TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, January 9, 2006

The Complete Tax Opinions of Judge Alito

AlitoIn November, we blogged Lee Sheppard's wonderful piece, The Tax Opinions of Judge Alito, 109 Tax Notes 721 (Nov. 7, 2005).  Lee concluded:

We found more than 20 tax opinions by Judge Alito, so we have a pretty good idea how he would decide federal tax cases -- assuming that the Roberts Court would accept any more federal tax cases than the Rehnquist Court did. Many of Judge Alito's tax opinions concern the technical grind of the less-than-glamorous end of tax practice -- investment tax credits, fuel tax refunds, innocent spouse relief. And because we are in the Third Circuit, we do find a fair amount of tax crime.

"Scalito?" In his social views, undoubtedly. But not in his statutory interpretation. Judge Alito gives free rein to legislative history, previous versions of the pertinent statute, colloquy, whatever is available in interpreting statutes. "Giulianito" might be a more accurate sobriquet for this former federal prosecutor. No, he's not flashy or publicity seeking or serially married, but the ex- prosecutor in Judge Alito is always evident. He's a solid technician who picks and chooses his arguments based on where he wants the law to go. Unlike Chief Justice Roberts, he does not let the law lead him.

My research assistant extraordinaire Kristin Grove prepared the following detailed summary of all of Judge Alito's tax opinions, as well as links to each of the opinions:

Hattman appealed the dismissal by the tax court of his petition for a re-determination of the amount of tax he owed. Hattman asked the tax court to order the Notice of Deficiency that he had received for not filing a 2002 tax return void. Hattman asserted that he lived and worked on private property that was in no way connected with the state or federal government; thus, he set forth the contention that he is "not subject" to any law or the Internal Revenue Code. In this appeal, Hattman claimed that rather than appealing the dismissal from the tax court he was petitioning for writs. The Third Circuit, in a per curiam opinion, noted that Hattman’s arguments were “nothing other than the thinly veiled arguments of a tax protester.” The court went on to comment that these types of tax protester arguments have been rejected as patently frivolous, and require no additional analysis. Moreover, to the extent that Hattman's filings in this court were intended as writs of mandamus and error, the Third Circuit denied them, as he failed to demonstrate a clear and indisputable right to issuance of such writs.

Brunner appealed the Tax Court’s decision sustaining the deficiency and penalty determined by the Commissioner for the 1997 tax year. Brunner had asserted that requiring him to file a tax return violated the 4th, 5th, 9th, and 13th amendments; and exceeded Congress’s authority under the 16th amendment. In affirming the judgment of the tax court, the Third Circuit in a per curiam opinion, said that Brunner's arguments were frivolous, and no extended discussion was necessary. The court also stated that Under 26 U.S.C. § 6673(a)(1), the tax court can impose on the taxpayer a penalty not in excess of $ 25,000, where, as here, it appears that the taxpayer's position in a tax liability dispute is frivolous or groundless.

The Byock case concerns a complaint filed by the U.S. in district court, pursuant to 26 U.S.C. § 7403, to reduce to judgment unpaid federal income tax assessments against the Byocks for the taxable years 1991-1999. The Byocks appealed a summary judgment against them. In affirming the district court, the Third Circuit in a per curiam opinion said that an assessment of taxes by the Commissioner of the IRS is presumptively correct and the Byocks do not dispute that they owe the back taxes. Instead, the Third Circuit focused solely on the Byocks’ belief that this complaint was filed as a personal vendetta. The court held that this allegation had no bearing on the Byocks' liability for taxes owed.

The case raised the issue of whether Murdock, an S-Corporation’s sole shareholder and president, was an employee for federal employment tax purposes. Relying on their opinion in Nu-Look Design Inc. (356 F.3d 290), Becker writing for the Third Circuit, affirmed the determination that Murdock was an employee of taxpayer for purposes of federal employment taxes, and that the taxpayer was not entitled to "safe harbor" relief from these taxes under Section 530 of the Revenue Act of 1978. To determine his status as an employee, the court looked to Murdock’s status as a corporate officer, and the nature of the services Murdock rendered and whether the distributions paid were remuneration for those services.

Ingram was an appeal from a conviction for tax evasion among other crimes. Ingram alleged insufficiency of evidence in proving the relevant taxpayer and in proving that she acted willingly in her attempt at tax evasion. In a per curiam opinion, the Third Circuit rejected these arguments stating that the government had overwhelming evidence of the relevant taxpayer. Further, the court stated that the evasion statute, 26 U.S.C. § 7201, prohibits a willful evasion of "any tax" by "any person," including the tax of another, committed in "any manner.” Therefore, government did not need to allege or prove that the defendant knew the identity of the relevant taxpayer in order to sustain a conviction for willful tax evasion. In rejecting the defendant’s request for a reversal of her conviction, the court also stated that the evidence was sufficient to support a finding of willingness.

Gilberton Power Co. concerned review of a decision where the district court determined that the tax partner was not entitled to an energy tax credit under I.R.C. § 6226(a)(2) for its investments in a coal by-product. In affirming the district court via a per curiam opinion, the Third Circuit said that where statutory language was plain, they must enforce that language according to its terms. The court went on to say that §§ 46(a) and (b) of the I.R.C. provide tax credits for investment in power generation facilities that qualify as "biomass properties," as defined in § 48(l)(15). A biomass property includes "a boiler for which the primary fuel will be an alternate substance." The culm that Gilberton used to fuel its power generation facility was a mixture of anthracite, a form of coal, and inorganic materials. Accordingly, the court concluded that under the plain language of Section 48(l), culm was not an alternate substance and Gilberton was not entitled to an energy tax credit.

Defendant, the president of a boxing federation, sought review of a judgment from the United States District Court which convicted him upon a jury verdict of conspiracy to engage in money laundering, interstate travel in aid of racketeering, and filing false tax returns in violation of 26 U.S.C.S. § 7206. The charges stemmed from bribes that he was accepting from boxing promoters. On appeal the defendant made several Constitutional and other arguments for the various counts, but concerning the filing of false tax return count, the defendant contended that the District Court erred when it imposed concurrent sentences of 22 months' imprisonment on the tax counts. In an opinion by Judge Alito, the Third Circuit affirmed the convictions. Regarding the sentence for filing of false tax returns, the court commented that Title 26, United States Code Section 7206 provides that any violation may be punished by a fine of "not more than $ 100,000 . . . or imprisonment for not more than 3 years." Because the statutory maximum for the defendant’s tax offenses, 3 years, is not less than the minimum guideline range of 21 months on the other counts, and because there was no mandatory minimum term of imprisonment for those offenses, the District Court did not commit plain error when it imposed the same concurrent 22-month sentence on all counts.

The State of Maryland and three Maryland counties (taxing authorities), sought review of a judgment from the district court, which affirmed two orders of the bankruptcy court. One order declared that certain real estate sales proposed by debtor would be exempt under 11 U.S.C.S. § 1146(c), and the second order directed the taxing authorities to refund previously paid transfer taxes. The taxing authorities claimed that the Fed. R. Bankr. P. 9014 proceedings concerning the propriety of the declarations violated the Eleventh Amendment. The Third Circuit, in an opinion by Altio, concluded that it was not required to address an Eleventh Amendment issue before proceeding to the merits of the case. On the merits, the Third Circuit found that the district court and the bankruptcy court erred in holding that 11 U.S.C.S. § 1146(c) exempted the sale of real estate interests from state transfer and recording taxes where those sales were made prior to the confirmation of a bankruptcy plan. The court interpreted the phrase "under a plan confirmed" in § 1146(c) to mean "made pursuant to the authority conferred by such a plan." Because an unconfirmed plan could not confer such authority, the court held that a transfer made prior to plan confirmation could not qualify for tax exemption under § 1146(c). The court further concluded that it was required to construe § 1146(c) in the taxing authorities' favor because it both constituted a tax exemption and interfered with the taxing authorities' scheme of property taxation. Federal laws that interfere with a state's taxation scheme must be narrowly construed in favor of the state. Therefore, the court reversed the judgment and remanded the action.

Neonatology Associates is an appeal of a tax court case assessing deficiencies and penalties to the appellants. The appellants participated in the Southern California Voluntary Employees' Beneficiary Association ("SC VEBA") and the tax court determined that the professional corporations had erroneously claimed deductions on their income tax returns for payments made to plans set up under the SC VEBA and that the individual taxpayers had failed to report on their income tax returns income arising from certain related transactions. What is discussed here is leave to file an amicus brief as the appellants in this case entered into a settlement agreement and release with Commonwealth Life Insurance Company ("Commonwealth") pursuant to which Commonwealth agreed to defend this case at its expense and to pay certain portions of Appellants' tax liabilities in the event of an unfavorable outcome. Unlike Appellants, amici declined to release their claims and have filed litigation against Commonwealth to recover the losses they suffered through their participation in the "VEBA scheme" condemned by the tax court. The amici are concerned that the appellants have argued that the Employee Retirement Income Security Act ("ERISA") applies to the plan and that the court’s discussion of this issue will have a bearing in their litigation on the question whether the plaintiffs' claims against Commonwealth are preempted by ERISA. The motion, having been referred to Alito as a single judge, was granted. In his opinion he stated that because the criteria set out in Rule 29(b) were met, i.e., that the amici have a sufficient "interest" in the case and that their brief is "desirable" and discusses matters that are "relevant to the disposition of the case," the motion was granted.

Gricco concerned an appeal from conviction for conspiracy to defraud the United States, tax evasion, and making false tax returns. All of the charges related to the conspirators' failure to report on their personal income tax returns money that had been stolen from airport parking facilities. Regarding the tax evasion and making false tax returns, the appellants’ contended that their convictions for violating § 7201 and § 7206(1) merged and that the district court therefore erred in entering judgments of convictions and sentences under both provisions. The Third Circuit, with Alito writing for the majority, said that since neither defendant had raised this argument in the district court, the appellate review was governed by Fed. R. Crim. Proc. 52 (b), which provides that "plain errors or defects affecting substantial rights may be noticed although they were not brought to the attention of the court." The court here found it unnecessary to decide whether the district court committed an error in entering judgments of conviction and imposing sentences on both offenses here because even if the district court did error, this court concluded that the other prongs of the test under Rule 52(b) were not met. The sentences imposed for making false returns were concurrent to the sentences for tax evasion, and thus the former sentences do not increase the length of incarceration. The Third Circuit said that the defendants did not suffer a deprivation of "substantial rights," and in the exercise of discretion, the court declined to entertain the argument that the defendants did not raise below. The court affirmed the appellants' convictions, but vacated their sentences and remanded for further sentencing proceedings and re-sentencing.

Plaintiffs' claims arose from an IRS investigation of plaintiffs and the execution of search warrants at the plaintiffs' home and husband's veterinary office by numerous known and unknown Internal Revenue Service agents. Plaintiffs alleged that the IRS agents, in executing the warrants, improperly patted them down, detained them for up to eight hours without probable cause or reasonable suspicion, and closed husband's business. The district court dismissed the plaintiffs claims for failure to state a claim under Fed. R. Civ. P. 12(b)(6), and they appealed. In an opinion by Judge Alito, the Third Circuit Court of Appeals found that while most of the arguments raised on appeal lacked merit and did not require further discussion, some of the Fourth Amendment claims presented important issues concerning the execution of search warrants. The court held that the plaintiffs successfully alleged certain violations of their Fourth Amendment rights, but the court concluded that the defendants (IRS agents) were entitled to qualified immunity due to uncertainty in the case law, and therefore they affirmed the decision.

Bell Atlantic Corp. concerned a telephone company that sought review of a decision which ruled that it was not entitled to a $77 million income tax refund under the transitional rule for capital investment tax credits (ITC) contained in the Tax Reform Act of 1986. Under this rule, although ITC’s were being eliminated, a taxpayer could still claim an ITC if it had agreed to perform some service that required it to purchase otherwise-qualified property and if that service contract was binding as of the end of 1985. The Tax Reform Act imposed two conditions for ITC eligible property: the property must be both "necessary to carry out" the service contract and "readily identifiable with" it. Looking to the text, legislative history and intent of the Act, Judge Alito ruled for the Third Circuit. His opinion stated that ITC property must be "readily identifiable with" a contract by some means other than an internally generated document and that this requirement was perfectly consonant with the requirement that the ITC property must be "specifically required" or "specifically described." As no property was "readily identifiable" with Bell Atlantic's franchises, tariffs, and other contracts with telephone companies, the Third Circuit rejected Bell Atlantic's claim for investment tax credit.

Connecticut General Life Insurance Co. is an appeal by a life insurance company that filed a life-nonlife consolidated return under 26 U.S.C.S. § 1503(c)(1) and (2). In its return, appellant set off a portion of its nonlife companies' losses against its life company's income. The Internal Revenue Commissioner issued notices of deficiency to appellant on the basis that under 26 C.F.R. § 1.1502-47(m)(3)(vi)(A), appellant was ineligible to offset its nonlife losses to its life's income. The appellant’s primary argument was that because none of the regulations adopted by the Commissioner in 1983 explicitly covered a group acquisition, it was free to follow any reasonable method to calculate the net operating loss of the members of the acquired Groups. The opinion of the Third Circuit was written by Sloviter and stated that once an agency had adopted regulations interpreting a statute, the agency's consistent interpretation of its own regulation would be accorded substantial deference. The Court said that they will defer to an agency unless an alternative reading is compelled by the regulation's plain language or by other indications of the agency's intent at the time of the regulation's promulgation. In affirming the decision of the tax court, the Third Circuit concluded that nothing in Regulation §1.1502-47(m)(4) contradicted the Commissioner's interpretation of Regulation §1.1502-47(m)(3)(vi) as applying to acquired groups.

The Third Circuit, in a memorandum opinion by Alito, affirmed the district court's denial of an individual's writ of mandamus to compel the IRS to investigate her relatives, holding that the doctrines of standing and sovereign immunity offer separate grounds for denial. Lichtman's alleged "loss of benefits from those uncollected taxes" did not qualify as the sort of "concrete and particularized injury" needed to show standing. In addition, Alito noted that the district court correctly determined that IRS decisions to investigate particular tax cases are committed to agency discretion by law, and, thus, are unreviewable under 5 U.S.C. §701(a)(2).

The issue in ACM Partnership involved whether certain transactions were sham transactions or legitimate business transactions. The company (the appellant) performed a series of financial transactions and created a partnership, which generated capital losses that appellant used to offset previous capital gains for tax purposes. The company attempted to apply the contingent installment sale provisions and the ratable basis recovery rule. The IRS disallowed, and the tax court agreed, the company's capital loss deduction, claiming the financial transactions were a sham and the transactions were created solely for tax motivated purposes without any realistic expectation of profits. On appeal, the Third Circuit, in an opinion by Greenberg, held that the company was not entitled to recognize a phantom loss from a transaction that lacked economic substance separate and distinct from economic benefit achieved solely by tax reduction. Both the objective analysis of the actual economic consequences of the transactions and the subjective analysis of the company's intended purposes supported the tax court's conclusion. The court, however, allowed the company to take deductions arising from the actual economic losses associated with the ownership of certain European financial notes.

Bodine Oil supplied home heating oil to consumers. They failed to respond to an IRS questionnaire, causing the IRS to revoke its exemption certificate covering its heating oil purchases for tax-exempt resale, causing it to pay $100,000 in diesel fuel excise taxes. Bodine sought a refund, claiming that competitive pricing pressures kept it from passing the taxes on to its customers and that its customers, as the ultimate consumers, never paid the tax. The district court granting the government's motion for summary judgment dismissed the claim for refund. The Third Circuit, in an unpublished memorandum opinion by Judge Alito, affirmed the district court’s holding that a retail seller of nontaxable heating oil was not the "ultimate purchaser" that could seek a refund of excise taxes under § 6427. Alito said that Bodine could gross up the price which it charges for such fuel, and have its customers recoup that premium by filing for refunds under 6427(1). Simply because its customers would have preferred not to seek a refund, the court noted, did not mean that the court could disregard § 6427's plain language.

Debtor filed a chapter 7 bankruptcy petition. At the time of the petition he held an IRA account that represented funds from his interest in a terminated pension plan that he had "rolled over" into his IRA two years earlier. While the debtor listed the IRA as an asset, he claimed that it was not part of the bankruptcy estate because of N.J.S.A. § 25:2-1(b). He filed a motion seeking a declaration to this effect, and the trustee filed a cross-motion seeking to have the IRA declared an asset of the estate. The bankruptcy court granted the debtor's motion and denied the trustee's motion, and the district court affirmed. The trustee then appealed whether the New Jersey statute that protects a qualified individual retirement account (IRA) from claims of creditors constitutes a "restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11 U.S.C. § 541(c)(2) and thus results in the exclusion of the IRA from a bankruptcy estate. Trustee argued that the funds could be included in the bankruptcy estate subject to the state law restrictions. The Third Circuit, in an opinion by Alito, disagreed, noting that if the IRA and its state restrictions met the requirements of § 541(c)(2) of the Bankruptcy Code, it had to be excluded completely. The court found that the IRA was a qualified trust and that the funds constituted appellee's beneficial interest in that trust, as required under the New Jersey statute. Noting the broad definition of "transfer" in § 101(54) of the Bankruptcy Code, the court found that state law exemption from all creditors' claims constituted a restriction on transfer as required by § 541(c)(2) of the Bankruptcy Code, and that, therefore, the account was excluded from the bankruptcy estate.

Avila concerned whether the government's tax lien in real property is limited to a taxpayer's equity when he conveyed the property subject to the lien or whether the lien also attaches to the appreciation in the value of the property after the conveyance. The district court had ruled that the lien should be limited to the value of the taxpayer’s equity in the property at the time of the conveyance. In reversing the district court’s order, the Third Circuit, in an opinion by Greenberg commented that a tax lien “shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.” 26 U.S.C. § 6322 (1988). Because the lien is unaffected by sale, the court saw no basis for fixing the amount of the lien at the time of sale. Further, since nothing in the relevant statutes suggested that the government lien should be limited to the value of the taxpayer's equity in the property at the time of the conveyance and since the conveyance cannot affect the lien, the court reversed the district court's order based on its contrary conclusion. Remand was then required to assess extent of the interest in property held by tenancy in the entirety in view of survivorship right.

Tate and Lyle represented an appeal by the IRS of the decision of the tax court to overturn the IRS’s disallowed deduction for unpaid accrued interest. The tax court held that appellee (Tate and Lyle) was not required to defer its interest deduction until it actually paid the interest. On appeal, the Third Circuit reversed, holding that Treas. Reg. § 1.267(a)-3 requiring a U.S. taxpayer to use the cash method of accounting with respect to the deduction of interest owed to a related foreign person was a permissible construction of I.R.C. § 267(a)(3) and that the regulation was not arbitrary, capricious, or manifestly contrary to the statute. In an opinion by Mansmann, the court, applying the Chevron test, found that Congress' intent was not clear from the plain language of § 267(a)(3) and that the regulation was a permissible construction of the statute. Further, the court found that retroactive application of the regulation did not violate the due process clause of the 5th Amendment because Treasury Regulations were presumed to apply retroactively and appellee had adequate notice that regulations that might alter the tax treatment of its interest deductions were forthcoming.

The Laxes claimed large partnership losses from a shelter investment on their tax returns for the years 1981, 1982, and 1985. The Laxes conceded the disallowance of the claimed losses, but challenged their liability for tax penalties. The tax court sustained the penalties, rejecting Lax's claim that he reasonably relied on the advice of his accountants. Judge Alito then affirmed the tax court’s decision and wrote that the negligence penalties were appropriate because Lax did not conduct an independent investigation of the investment, nor read the prospectus, and he was aware that his accountant had no background or expertise in the area of the investment (oil and gas). Given the fact that Lax had run a business for more than 30 years, Alito felt that he should have possessed enough business acumen not to blindly trust others with business decisions. The appeals court also concurred with tax court that the IRS did not abuse its discretion in refusing to waive the substantial understatement penalties. Judge Alito stated that, in determining whether there was reasonable cause for the understatement, the most important factor was the extent of the taxpayer's effort to assess his proper tax liability. Here, Judge Alito again pointed to the tax court's finding that Lax had business acumen and could not shift the blame for poor business decisions to others around him.

Nicholson concerned litigation costs per IRC §7430, when the government’s position was not substantially justified. The government had disallowed certain deductions claimed by appellant taxpayers on their tax returns regarding computer equipment. The IRS maintained that appellants were not entitled to take the deductions because appellant was not “at risk” regarding a promissory note that he gave in partial payment for the equipment. Prior to a trial before the tax court on the propriety of these deductions, the parties settled on terms generally favorable to appellants. Appellants subsequently filed a motion for litigation costs pursuant to I.R.C. § 7430, arguing that appellee's position in the underlying proceedings was not substantially justified. The tax court disagreed and refused to award litigation costs. The Third Circuit, in an opinion by Alito, reversed and remanded the tax court's decision because appellee's position was not supported in law or fact and was therefore unjustified. The inadequacy of appellee's position was apparently due to Commissioner’s failure to properly develop the case against appellants before issuing the notice of deficiency. Thus, the court held that the tax court abused its discretion in ruling appellee's position was substantially justified.

Plaintiff, secretary of labor, brought an action against defendants, plan trustees, mechanics association, trust company, and union, to redress alleged violations of the ERISA, 29 U.S.C.S. §§ 1001-1461. Defendant union's pension plan (the Plan) made a loan to defendant association. The loan was a prohibited transaction. Plaintiff brought an action against defendants alleging that defendants had breached their fiduciary duties to the Plan. The lower court granted summary judgment to defendants, concluding that defendants could not be liable under the theory that they engaged in a prohibited transaction with the alter ego of a party in interest because ERISA did not contain such a prohibition. The Third Circuit, in an opinion by Alito, reversed in part, affirmed in part, and remanded for further proceedings. The Third Circuit reversed the judgment on plaintiff's claim that defendant plan trustees acted to benefit defendant union and remanded. The court also permitted plaintiff's claim against defendants, association and union, regarding their participation in a prohibited transaction, and against defendant union trustees for violation of 21 U.S.C.S. § 1106(b)(2).

Venen v. U.S. concerned an appeal of the summary judgment granted for the United States in a taxpayer's suit for damages that allegedly resulted from unauthorized disclosure of tax return information, failure to release a tax lien, and an unauthorized tax collection action, in violation of 26 U.S.C.S. §§ 7431, 7432, 7433, respectively. A taxpayer had reached an installment agreement with the United States on delinquent taxes. The United States mistakenly filed multiple notices of levy to collect taxes with the taxpayer's employer. The taxpayer filed suit against the United States and alleged unauthorized tax collection under 26 U.S.C.S. § 7433, failure to release a tax lien under 26 U.S.C.S. § 7432, and unauthorized disclosure of tax return information under 26 U.S.C.S. § 7431. The district court granted summary judgment for the United States. On appeal the Third Circuit via an opinion by Brody affirmed because the taxpayer failed to exhaust his administrative remedies for 26 U.S.C.S. § 7432, set forth in Treas. Reg. § 301.7432-1 and the remedies for 26 U.S.C.S. § 7433, found in Treas. Reg. § 301.7433-1. In making the decision, the court said that the history and structure of the Code’s damage scheme compelled this result as well as the plan language of the statute. The court also ruled that Treas. Reg. § 301.6103(k)(6), permitted disclosure to obtain information necessary to apply the Tax Code.

The appeal in Columbia Gas Transmission & Columbia Gas Systems, Inc. originated from an order of the bankruptcy court that denied the motion of Chapter 11 debtor Columbia Gas for authorization to pay as administrative expenses certain personal property taxes assessed by the State of West Virginia. The district court affirmed that order. In affirming the district court’s decision, the Third Circuit in an opinion by Parell said that since the taxes at issue here had not been assessed at the time Columbia filed its petition in bankruptcy, it is undisputed that the Taxes are not a priority tax under section 507(a)(7). The Bankruptcy Code does not precisely define when a property tax obligation is "incurred." The determination of when a state tax is incurred is governed by state law. The ownership of the property in 1990, the event giving rise to the property tax, occurred before the petition for bankruptcy had been filed. Based on West Virginia law, the Third Circuit then concluded that the property taxes were incurred pre-petition, even though the amount of tax had not yet been determined. Accordingly, the property taxes were not entitled to administrative expenses under section 503(b)(1)(B)(i), and the order of the district court was affirmed.

In Yonadi, the appellants, former husband and wife, divorced after 38 years of marriage. The tax court determined a deficiency in appellants' federal income tax was due. The tax court held that appellant former husband was liable for the capital gains tax attributable to the portion of the sale proceeds of certain appreciated assets distributed to appellant former wife pursuant to a divorce settlement agreement. Appellants sought review and Commissioner of Internal Revenue Service sought review from a separate order of the tax court that held that appellant former wife was not liable for the tax. In reversing both tax court decisions, the Third Circuit in the majority opinion by Cowen said that a common sense reading of the language of the entire judgment leads to the conclusion that the judgment contemplated an actual division of marital property upon the divorce. The term "interest" in the judgment meant "ownership interest." Therefore, the appellant former wife received an ownership interest in the appreciated assets upon her divorce and she must pay taxes on the appreciation realized. The court determined further that appellant former wife's interest resulted from a division of property that could be characterized as already co-owned by her and Vincent before the divorce. As a result, the grant of an interest to her was a transfer not taxable to Vincent upon divorce. Accordingly, former wife’s basis in her interest was not the fair market value of her interest at the time the judgment of divorce was entered, but rather the carry-over basis equal to the adjusted basis in her interest before divorce.

In American Insurance Co., the appellant argued the decision by the tax court that they owed interest on a defaulted bond calculated under 26 U.S.C.S. § 6601 and 26 U.S.C.S. § 6621(a) rather than under the Debt Collection Act of 1982, 31 U.S.C.S. § 3717(a)(1). In an opinion by Cowen, the majority in the Third Circuit affirmed, holding that appellant contracted to pay the taxpayer obligations of a third-party, and thus, 26 U.S.C.S. § 6601 and 26 U.S.C.S. § 6621(a) interest rates applied. The court held that appellant assumed joint and several liability for taxpayer obligations, and thus, was subject to interest accruals at the rate determined by the Internal Revenue Code. The court said that the principal governing language of the bond specifically stated that the appellant and the taxpayer were jointly and severally liable for the taxpayer's liability to the IRS. The court held that as a matter of law a surety was obligated to pay interest on the taxpayer's unpaid tax liability at the rate determined by the Internal Revenue Code, not the Debt Collection Act of 1982, 31 U.S.C.S. § 3717(a)(1), when the surety had posted a bond incorporating the taxpayer's obligation to pay Internal Revenue Service statutory accruals.

Purificato concerned whether the innocent spouse provision of IRC § 6013(e), applied for relief of amounts due under a joint tax return. Appellant wives filed joint returns with their husbands, who were brothers and co-owners of a subchapter S corporation. For three years they reported operating losses which significantly reduced their gross incomes. The Commissioner determined that the corporation actually had substantial profits and issued notices of deficiency. The lower court determined that neither spouse was entitled to relief from the taxes under the innocent spouse provision of 26 U.S.C.S. § 6013(e)(1) and they challenged the decision. The Third Circuit, in an opinion by Judge Alito, stated that in order to qualify for relief under this provision, the claimant bears the burden of proving all four of the elements set out in subsections (A) to (D) of 6013(e)(1). Although subsection (D) does not expressly mention the importance of whether a claimant "significantly benefited" from the understatement of tax, the Third Circuit thought that the history of the "innocent spouse" provision supported the Tax Court's conclusion that this question should be considered in determining whether joint and several liability would be inequitable. The Third Circuit found that they significantly benefited from the understated tax and therefore were not entitled to innocent spouse protection because it was not inequitable to hold the wives liable for the deficiency. Thus, the Third Circuit affirmed the tax court.

After the employer sold a division to the successor, the employees continued to work in their same positions and later filed claims that their employer failed to comply with the Employee Retirement Income Security Act (ERISA), 29 U.S.C.S. §§ 1001-1461. The district court granted summary judgment in favor of the employer and retirement plan, holding that the employees' right to early retirement benefits was not protected by ERISA because they had not satisfied the eligibility requirements for early retirement at the time that their division was sold. The Third Circuit in an opinion by Sietz, affirmed the grant of summary judgment for the employer and the retirement plan on the employees' class action claim for severance benefits, but it vacated the summary judgment as to their other claims. By analogy to mirror-image Internal Revenue Code provisions, the Third Circuit held that the employees would be able to qualify for early retirement benefits at a later date by meeting the plan's pre-termination requirements, even when they continued in their same jobs for a successor employer. The Third Circuit held that the district court erred in concluding that a plan participant must demonstrate harm in order to obtain an injunction requiring the plan administrator to comply with 29 U.S.C.S. § 1024(b)(4) disclosure requirements, as it was not necessary to show harm. Alito, in a concurring opinion, wrote separately to highlight his understanding of the question concerning early retirement benefits. He, like his colleagues, believed that Rev. Rul. 85-6 should be heeded. Therefore, if the Hoechst Celanese Plan had terminated just before the transfer, the plaintiffs would have retained the right to qualify for early retirement benefits after the termination and assets would have had to have been allocated to these prospective benefits. Consequently, in order to comply with Section 208 of ERISA and Section 414(l) of the Internal Revenue Code, Hoechst Celanese was required to transfer sufficient assets to the American Mirrex Plan to ensure that at least an equal allocation would occur if the latter plan terminated just after the transfer. Since there was a factual dispute as to whether the defendants in this case transferred sufficient assets to meet this requirement, Alito believed summary judgment for the defendants was inappropriate.

In Geisinger Health Plan, the Commissioner appeals a tax court decision granting Geisinger Health Plan ("GHP") tax-exempt status under IRC § 501(c)(3). This case concerns whether a health maintenance organization (an "HMO") which serves a predominantly rural population, enrolls some Medicare subscribers, and which intends to subsidize some needy subscribers but, at present, serves only its paying subscribers, qualifies for exemption from federal income taxation under IRC § 501(c)(3). The Third Circuit in an opinion by Judge Lewis overruled the tax court on one issue and remanded on another. The Third Circuit rules that GHP does not qualify for tax-exempt status under section 501(c)(3) since it did not demonstrate the community benefit required to satisfy the operational test. GHP does no more than arrange for its subscribers, many of whom are medically underserved, to receive health care services from health care providers. This is so even though it has a program designed to subsidize the subscribership of those who might not be able to afford the fees required of all other subscribers. Arranging for the provision of medical services only to those who "belong" is not necessarily charitable, particularly where, as here, the HMO has arranged to subsidize only a small number of such persons. Alternatively, GHP argued that it is entitled to tax-exempt status under section 501(c)(3) because it is an integral part of the Geisinger System. The Third Circuit remanded this case to the tax court for a determination of whether GHP qualifies for tax-exempt status under section 501(c)(3) because of the integral part doctrine.

Armstrong World Industries, Inc. concerned a deficiency due to the disallowance of depreciation deductions and investment credits claimed by appellant under the repealed "safe-harbor leasing" rules of 26 U.S.C.S. § 168(f)(8). Appellant corporation entered into safe-harbor leasing agreements to purchase railroad properties from another corporation pursuant to the safe-harbor leasing rules established in 26 U.S.C.S. § 168(f)(8). The tax benefit transfer could be accomplished through a fictional sale and leaseback of "qualified leased property." The IRS disallowed appellant’s depreciation deductions because some of the properties had not been placed in service within three months of the agreements, and the tax court affirmed. The Third Circuit, in an opinion by Greenberg, affirmed the judgment of the tax court, holding that the majority of the properties were not placed in service during the necessary period, and that the incomplete safe-harbor leasing agreement was invalid. The court held that the Regulations, promulgated under the Secretary's general authority, were a reasonable interpretation of legislative intent.

The Internal Revenue Service appealed the district court’s judgment, affirming the Bankruptcy Court's ruling, that a claim for nonpecuniary loss tax penalties may be subordinated under 11 U.S.C.S. § 510(c). Debtor was assessed taxes, penalties, and interest for various tax periods, which he failed to pay. The IRS filed four separate notices of a tax lien. Debtor filed for Chapter 13 bankruptcy and the bankruptcy court subordinated the pre-petition penalties portion of the IRS' claims to the claims of other general non-subordinated unsecured claims. The IRS appealed, contending that equitable subordination and 11 U.S.C.S. § 510(c) did not permit the automatic subordination of nonpecuniary loss tax penalties, and equitable subordination required a showing of misconduct. While the majority of the third circuit agreed that the legislative history allowed courts flexibility in applying the principle of equitable subordination, it found no indication that Congress contemplated that nonpecuniary loss tax penalties would be subordinated automatically. While 11 U.S.C.S. § 510(c) permitted equitable subordination of nonpecuniary loss tax penalties, in determining whether to subordinate courts must balance the equities of the various claims, and creditor misconduct was not a prerequisite for equitable subordination. Therefore, the judgment was reversed and remanded. Judge Alito concurred in the judgment of the court, that the disctict court decision automatically subordinating nonpecuniary loss tax penalties must be reversed and that the case must be remanded for a hearing. He disagreed, however, regarding the legal standard that should be applied on remand. The majority held that the district court on remand may subordinate nonpecuniary loss tax penalties without proof of inequitable conduct by the government if a weighing of competing equities suggests that subordination is appropriate. Alito in his dissent states that this apparently means that a nonpecuniary loss tax penalty not associated with any inequitable government conduct may be subordinated to other unsecured claims provided those claims are not themselves inequitable. In his view, this holding, which treats nonpecuniary loss tax penalties less favorably than other categories of unsecured claims, was incorrect.

Public employee Joseph Moses accepted kickbacks from vendor Gaudelli, which he did not report on his personal returns nor did he file corporate returns for his business. Gaudelli and Ronschke, another public employee involved in the kickback scheme, made false statements to a grand jury about the money paid to Moses. Gaudelli, Ronschke, and Moses were convicted for conspiring to evade taxes. Moses was also convicted for failing to file and filing false returns. Moses appealed, contending that Gaudelli's and Ronschke's grand jury statements were inadmissible under Fed. R. Evid. 801(d)(2)(E), because they were made after the object of the conspiracy had been accomplished, not during the conspiracy. The Third Circuit affirmed the convictions for failing to file corporate returns, filing false personal returns, and conspiracy to evade taxes. Following Forman v. United States, 361 U.S. 416 (1960), Judge Alito noted that a conspiracy to evade taxes continues until collection is time-barred and the tax evasion "permanently effected." Therefore, the grand jury statements were made in furtherance of the conspiracy and were admissible.

A taxpayer, who for many years had worked in automobile salvage and parts sales changed businesses to go into bulk sales and mortgage loans. He eventually became the subject of an IRS criminal investigation. The IRS reconstructed Paschal's income for the years at issue by analyzing his expenditures and the changes in his net worth, and concluded that Paschal had failed to report $267,779, or 89%, of his taxable income from 1980 through 1982. Specifically, the tax court found deficiencies in income taxes for those years and also found that Paschal's underpayment was due to fraud. Pursuant to IRC § 6653(b), the tax court imposed additions to tax in the amount of 50% of the underpayment for each of the three years. The taxpayer contended that the deficiencies were incorrectly computed in that certain items were omitted or undervalued in computing his opening net worth. Judge Alito, writing for the Third Circuit in an unpublished opinion, contended that in the tax court, Paschal not only failed to carry his burden, but he stipulated to all of the elements of the net worth analysis.

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FYI, WSJ attributed Lee Sheppard's conclusions to you...and lord knows you should be concerned if you're confused for Ms. Sheppard!!

"We've tuned in to the Alito hearings and we've already tuned out, bored with the senators' long-winded opening statements. And whenever we get bored around here, we turn to matters of federal tax.

For a look at Alito's tax jurisprudence, here's a survey by law professor Paul Caron and the author of TaxProf blog. Caron calls Alito "a solid technician who picks and chooses his arguments based on where he wants the law to go." In interpreting the federal tax code, Alito "gives free rein to legislative history, previous versions of the pertinent statute, colloquy, whatever is available in interpreting statutes." For more on the Alito hearings, see here, and here.

Posted by: andy | Jan 10, 2006 12:54:47 AM