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

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

Hardy filed for Chapter 13 bankruptcy relief. On her Schedule B, Hardy stated that she would be receiving a 2012 tax refund. On her Schedule C, Hardy claimed the majority of the refund as exempt. She noted that $2,000 of the refund was attributable to federal Child Tax Credit (CTC), 26 U.S.C. 24(d). She claimed that the CTC was a "public assistance benefit" that would be exempt from the bankruptcy estate under Missouri law. The bankruptcy court sustained the trustee’s objection, finding that the CTC was not a public assistance benefit because the purpose of the credit was to "reduce the tax burden on working parents and to promote family values" and because the full credit was available to head-of-household filers with Modified Adjusted Gross Incomes (MAGI) of up to $75,000 and joint-married filers with MAGIs of up to $110,000. The Bankruptcy Appellate Panel affirmed, stating Hardy did not present evidence that only lower income families were eligible for the refundable portion of the credit. The Eighth Circuit reversed, reasoning that Congress demonstrated intent to help low-income families through amendments to the Additional Child Tax Credit statute, sp the credit at issue qualifies as a public assistance benefit. View "Hardy v. Fink" on Justia Law

Jones owned SAM Packaging and owed several hundred thousand dollars in back taxes for 2006-2008. Jones refused to provide the IRS with bank statements, and later submitted statements, with blacked-out parts. He submitted financial disclosure forms, disclosing accounts at Mutual of Omaha Bank (MO), but not accounts at Community Credit Union. He directed his financial activity to the undisclosed accounts. When the IRS levied on Jones’s MO accounts, they were nearly empty. Jones commingled personal and business accounts, then began dealing in cash. He refused to turn over accounts receivable, stating that he would terminate the business before doing so. In 2010, he declared that SAM had been “suspended” and he was unemployed. He had started a new company to secretly serve his customers. The IRS summonsed customers and learned Jones had performed work without billing them, preventing levy on his accounts receivable. Jones pled guilty to tax evasion, 26 U.S.C. 7201. The district court imposed a two-level enhancement for use of sophisticated means, as recommended in the PSR. After a three-level reduction for acceptance of responsibility, the district court calculated a Guidelines range of 30 to 37 months and sentenced Jones to 24 months. The Eighth Circuit affirmed, rejecting an argument that Jones’s actions were typical of tax evasion offenses and did not make detection more difficult. View "United States v. Jones" on Justia Law

Butler sells agricultural and construction equipment, primarily for Caterpillar. In 2002, Butler formed North Central to take over its leasing operations. The companies are ultimately controlled by the same family and share space. Butler performs North Central’s accounting and ordering functions and initially pays the wages of its employees. Caterpillar assigned separate dealer codes, but Butler used its code to order equipment for itself and North Central. Under North Central's like-kind-exchange (LKE) program, North Central sold its used equipment to third parties, who paid a qualified intermediary, Accruit, which forwarded proceeds to Butler; Butler purchased new Caterpillar equipment for North Central and transferred it to North Central via Accruit, charging the same amount that Butler paid for the equipment. Butler's LKE transactions facilitated favorable Caterpillar financing terms. Butler essentially received a six-month, interest-free loan from each exchange. From 2004-2007 North Central claimed nonrecognition treatment of gains from 398 LKE transactions under IRC 1031, so that the gain was not included in gross income at the time of actual sale or gain. The IRS declared that the transactions were not entitled to nonrecognition treatment, reasoning that North Central structured the transactions to avoid the related-party exchange restrictions of section 1031(f). The district court analyzed Butler's unfettered access to the cash proceeds and the relative complexity of the transactions and entered judgment in favor of the government. The Eighth Circuit affirmed. View "North Cent. Rental & Leasing, LLC v. United States" on Justia Law

In 2001, N.D. Laws 53-06.2-10.1 was amended to authorize “account wagering,” a form of parimutuel wagering in which an individual deposits money in an account and, through a licensed simulcast service provider authorized to operate a simulcast parimutuel wagering system, uses the balance to pay for parimutuel wagers. The legislature did not make corresponding changes to section 53-06.2-11 or otherwise alter the statutory takeout formulas to authorize a tax on account wagering until 2007. Racing Services (RSI), formerly a state-licensed horse racing simulcast service provider, filed bankruptcy. PW Enterprises, its largest non-governmental creditor filed suit on behalf of all creditors to recover money the state collected from RSI as taxes on parimutuel account wagering. The district court held that the money must be returned to the bankruptcy estate because North Dakota law did not authorize the state to collect taxes on account wagering before 2007. The Eighth Circuit affirmed. Though some members of the legislature may have understood account wagering would be taxed similarly to existing forms of parimutuel wagering, that belief does not make the statute as written ambiguous or require a court to strain to infer a legislative intent that is entirely absent from the statutory language. View "PW Enters., Inc. v. North Dakota" on Justia Law