7th Circuit Tax Law News - U.S. Seventh Circuit
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Recent Tax Law Decisions

7th Circuit: Inefficient 401(k) Leads to Violation of ERISA Law

The 7th Circuit Court of Appeals ruled that inaction might trigger liability under ERISA law, reports CFO.com.

ERISA. It's one of those things that in-house lawyers hear about but don't always fully understand. It's something that employment lawyers know can be one of their greatest weapons but they don't want to crack open the Tax Code to decipher it.

The basic rule behind ERISA is simple: Employers who offer an employee benefit plan must comply with certain rules set aside under ERISA law. These rules place upon the plan administrators the fiduciary duty of prudent management of the employee benefit plans and the duty to make adequate and appropriate disclosures.

Heyde v. Pittenger, 09-1388

Action challenging property assessments

Heyde v. Pittenger, 09-1388, concerned a plaintiff's suit against members of a county Board of Review (BOR) and town's assessors, claiming that by setting his property's assessment at levels grossly disproportionate to its fair market value, the BOR and the assessors deprived him of his equal protection rights, and retaliated against him for previously exercising his right to challenge assessments.

US v. Olmeda-Garcia, 09-3042, In a prosecution of defendant for illegal re-entry into the United States, district court's imposition of a 64-month sentence is affirmed as the only potential error defendant identified is the district court's silence with respect to a possible disparity that could arise between defendant's sentence and those available to defendants in other districts, and here, defendant did not adequately develop this argument and the district court was entitled to hand down an otherwise procedurally and substantively sound sentence without discussing the point.

US v. Diaz-Gaudarama, 09-4048, concerned a challenge to the district court's refusal to credit defendant with a two-point reduction for acceptance of responsibility in a prosecution of defendant for conspiring to distribute methamphetamine, cocaine, and marijuana.  In affirming the denial, the court held that defendant is not entitled to a reduction in his advisory guideline range for acceptance of responsibility, given defendant's attempt to avoid criminal responsibility for his actions, the absence of statements by defendant reflecting remorse for his crime, and the last-minute nature of his attempt to plead guilty.

Mosley v. City of Chicago, 09-3598, concerned a challenge to the district court's grant of summary judgment in favor of the defendants in plaintiff's section 1983 suit against the City of Chicago and several of its police officers, arising from his arrest and prosecution for murder, of which he was acquitted at trial after approximately five years in jail.  In affirming the judgment, the court held that there is no evidence in the record that the officers withheld any materially favorable piece of evidence, and even assuming that a Brady violation could occur when a trial ends in acquittal, this claim cannot rise to the level described in Bielanski v. County of Kane, 550 F.3d 632 (7th Cir. 2008).  The court also held that the district court did not err in concluding that the defendants had probable cause to press forward with the prosecution and therefore plaintiff could not maintain a claim for malicious prosecution, nor in granting summary judgment on plaintiff's civil conspiracy claim.

Louis & Karen Metro Family, LLC v. Lawrence Conservancy Dist., 09-2418, concerned a plaintiff's breach of contract suit against a city and a conservancy district, claiming that the defendants breached their option contract to acquire land.  In affirming in part, the court held that the district court correctly concluded that a breach occurred as the defendants' failure to allow the plaintiffs to exercise the option within 18 months of the decision to cancel the flood control project was a breach of the contract.  Court also held that the district court did not abuse its discretion in deciding to invoke the equitable remedy of reformation.  However, the district court's order of reformation of an option contract to extend the date by which the option could be exercised in denying plaintiffs' request for money damages is vacated and remanded as the closest that one can come to making plaintiff whole for the shortfall in compensation is to determine how much it lost at the moment that the option became impossible to exercise.

Kovacs v. US, 09-3328, concerned a challenge to the district court's order affirming the bankruptcy court's dismissal of plaintiff's claim for lack of jurisdiction in a taxpayer's suit against the United States seeking to recover damages resulting from the Internal Revenue Service (IRS), claiming violation of the discharge injunction provided by section 524 of the Bankruptcy Code, arising from an Offer and Compromise (OIC) that she entered into with the IRS to resolve her tax liabilities for tax years 1990 through 1995.  In affirming in part, the court held that, due to the unequivocal exclusivity provision of 26 U.S.C. section 7433, the district court did not err in determining that plaintiff must comply with the jurisdictional provisions of section 7433 prior to recovery for a willful violation of the discharge injunction.  The court also held that the district court did not err in holding that plaintiff's cause of action with respect to IRS's July 8, 2002 collection effort is time-barred. However, the court reversed in part and remanded as, the district court erred in holding that plaintiff's claim with respect to IRS's September 8, 2003 and September 18, 2003 violations was time-barred.

Related Resources:

In Lantz v. Comm'r of Internal Revenue, No. 09-3345, the Seventh Circuit faced a challenge to the Tax Court's judgment invalidating the two-year deadline that the Treasury has imposed on claims under section 6015(f), and thus reversing the IRS's denial of a taxpayer's application for innocent-spouse relief.

As the court wrote: "The Tax Court's basic thought seems to have been that since some statutes...prescribe deadlines, whenever a statute (or provision) fails to prescribe a deadline, there is none.  That is not how statutes that omit a statute of limitations are usually interpreted.  Courts 'borrow' a statute of limitations from some other statute..."

Thus, in reversing the Tax Court's judgment, the court held that the fact that Congress designated a deadline in two provisions of the same statute and not in a third is not a compelling argument that Congress meant to preclude the Treasury Department from imposing a deadline applicable to cases governed by that third provision.     

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Decisions in Criminal, Tax, and Civil Rights Matters

Today, the Seventh Circuit decided a criminal matter, a former inmate's civil rights action and a tax matter involving a taxpayer's challenge to the IRS's increase the amount of income tax withholdings. 

In US v. Krumwiede, No. 08-4081, the court faced a challenge to the district court's imposition of a 140-month sentence for stealing thirty-four firearms from a federally licensed firearms dealer and other crimes.  In rejecting the defendant's contention that the district court erred in applying s four-level enhancement, the court held that there was no error as under Application Note 14(B) , section 2K2.1(b)(6) applies when a defendant during the course of a burglary, finds and takes a firearm even if the defendant did not engage in any other conduct with that firearm. 

Wrightsell v. Cook County, No. 09-2634, involved a former inmate's 42 U.S.C. section 1983 suit claiming that the county's failure to make more than a single dentist available to the jail's 10,000 inmates was cruel and unusual punishment.  In affirming district court's denial of class certification and dismissal of another former inmate's petition to intervene, the court held that the first inmate had no personal stake in having the class certified as he already settled  his claim and received all the relief he sought.  As for the second inmate, the court held that the dismissal was correct as he failed to ask the district court for permission to intervene within the statutory deadline for filing notice of appeal.

In Cleveland v. Comm'r of Internal Revenue, No. 09-2952, the court faced a challenge to the Tax Court's denial of a taxpayer's petition to keep the IRS from increasing the amount of his withholdings of his wages.  In affirming the dismissal, the court held that even if the taxpayer's theory that the underlying dispute concerned a collection action within the ambit of section 6330 was accepted, the Tax Court would lack subject matter jurisdiction because there was no issuance of a notice of determination. 

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The Seventh Circuit decided an employment matter, a case involving breach of an insurance contract, and Tax Court's determination of settlement payments and incurred litigation costs for deduction purposes.

In Luster v. Allstate Ins. Co., No. 09-2483, the court faced a challenge to the district court's grant of summary judgment in favor of an insurance company in an attorney's action for breach arising from the insurer's refusal to cover extensive fire damage to the attorney's deceased client, that had occurred while the home was unoccupied for more than four years, and had remained unoccupied until the client's  death.  In reversing the summary judgment, the court remanded the case in determining that the plaintiff was entitled to a hearing on whether an exclusion applies as the district court's decision was based not on cancellation but on the hazard exclusion.

WellPoint, Inc. v. Comm'r of Internal Revenue, No. 09-3163, involved an appeal of the decision of the Tax Court that plaintiff could not deduct from its taxable income, either the amount it paid to the states in its settlement or the legal expenses incurred in defending the case.  The underlying litigation against the plaintiff by three states arose from its acquisition of nonprofit companies some years ago and allegedly used the assets for its purposes as a for-profit company.  In affirming the Tax Court's judgment, the court held that under the application of the "origina of the claim" doctrine, costs incurred in defending the lawsuit were capital expenditures and not ordinary and necessary business expenses.

Fleszar v. U.S. Dep't of Labor, No. 09-2423, involved a plaintiff's petition for review a decision by the Administrative Review Board declining to investigate her allegation that her termination from employment by the American Medical Association violated the whistleblower-provision, section 806 of the Sarbanes-Oxley Act.  In affirming the decision, the court denied plaintiff's petition and held that the AMA, a nonprofit membership association that does not issue stock, is not covered under the Act. 

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Decisions in Section 1983 Cases and Criminal and Tax Matters

The Seventh Circuit decided a tax matter involving tax deductions of an S corporation, criminal matters, and 42 U.S.C. section 1983 cases involving sex offender registration requirement.

In US v. Corner, No. 08-1033, the court faced a challenge to the district court's holding that, in light of US v. Welton, district courts are not entitled to disagree with U.S.S.G section 4B1.1, in sentencing defendant to 188 months for possession of more than five grams of cocaine with intent to distribute as a career offender.  However, in reversing the decision, the court concluded that under Kimbrough and Spears, district judges are at liberty to reject any Guideline on policy grounds.  Thus, the court overruled Welton to the extent that it holds that section 4B1.1 differs from other Guidelines.

In Brown v. Finnan, No. 08-3151, the court dealt with a defendant's request for relief claiming ineffective assistance of counsel at both trial and appellate levels.  The defendant had claimed that his counsel declined to request a hearing to determine the impact of an in-court statement by one of the victim's mother and her out-of-court statement on the jury.  However, in rejecting defendant's ineffective assistance claim the court held that he failed to demonstrate that his counsel's assistance was objectively unreasonable and resulted in a substantial risk of prejudice.

In US v. Panice, No. 08-3323, the court faced a challenge to the district court's imposition of a 360 month sentence on a defendant convicted of various fraudulent schemes including a scheme to defraud people seeking jobs in the technology sector.  The court rejected most of defendant's contentions and affirmed the conviction but vacated and remanded his sentence as the sentencing record left too much doubt about whether the judge impermissibly started the presumption that a within-guidelines sentence in entitled to a rebuttable presumption of reasonableness and whether he completed adequate consideration of all the relevant section 3553(a) factors.

In Rosin v. Monken, No. 08-4132, the court addressed the issue of whether a plaintiff, having pleaded guilty to a misdemeanor offense of non-consensual sexual contact in New York under assurances that he would not be required to register as a sex offender, is nevertheless subject to mandatory life-long registration by Illinois.  In affirming the district court's dismissal of plaintiff's section 1983 suit in holding that the New York order was merely stricken and was silent on the subject.  Furthermore, because plaintiff's plea agreement did not purport to prevent any state other than New York from registering plaintiff as a sex offender, and any such provision would have been ineffective anyway.

In US v. Ray, No. 09-2392, the court addressed defendant's motion for a reduction in his 263 month sentence for possessing almost two kilograms of crack cocaine, which was significantly lower than the guidelines range of 292-365 months.  In affirming that the district court was correct to conclude that the defendant's sentence was not based on the guidelines, the court held that in the absence of explicit language in the plea agreement to the contrary, a sentence imposed under 11(c)(1)(C) plea agreement is not based on the sentencing guidelines.

In T.E. v. Grindle, No. 09-2920, the court faced a challenge to the district court's denial of a school principal's  motion for summary judgment claiming she was entitled to qualified immunity because plaintiffs failed to establish a clearly established right in their 42 U.S.C. section 1983 suit against the principal and a district band teacher who allegedly molested the plaintiff-children.   The court affirmed the summary judgment motion denial and held that the plaintiffs have put forth evidence that is sufficient to create liability under clearly established law of the circuit. 


In Tully v. Barada, No. 09-3237, the court faced a challenge to the district court's dismissal of plaintiff's 42 U.S.C. section 1983 suit against a prosecutor for failure to state a claim upon which relief can be granted.  In deciding on the merits of the case, because the defendant waived defense of absolute immunity and others, the court held that a section 1983 claim cannot lie for a mere court summons and prosecution without probable cause.

In Vainisi v. Comm'r of Internal Revenue, No. 09-3314, the court addressed the issue of whether the plaintiffs were entitled to deduct from their taxable income the entire interest expense that their QSub bank had incurred in borrowing money with which to buy qualified tax-exempt obligations.  In reversing the Tax Court's conclusion that the plaintiffs were entitled to deduct only 80 percent of that expense, the court held that for firms that have been S corporations for at least three years escape the "except" clause in section 291, and as such, the zero percent rule and the 80 percent rule are replaced by a 100 percent rule so that all the interest expense incurred in acquiring qualified tax-exempt obligations is deductible.

In DeKoven v. Plaza Assocs., No. 09-2016, the court faced a challenge to the district court's grant of summary judgment in favor of defendants in a class action lawsuit brought under the Fair Debt Collection Practices Act.  The case involved two letters sent to plaintiffs concerning a statement that the offer of settlement is valid for only 35 days and an additional statement in another letter regarding "satisfactory proof" that the account is in error.  As required, the plaintiffs conducted a consumer survey, but the court affirmed the district court's decision and held it was inadmissible under the standards governing admission of survey evidence as it was confusing and misleading. 

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Kanter v. Comm'r of Internal Revenue, No. 08-1036

In a case begun in 1986, now involving the estate of a well-known tax attorney, seeking review of the Commissioner of Internal Revenue's determination that the attorney had not paid all his taxes, judgment of the Tax Court is reversed and remanded as the Tax Court did not show the proper level of deference to the Special Trial Judge's (STJ) factual findings where: 1) STJ's factual findings are not clearly erroneous with respect to petitioner's tax liability and tax fraud; 2) there is no reversible error in the STJ's conclusion that petitioner was not the owner of the trusts in question, and as such, he is not liable for the tax deficiencies that the Commissioner assessed; 3) with respect to the partnership, the Tax Court lacked jurisdiction over the 1983, 1984, and 1986 tax years; and 4) STJ's conclusion that only the 1% interest that petitioner held in the partnership for the 1981 and 1982 tax years was taxable is not clearly erroneous.     

Read Kanter v. Comm'r of Internal Revenue, No. 08-1036

Appellate Information

Appeal from the United States Tax Court

Decided December 1, 2009

Judges

Before:  Cudahy, Ripple, and Wood,  Circuit Judges

Opinion by Wood, Judge

Am. Boat Co., LLC. v. US, No. 09-1109

In a tax case where the IRS issued a Notice of Final Partnership Administrative Adjustment based on its determination that the defendants implemented an illegal tax shelter and misstated certain information on its tax documents which resulted in significant tax underpayments, district court did not err in finding that the defendants had reasonable cause for its tax position, and, consequently, that it was not subject to the accuracy-related penalty in 26 U.S.C. section 6662.   

Read Am. Boat Co., LLC. v. US, No. 09-1109

Appellate Information

Appeals from the United States District Court for the Southern District of Illinois

Argued May 28, 2009
Decided October 1, 2009

Judges

Before Bauer, Flaum, and , Kanne, Circuit Judges

Opinion by Bauer, Circuit Judge

US v. Pansier, No. 07-3771

Conviction for obstructing the administration of the IRS, filing false IRS forms, and passing phony financial instruments with the intent to defraud is affirmed where: 1) the delays in defendant's trial did not violate the Speedy Trial Act as the the district court was permitted to exclude at least thirty days to resolve multiple pretrial motions; 2) the indictment for defendant's conviction for obstructing the due administration of the IRS is not duplicitous as the indictment solely charges a violation of the omnibus clause of 26 U.S.C. sec. 7212(a); 3) the indictment sufficiently charged that defendant willfully made and subscribed false statements on IRS forms in violation of 26 U.S.C. sec. 7206(1); and 4) the court correctly applied Daubert and allowed the expert testimony.   

Read US v. Pansier, No. 07-3771

Appellate Information
Appeal from the United States District Court for the Eastern District of Wisconsin.
Argued September 9, 2008
Decided August 12, 2009

Judges
Before FLAUM, WILLIAMS, and SYKES, Circuit Judges.
Opinion by WILLIAMS, Circuit Judge.