Justia U.S. 10th Circuit Court of Appeals Opinion Summaries

In 2010, the Internal Revenue Service issued a refund to the Wichita Center of Graduate Medical Education (a federally qualified charitable organization) on overpaid taxes along with incorrectly calculated interest on the refund. The IRS then sought repayment of part of the interest. Under the Internal Revenue Code, corporate taxpayers received a lower refund interest rate than other taxpayers such as individuals or partnerships. The Center claimed it was not a corporation for purposes of this section and was be entitled to the higher interest rate applicable to non-corporations. The Tenth Circuit affirmed the district court’s finding that the Center was a corporation and subject to the lower interest rate: the statutory text compelled the conclusion that the Center, even though it did not issue stock or generate profit, had to be treated as an ordinary corporation for purposes of the refund statute. View "Wichita Ctr for Grad Med. Ed. v. United States" on Justia Law

This case arose out of the efforts the IRS made to investigate the tax liability of High Desert Relief, Inc. (“HDR”), a medical marijuana dispensary in New Mexico. The IRS began an investigation into whether HDR had improperly paid its taxes, and specifically whether it had improperly taken deductions for business expenses that arose from a “trade or business” that “consists of trafficking in controlled substances.” Because HDR refused to furnish the IRS with requested audit information, the IRS issued four summonses to third parties in an attempt to obtain the relevant materials by other means. HDR filed separate petitions to quash these third-party summonses in federal district court in the District of New Mexico, and the government filed corresponding counterclaims seeking enforcement of the summonses. HDR argued that the summonses were issued for an improper purpose—specifically, that the IRS, in seeking to determine the applicability of 26 U.S.C. 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act. HDR also asserted that enforcement of section 280E was improper because an "official [federal] policy of non-enforcement” of the CSA against medical marijuana dispensaries had rendered that statute’s proscription on marijuana trafficking a “dead letter” incapable of engendering adverse tax consequences for HDR. The petitions were resolved in proceedings before two different district court judges; both judges ruled in favor of the United States on the petitions to quash, and separately granted the United States’ motions to enforce the summonses. HDR challenged these rulings on appeal. The Tenth Circuit determined HDR was unable to overcome the government’s demonstration of good faith under United States v. Powell, 379 U.S. 48 (1964), and its alternative “dead letter” argument was without merit. View "High Desert Relief v. United States" on Justia Law

Taxpayers Neil Feinberg, Andrea Feinberg, and Kellie McDonald were shareholders in Total Health Concepts, LLC (THC), a Colorado company allegedly engaged in selling medical marijuana. After the Taxpayers claimed THC’s income and losses on their tax returns, the IRS conducted an audit and disallowed certain deductions under 26 U.S.C. 280E, which prohibited deductions for businesses engaged in unlawful trafficking of controlled substances. The IRS then recalculated the Taxpayers’ tax liability and issued a notice of deficiency for the unpaid balance. The Taxpayers challenged that determination in tax court, which affirmed on the basis that the Taxpayers had failed to substantiate the business expenses. Both parties agreed the tax court erred by injecting a substantiation issue into this case not raised in the notice of deficiency, and then placed the burden for refuting that claim on the Taxpayers. But the Commissioner argued the Tenth Circuit should affirm on the alternative ground that the Taxpayers did not meet their burden of proving the IRS’s determination that THC was unlawfully trafficking in a controlled substance was erroneous. The Taxpayers disagreed and contended placing the burden on them would violate their Fifth Amendment privilege. Because the Tenth Circuit concluded allocation of the burden of proof did not constitute “compulsion” under the Fifth Amendment, and because the Taxpayers made no attempt to meet their evidentiary burden, the Court affirmed the tax court on the alternative ground that section 280E prohibited the deductions. View "Feinberg v. CIR" on Justia Law

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

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

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

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

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

“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

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