Articles Posted in Tax Law

by
Plaintiff Omega Forex Group LC (Omega), appearing by and through partner Robert Flath (Flath), appealed a district court decision affirming two Notices of Final Partnership Administrative Adjustment (FPAA) issued by the Internal Revenue Service to Omega. The two FPAAs, on the basis of fraud at the partnership level, eliminated large losses reported by Omega on its tax returns for years 1998 and 1999, and imposed penalties on Omega. Flath was an endodontist in private practice in Utah. At some point in 1997 or 1998, one of the endodontists in Flath’s practice suggested that Flath meet with Dennis Evanson, an “expert in options trading and general business organization and planning, tax planning and asset protection.” Evanston was Omega’s managing partner. Through their business arrangement, Flath would make contributions or investments in Omega or other entities controlled by Evanston. Evanson, in exchange for Flath’s agreed payments, “manufactured fictitious transactions to conceal income [for Flath] and create apparent [tax] deductions [for Flath].” For the years at issue here, Flath or his endodontist practice would claim pass-through losses from Omega. Flath was not completely forthcoming with his tax accountant. In 2005, a grand jury indicted Evanson and other individuals related to Omega. In February 2008, Evanson was convicted of conspiracy to commit mail and wire fraud, tax evasion, and assisting in the filing of false tax returns. Omega’s FPAAs were upheld. Flath, on behalf of Omega, raised three issues on appeal: (1) whether the district court erred in holding that the FPAAs issued by the IRS to Omega were not barred by the applicable statute of limitations; (2) even assuming the district court applied the proper statute of limitations, whether it incorrectly applied the legal standards for determining whether Flath had fraudulent intent as to his personal tax returns; and (3) whether the district court erred in determining the asserted fraud penalty at the partnership level. The Tenth Circuit rejected all of these arguments and affirmed the district court’s decision. View "Omega Forex Group v. United States" on Justia Law

by
In February 2016, Defendant Ricky Williams pled guilty to tax fraud relating to his preparation of federal income-tax returns for third-party clients for the 2010 and 2011 tax years. In his plea agreement, he agreed to pay restitution. After pleading guilty, he was initially released on bond pending sentencing. However, his release was revoked after the court discovered that he had been violating the terms of his release by again engaging in tax preparation activities for someone other than himself or his spouse. The probation officer who prepared his Presentence Investigation Report “determined that the defendant lied about his income, assets, and liabilities” to the probation officer. Among other things, the probation officer discovered several undisclosed financial transactions that Defendant had conducted with someone else’s social security number, and an attempt to unfreeze a bank account that contained approximately $37,000. The bank contacted the IRS. This lead to a sentence of thirty months in prison and an increased restitution amount to the IRS. A few months after Defendant’s sentencing, the government filed an application for post-judgment writ of garnishment against the frozen bank account. The bank objected on the grounds that the account was subject to “a prior internal USAA Federal Savings Bank hold from its Fraud Department." A magistrate judge concluded the government could not seek garnishment. The district court declined to accept the magistrate judge's recommendation pursuant to the terms of defendant's earlier restitution agreement. The Tenth Circuit found no error in the district court’s conclusion that the government was entitled to garnish Defendant’s bank account to obtain partial payment of the amount then-currently due in restitution. View "United States v. Williams" on Justia Law

by
Austin Ray was convicted by jury convictions for one count of conspiracy to defraud the United States, five counts of aiding in the preparation of a false tax return, and two counts of submitting a false tax return. Ray argued on appeal: (1) the government violated the Interstate Agreement on Detainers Act (IAD) of 1970; (2) the government engaged in vindictive prosecution; (3) the district court violated his rights under the Speedy Trial Act (STA) of 1974; (4) the government violated his due-process rights by destroying certain evidence; and (5) the district court constructively amended the indictment. The Tenth Circuit affirmed in all respects, finding: (1) the government never lodged a detainer against Ray, meaning the IAD didn’t apply; (2) Ray established neither actual nor presumptive vindictiveness; (3) Ray’s STA argument was waived for failing to raise it below; (4) the evidence at issue lacked any exculpatory value, and even if the evidence were potentially useful to Ray’s defense, the government didn’t destroy it in bad faith; and (5) the district court narrowed, rather than broadened, the charges against Ray. View "United States v. Ray" on Justia Law

by
Alpenglow Botanicals, LLC (“Alpenglow”) sued the Internal Revenue Service (“IRS”) for a tax refund, alleging the IRS exceeded its statutory and constitutional authority by denying Alpenglow’s business tax deductions under 26 U.S.C. 280E. The federal government classified marijuana as a “controlled substance” under schedule I of the Controlled Substances Act (“CSA”), but it is legal for medical or recreational use in Colorado. This appeal was the product of the clash between these state and federal policies: Alpenglow is a medical marijuana business owned and operated by Charles Williams and Justin Williams, doing business legally in Colorado. After an audit of Alpenglow’s 2010, 2011, and 2012 tax returns, however, the IRS issued a Notice of Deficiency concluding that Alpenglow had “committed the crime of trafficking in a controlled substance in violation of the CSA” and denying a variety of Alpenglow’s claimed business deductions under section 280E. Alpenglow’s income and resultant tax liability were increased based on the denial of these deductions. Because Alpenglow was a “pass through” entity, the increased tax liability was passed on to Charles Williams and Justin Williams. The two men paid the increased tax liability under protest and filed for a refund, which the IRS denied. The district court dismissed Alpenglow’s suit under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief could be granted, and denied Alpenglow’s subsequent motion under Federal Rule of Civil Procedure 59(e) to reconsider the judgment. Finding no reversible error in the district court's judgment, the Tenth Circuit affirmed. View "Alpenglow Botanicals v. United States" on Justia Law

by
Defendant Kathleen Stegman was convicted by a jury of two counts of evading her personal taxes for the tax years 2007 and 2008. Stegman was sentenced to a term of imprisonment of 51 months, to be followed by a three-year term of supervised release. The district court also ordered Stegman to pay a $100,000 fine, plus restitution in the amount of $68,733. Stegman established several limited liability corporations pertaining to a “medical aesthetics” business she owned, using these corporations to effectively launder client payments. As part of this process, Stegman would use the corporations to purchase money orders, typically in denominations of $500 or less, that she in turn used to purchase items for personal use. In 2007, Stegman purchased 162 money orders totaling $77,181.92. In 2008, she purchased 252 money orders totaling $121,869.99. And in 2009, she purchased 157 money orders totaling $73,697.31. Notably, Stegman reported zero cash income on her federal income tax returns during each of these years. At the conclusion of the evidence, the jury convicted Stegman of evading her personal taxes for the tax years 2007 and 2008 (Counts 4 and 5), as well as evading corporate taxes for the tax years 2008 and 2009 (Counts 1 and 2). The jury acquitted Stegman of evading corporate taxes for the tax year 2010 (Count 3). The jury also acquitted Stegman and Smith of the conspiracy charge (Count 6). Stegman moved for judgment of acquittal or, in the alternative, a new trial. The district court granted the motion as to the two counts that related to the evasion of corporate taxes (Counts 1 and 2), but denied the remainder of the motion. In doing so, the district court chose to acquit Stegman of the corporate tax evasion counts not due to a lack of “proof beyond a reasonable doubt that this corporation evaded taxes,” but rather because “the indictment itself was flawed in attributing the loss as due and owing by Ms. Stegman, when actually it was due and owing by the corporation.” Stegman raised five issues on appeal, four of which pertain to her convictions and one of which pertained to her sentence. Although several of these issues require extensive discussion due to their fact-intensive nature, the Tenth Circuit concluded that all of these issues lacked merit. View "United States v. Stegman" on Justia Law

by
“Lowrie v. United States,” (824 F.2d 827 (10th Cir. 1987)), is still the controlling case law in matters challenging “activities leading up to and culminating in” an assessment. The Green Solution was a Colorado-based marijuana dispensary being audited by the Internal Revenue Service for tax deductions and credits taken for trafficking in a “controlled substance.” Green Solution sued the IRS seeking to enjoin the IRS from investigating whether it trafficked in a controlled substance in violation of federal law, and seeking a declaratory judgment that the IRS was acting outside its statutory authority when it made findings that a taxpayer trafficked in a controlled substance. Green Solution claimed it would suffer irreparable harm if the IRS were allowed to continue its investigation because a denial of deductions would: (1) deprive it of income, (2) constitute a penalty that would effect a forfeiture of all of its income and capital, and (3) violate its Fifth Amendment rights. The IRS moved to dismiss for lack of subject matter jurisdiction. According to the IRS, Green Solution’s claim for injunctive relief was foreclosed by the Anti-Injunction Act (AIA), which barred suits “for the purpose of restraining the assessment or collection of any tax.” Similarly, the IRS asserted that the claim for declaratory relief violated the Declaratory Judgment Act (DJA), which prohibited declaratory judgments in certain federal tax matters. The district court dismissed the action with prejudice for lack of subject matter jurisdiction, relying on “Lowrie.” Green Solution timely appealed, contending the district court had jurisdiction to hear its claims because the Supreme Court implicitly overruled Lowrie in “Direct Marketing Association v. Brohl,” (135 S. Ct. 1124 (2015)). The Tenth Circuit concluded it was still bound by Lowrie and affirmed. View "Green Solution Retail v. United States" on Justia Law

by
The issue presented for the Tenth Circuit’s review centered on whether a taxpayer may challenge a tax penalty in a Collection Due Process hearing (“CDP hearing”) after already having challenged the penalty in the Appeals Office of the Internal Revenue Service (“IRS”). Keller Tank Services II, Inc. participated in an employee benefit plan and took deductions for its contributions to the plan. The IRS notified Keller of: (1) a tax penalty for failure to report its participation in the plan as a “listed transaction” on its 2007 tax return; and (2) an income tax deficiency and related penalties for improper deductions of payments to the plan. Keller protested the tax penalty at the IRS Appeals Office. It then attempted to do so in a CDP hearing but was rebuffed because it already had challenged the penalty at the Appeals Office. Keller appealed the CDP decision to the Tax Court, which granted summary judgment to the Commissioner of Internal Revenue (“Commissioner”). Finding no reversible error in the Tax Court’s judgment, the Tenth Circuit affirmed. View "Keller Tank Services v. Commissioner, Internal Rev. Svc." on Justia Law

by
After a bench trial, defendant-appellant Eldon Boisseau was convicted of tax evasion The district court determined that Boisseau, a practicing attorney, willfully evaded paying his taxes by: (1) placing his law practice in the hands of a nominee owner to prevent the Internal Revenue Service (IRS) from seizing his assets; (2) causing his law firm to pay his personal expenses directly given an impending IRS levy, rather than receiving wages; and (3) telling a government revenue officer that he was receiving no compensation from his firm when in fact the firm was paying his personal expenses. On appeal, he challenged the sufficiency of the evidence and argued that the district court wrongly convicted him: (1) without evidence of an affirmative act designed to conceal or mislead; and (2) by concluding that proof satisfying the affirmative act element of tax evasion was sufficient to prove willfulness. Finding no reversible error, the Tenth Circuit affirmed. View "United States v. Boisseau" on Justia Law

by
Prior to petitioner-appellant Corbin McNeill retiring as an executive to a utility company, "he came across a complicated little scheme suggested by some well-heeled tax advisors." At its core, the scheme was to transfer to McNeill losses that foreign debt holders had already suffered: McNeill would claim the losses as deductions against his income; the foreign debt holders would transfer their assets for a slight premium over their current (and much reduced) market value because McNeill could use them to secure a tax advantage they didn’t need. To accomplish this, McNeill's tax advisors established a series of partnerships to which the foreign debt holders contributed their underwater debt instruments and their basis in them. McNeill contributed a relatively small sum of money, but owned over 90% of the partnership. When the partnership sold the debt to third parties, it could claim to realize the whole of the losses, and McNeill could claim his income was offset by the losses. In aid of the scheme, various accounting and law firms supplied opinion letters affirming that the scheme would withstand IRS scrutiny. The IRS indeed questioned McNeill's partnerships, and determined McNeill owed back taxes. McNeill paid the tax then filed suit seeking a partial refund. McNeill didn’t suggest that the partnership scheme was lawful or that he should have been excused the taxes the IRS assessed. Instead, he argued only that he should have been excused from the penalties and associated interest the IRS had imposed. The district court declined to decide the merits of McNeill’s partner level defense, holding it was precluded from doing so by Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The Tenth Circuit concluded this judgment was made in error, reversed and remanded for further proceedings. View "Mc Neill v. United States" on Justia Law

by
The Internal Revenue Service notified petitioner-appellant James Cropper of its intent to collect unpaid taxes by levying his property. Cropper requested a collection due process (CDP) hearing with the IRS Office of Appeals. The Office of Appeals determined that the IRS could proceed with the proposed levy. Cropper sought judicial review, and the United States Tax Court sustained the Office of Appeals’ determination. Because the Tenth Circuit agreed with the Tax Court that the Office of Appeals didn’t abuse its discretion in determining that the IRS could proceed with the levy, it affirmed. View "Cropper v. CIR" on Justia Law

Posted in: Criminal Law, Tax Law