which it reported as taxable capital gains on its 2006 and 2008 returns. The IRS had adopted the position that a policyholder’s proprietary interest in a mutual insurance company had a tax basis of zero. In 2008, the Claims Court rejected that position. Lumber sought refunds for 2004, 2006, and 2008. The IRS delayed a ruling until the Federal Circuit affirmed, then allowed Lumber’s claims for 2006 and 2008 and refunded $42,847 and $32,035, but denied Lumber’s claim for 2004, citing the three-year limitations period. The district court granted Lumber summary judgment, concluding that the mitigation provisions, I.R.C. 1311-1314, permitted correcting the erroneous recognition of gain. The Eighth Circuit reversed. Allowing taxpayers to reopen closed tax years based upon a favorable change in, or reinterpretation of, the laws would be inconsistent with the congressional intent in enacting the mitigation provisions to “preserve unimpaired the essential function of the statute of limitations.” View "Ill. Lumber & Material v. United States" on Justia Law

Zavadil organized AS and was its sole owner until he sold it to an employee stock ownership plan and received a $28,760,000 note, payable in annual installments. Zavadil served without compensation as CEO and on the board of directors. In 2004 and 2005, AS paid Zavadil’s personal expenses. Zavadil reimbursed the company monthly by personal check. AS recorded Zavadil’s personal expenses on a ledger after Zavadil used his company credit card or instructed an employee to issue a check. AS’s creditors required that all ledger accounts, including Zavadil’s, be paid off at the end of each month. In some months, however, Zavadil’s personal bank account had insufficient funds; Zavadil would write a personal check and AS brought the ledger balance to zero. At the beginning of the next month, AS advanced funds to Zavadil to cover the check, recorded the advance as an expense, and then cashed the personal check received the previous month. The IRS issued a notice of deficiency. The tax court ruled in favor of the Zavadils on charitable contributions made before July 2005, finding that Zavadil reimbursed AS and bore the economic burden; disallowed charitable deductions made later, because Zavadil did not demonstrate that he bore the economic burden; and disallowed unreimbursed expenses, finding Zavadil failed to introduce credible evidence regarding the nature and purpose of the payments. The tax court assessed deficiencies (about $260,000, with penalties) and the Eighth Circuit affirmed. View "Zavadil v. Comm'r of Internal Revenue Serv." on Justia Law

In 2011, the IRS required tax preparers who were neither attorneys nor CPAs to pass a certification exam and obtain an identification number. H&R, a nation-wide tax service, passed anticipated costs to its customers by charging a “Compliance Fee.” H&R explained at its offices and on its website that the fee would cover only the costs to comply with the new laws. In 2011, the fee was $2; in 2012, the fee was $4. Perras sued on behalf of himself and a putative class. Perras alleged that the amount collected exceeded actual compliance costs. Perras sued under the Missouri Merchandising Practices Act. The district court compelled arbitration of the 2011 claims. Later, the court declined to certify the class, agreeing that the proposed class met the requirements under Federal Rule of Civil Procedure 23(a) of “numerosity, commonality, typicality, and fair and adequate representation,” but Rule 23(b)(3), requires that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” The Eighth Circuit affirmed, reasoning that the Supreme Court of Missouri would likely conclude that the MMPA does not cover the out-of-state transactions. The law applicable to each class member would be the consumer-protection statute of that member’s state; questions of law common to the class members do not predominate over individual questions. View "Perras v. H&R Block" on Justia Law

The Ibrahims, immigrants from Somalia Have very limited English. In 2011, Oday Tax Service, whose employees spoke Somali, prepared their returns. Ibrahim’s return claimed “head of household” status, which was improper because he was living with his wife. After receiving a notice of deficiency, he filed a petition with the Tax Court, seeking to change his status to “married filing jointly” to receive a credit and refund. The Internal Revenue Code prohibits joint returns after a taxpayer has filed a “separate return,” received a deficiency notice, and filed a petition, 26 U.S.C. 6013(b). Section 6013(b)(1) does not define “separate return.” The Tax Court ruled that head-of- household returns are separate returns, so Ibrahim was prohibited from filing jointly. The Eighth Circuit reversed and remanded, reasoning that under the Code’s plain language “separate return” refers only to married filing separately, 26 U.S.C. 1(d), 6654(d)(1)(C)(ii), 7703(b). Since Ibrahimdid not file a separate return within the meaning of section 6013(b)(1), section 6013(b)(2)(B) does not prohibit him from amending his status to married filing jointly. View "Ibrahim v. Comm'r of Internal Revenue" on Justia Law

Heckman did not report, as income, a distribution from his employee stock ownership plan into his individual retirement account of investments worth $137,726 on his 2003 tax return. The IRS issued a notice of deficiency in 2010. The plan was not eligible for favorable tax treatment under 26 U.S.C. 401(a), so the distribution constituted taxable income. Heckman petitioned the tax court, arguing that the deficiency notice was untimely, because the statute of limitations expired three years after the filing of his return. The tax court determined that a six-year statute of limitations applied and held Heckman liable for a deficiency of $38,623. The Eighth Circuit affirmed. Under 26 U.S.C. 6501(a), the IRS must assess a deficiency within three years. Section 6501(e)(1)(A) extends that period to six years if the taxpayer “omits from gross income” an amount in excess of 25 percent of the gross income stated on the return. The distribution exceeded 25 percent of Heckman’s gross income for 2003. An amount is not considered “omitted” from gross income if it is “disclosed in the return, or in a statement attached to the return,” in an adequate manner. Heckman did not disclose the distribution. View "Heckman v. Comm'r of Internal Revenue" on Justia Law

In 2005 Ellis formed CST, to engage in the business of used automobile sales in Harrisonville, Missouri. CST's members were Ellis's self-directed IRA and Brown, an unrelated full-time CST employe. Ellis’s IRA was to provide an initial capital contribution of $319,500 in exchange for a 98 percent ownership and Brown would purchase the remaining interest for $20. Ellis was the general manager, with “full authority to act on behalf of” the company. Ellis subsequently established the IRA with First Trust, received money from a 401(k) established with his previous employer, and deposited that amount in his IRA. He directed First Trust to acquire shares of CST. Ellis reported the transfers from his 401(k) to the IRA as non-taxable rollover contributions. CST paid Ellis a salary of $9,754 in 2005 and $29,263 in 2006, which was reported as income on the Ellises’ joint tax returns. The IRS sent the Ellises a notice of deficiency, identifying a $135,936 income-tax deficiency for 2005 or, alternatively, a $133,067 deficiency for 2006; it imposed a $27,187 accuracy penalty for 2005 or, alternatively, a $26,613 accuracy penalty and $19,731 late-filing penalty for 2006. The Commissioner determined that Ellis engaged in prohibited transactions under 26 U.S.C. 4975(c) by directing his IRA to acquire an interest in CST with the expectation that CST would employ him, and receiving wages from CST, so that the account lost its IRA status and its entire fair market value was treated as taxable income. The tax court and Eighth Circuit agreed. View "Ellis v. Comm'r of Internal Revenue" on Justia Law