Justia U.S. 5th Circuit Court of Appeals Opinion Summaries

Articles Posted in Tax Law
by
Exxon sought $1.5 billion from the IRS. The source of this sum is two retroactive changes Exxon made to its returns. The first change involves a tax issue: whether a transaction is a mineral lease or mineral sale. See, e.g., Goldfield Consol. Mines Co. v. Scott, 247 U.S. 126 (1918); Stratton’s Indep., Ltd. v. Howbert, 231 U.S. 399 (1913). The second concerned a more recent development in the tax code: how an incentive for producing renewable fuels affects a company’s excise tax, and in turn, its income tax.   The district court rejected both changes but gave Exxon back a penalty the IRS imposed for requesting an excessive refund. Exxon appealed the lease-versus-sale issue, and the government cross-appealed the rejection of the penalty. The Fifth Circuit affirmed the district court’s ruling.   The court explained that Qatar and Malaysia have an economic interest in the minerals being extracted. That means the agreements are as Exxon originally described them: leases. The court further wrote that although Exxon’s position is close to the “reasonable basis” line, it agreed with the district court’s assessment granting Exxon a refund.   The court next addressed the issue regarding which amount of excise tax Exxon can deduct from its gross income: (1) the lesser amount it actually paid after claiming a renewable-fuel credit or (2) the greater amount it would have paid without the credit. The court found that Exxon’s renewable-fuel credit reduced its excise tax. It can deduct only the reduced amount. View "Exxon Mobil v. USA" on Justia Law

Posted in: Tax Law
by
Petitioner appealed the denial of an income tax deduction he claimed for a charitable donation of an aircraft. Because Petitioner failed to comply with the statutory requirements for such a deduction, the Fifth Circuit affirmed the judgment of the Tax Court.   The court explained Section 170 of the Internal Revenue Code governs deductions for charitable contributions. For a contribution of a qualified vehicle, including airplanes, whose value exceeds $500, the taxpayer must provide contemporaneous written acknowledgment from the donee organization of the contribution, including the name and taxpayer identification number of the donor. Further, the donee organization must provide the IRS with the information contained in the acknowledgment.   Here, the court wrote that the Commissioner of Internal Revenue (“Commissioner”) was entitled to summary judgment as Petitioner was disallowed from claiming the deduction as a matter of law. Petitioner failed to provide a contemporaneous written acknowledgment from the donee organization that satisfied the requirements of 26 U.S.C. Section 170(f)(12)(B). Petitioner did not provide a satisfactory contemporaneous written acknowledgment with his Form 1040X. He included a letter dated December 30, 2010, from the Society discussing the donation of the airplane, but the letter was not addressed to Petitioner. The letter does not mention Petitioner and does not provide his taxpayer identification number. Thus, the court held that the letter cannot substantiate the contribution of the airplane under Section 170(f)(12)(B)(i). View "Izen v. CIR" on Justia Law

Posted in: Tax Law
by
Sunoco sued the Internal Revenue Service  (“IRS”) in Texas federal court, seeking a partial refund of its income tax payments for 2010 and 2011. Sunoco’s claims rested on a theory of reduced tax liability that the company had argued unsuccessfully for prior tax years in the Court of Federal Claims. Because the issue was fully and actually litigated in the earlier case, the district court dismissed Sunoco’s new suit based on collateral estoppel, and the Fifth Circuit affirmed.   The court held that the only question is the correctness of the issue preclusion ruling. Sunoco did not dispute that the three traditional elements of preclusion are satisfied. It argued, however, that the court should have considered a fourth factor: whether there are “special circumstances that would render preclusion inappropriate or unfair.”  The court found that because Sunoco and the IRS were both parties to Sunoco I, “an inquiry into special circumstances is unnecessary.” Sunoco is barred from relitigating the Federal Circuit’s conclusion that it cannot use the mixture credits to offset both excise-tax and income-tax liability. View "ETC Sunoco Holdings v. USA" on Justia Law

by
The Fifth Circuit held that 26 U.S.C. 4611(b) imposes a tax on exports in violation of the Export Clause. In this case, the United States contends that Trafigura must pay a tax on domestic crude oil that it exports from the United States. Applying Pace v. Burgess, 92 U.S. 372, 376 (1876), and United States v. U.S. Shoe Corp., 523 U.S. 360, 363 (1998), the court first considered whether the charge under section 4611(b) is based on the quantity or value of the exported oil—if so, then it is more likely a tax. Then the court considered the connection between the Fund’s services to exporters, if any, and what exporters pay for those services under section 4611(b). Finally, the court applied heightened scrutiny and strictly enforced the Export Clause's ban on taxes by guarding against the imposition of a tax under the pretext of fixing a fee.The court affirmed the district court's judgment and concluded that the United States may not enforce section 4611(b) on crude oil "exported from the United States." The court stated that Congress has crafted a scheme in which crude oil exporters are forced to subsidize activities that are not "services used or usable by the exporter." Section 4611(b) saddles exporters with the cost of anti-pollution measures that generally benefit society at large, and not specifically the exporter who pays the charge. View "Trafigura Trading LLC v. United States" on Justia Law

Posted in: Tax Law
by
The Fifth Circuit affirmed the district court's denial of partial summary judgment in an action brought by Vitol against the United States, seeking an $8.8 million tax refund. The court concluded that the plain language of the statute, taken in context, excludes butane from the definition of a liquefied petroleum gas (LPG) under 26 U.S.C. 6426(d)(2).In this case, the court applied the standard tools of statutory interpretation in their proper order, and the court need not consider legislative history or abstract congressional purpose. The court explained that, although the common meaning of LPG includes butane, section 6426(d)(2) is a subsidiary part of a broader statutory framework that treats a given fuel as either a taxable fuel or an alternative fuel, but not both. Therefore, the statutory context of section 6426 provides sound reason to depart from butane's common meaning. Furthermore, section 4083 defines butane as a taxable fuel for purposes of the excise tax imposed at section 4081. The court reasoned that, if butane is a taxable fuel, it cannot be an alternative fuel and thus it is not an LPG under section 6426(d)(2). View "Vitol, Inc. v. United States" on Justia Law

by
JetPay is a national company offering credit card processing services to merchants and banks. JetPay processed credit card payments for customers purchasing tickets from Direct Air, placing the funds in Direct Air's escrow account until the passengers took the flights. After Direct Air ended its operations and filed for bankruptcy, JetPay asserts that it was contractually obligated to use its own funds to reimburse thwarted passengers. JetPay timely filed with the IRS for a refund of the excise taxes it repaid to the consumers, but the IRS denied the claim.The Fifth Circuit affirmed the district court's adverse grant of summary judgment against JetPay, agreeing with the district court that the company was not a proper party to seek a refund from the IRS. JetPay did not pay the tax to the Secretary, and thus the court did not consider whether the company qualifies as "the person who collected the tax" under 26 U.S.C. 6415(a). In this case, JetPay is neither a customer required to pay the tax before taking a flight nor an airline required to collect it. The court also concluded that the economic burden test does not apply to JetPay's case. Finally, the court rejected JetPay's equitable subrogation claim. View "JetPay Corp. v. United States" on Justia Law

Posted in: Tax Law
by
Bittner non-willfully failed to report his interests in foreign bank accounts on annual FBAR forms, as required by the Bank Secrecy Act of 1970 (BSA), 31 U.S.C. 5314. The Act imposes no penalty for a non-willful violation if “such violation was due to reasonable cause.”The government assessed $2.72 million in civil penalties against him—$10,000 for each unreported account each year from 2007 to 2011. The district court found Bittner liable and denied his reasonable-cause defense but reduced the assessment to $50,000, holding that the $10,000 maximum penalty attaches to each failure to file an annual FBAR, not to each failure to report an account.The Fifth Circuit affirmed the denial of Bittner’s reasonable-cause defense. Bittner did not exercise ordinary business care and prudence in failing to fulfill his reporting obligations. In assessing reasonable cause, the most important factor is the extent of the taxpayer’s effort to assess his proper liability. The court reversed with respect to the application of the $10,000 penalty. Each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty. The penalty applies on a per-account, not a per-form, basis. View "United States v. Bittner" on Justia Law

by
Mary and James Nelson, a married couple with daughters, formed Longspar limited partnership in 2008; each had a 0.5% general partner interest. The limited partners were Mary and trusts that had been established for their daughters. The Nelsons also formed a trust in 2008. Mary was the settlor, James was the trustee. James and the daughters were the beneficiaries. In 2008-2009, Mary transferred her Longspar limited partner interests to the trust in a gift (valued at $2,096,000.00) and then a sale for $20,000,000. An accountant valued a 1% Longspar limited partner interest at $341,000. The Nelsons used that value to convert the dollar values in the transfer agreements to percentages of limited partner interests—6.14% for the gift and 58.65% for the sale. Those percentages were then listed on Longspar’s records, included in Longspar’s amended partnership agreement, and listed on the Nelsons’ gift tax returns.The IRS audited the Nelsons’ tax returns. The Nelsons amended their records and reallocated previous distributions. The Commissioner issued Notices of Deficiency listing $611,708 in gift tax for 2008 and $6,123,168 for 2009. The Tax Court found that the proper valuation of a 1% Longspar limited partner interest was $411,235; the transfer documents' language was not a valid formula clause that could support reallocation; Mary had transferred the percentage of interests that the appraiser had determined to have the values stated in the transfer documents; those percentages were fixed once the appraisal was completed. The Fifth Circuit affirmed; the Nelsons each owed $87,942 in gift tax for 2008 and $920,340 for 2009. View "Nelson v. Commissioner of Internal Revenue" on Justia Law

by
The Fifth Circuit affirmed in part and reversed in part the district court's grant of summary judgment in favor of the government in this tax refund action arising under the Internal Revenue Code. Taxpayers overpaid their reported 2010 tax liabilities by an amount sufficient to cover any later-determined deficiency for the 2010 tax year, and then elected on their 2010 tax return to credit the overpayment forward to their estimated 2011 tax liabilities. The IRS subsequently completed an audit of taxpayers' 2010 tax return and determined that their interest award in a prior lawsuit should have been reported as ordinary income taxable at the ordinary income rate.The court concluded that the interest award is properly classified and taxable as ordinary income. The court explained that the award portion of the judgment one of the taxpayers received was "in lieu of" what she might have earned on the fair value of her shares for the 13-year period between the merger and final judgment in the prior litigation. Therefore, the court concluded that it qualifies as ordinary income under the origin-of-the-claim doctrine. However, in the absence of clear statutory authority, the court applied the established use-of-money principle and concluded that the IRS improperly assessed underpayment interest against taxpayers from April 16, 2012 to April 15, 2017. The court remanded for the district court to enter a judgment for taxpayers as to their claim for refund of the $603,335.27 underpayment interest amount. View "Goldring v. United States" on Justia Law

Posted in: Tax Law
by
Petitioner filed a petition with the U.S. Tax Court challenging the IRS's deficiency determination and the imposition of an accuracy-related penalty. The Tax Court issued a decision upholding in part the IRS's deficiency determination and imposition of the accuracy-related penalty.After the Fifth Circuit found that collateral estoppel does not bar the Commissioner from litigating this issue, the court concluded that the Tax Court did not clearly err in finding that petitioner is not entitled to deduct his 2014 legal expenses under 26 U.S.C. 162(a). In this case, petitioner has not carried his burden of proof to show that the origin of the claims underlying his litigation to recoup his trading agreement losses—the trading agreement venture—was related to his engagement in a trade or business within the meaning of section 162(a). The court also concluded that the Tax Court did not err in finding that petitioner cannot deduct his legal expenses incurred litigating to recover on his ex-wife's indebtedness as expenses for the production of income under 26 U.S.C. 212(1). However, the court concluded that petitioner is entitled to a reasonable cause and good faith defense for his understatement attributable to deducting his trading agreement legal fees under section 162(a) rather than section 212. View "Ray v. Commissioner of Internal Revenue" on Justia Law

Posted in: Tax Law