Tag Archives: 2nd Circuit

Today: Supreme Court to Hear Arguments in DOMA Tax Case

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Seal_of_the_United_States_Supreme_Court.svgToday, the United States Supreme Court will hear arguments about the Constitutional rights of homosexual couples courtesy of the Internal Revenue Code.

The Court may rule on a variety of grounds in United States v. Windsor including standing (was the couple’s marriage recognized under New York law) and the proper Constitutional standard (does Intermediate Scrutiny apply to homosexuals) but the case started with a tax return.

Edie Windsor and Thea Spyer were New York residents and a couple for over 40 years. In 2007, they were married in Canada where same-sex marriage was legal. Upon Thea’s death, Edie filed a federal estate tax return, Form 706. Thea’s estate paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC §2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes paid. When that claim for refund was denied she filed suit in federal district court.

The refund denial was reversed by the U.S. District Court for the Southern District of New York and the Second Circuit Court of Appeals. Read opinions published in those cases here and here.

Whether not the Supreme Court issues a sweeping or narrow opinion on the rights of homosexuals, there is little question that the tax code touches everyone. After all, that’s where this case started.

Second Circuit: Co-Op Owner Is Entitled to Casualty Loss

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circseal2The Second Circuit Court of Appeals has reversed the Tax Court’s decision that a New York City co-op owner, Ms. Alphonso, could not deduct casualty losses that occurred on grounds owned in common with other cooperative shareholders.

The Tax Court held that Ms. Alphonso could not take a deduction for a casualty loss because she did not hold a property interest in the damaged property. The damage in question occurred when a retaining wall along the common property of the cooperative apartment building collapsed. The co-op shareholders contributed to the necessary repairs and clean-up. Ms. Alphonso took a deduction of about $23,000 for her share of the repairs, claiming that it qualified as a casualty loss under under IRC §165(c)(3).

The Tax Court did not address the merits of the casualty loss claim. Rather, the Court ruled as a matter of law that Ms. Alphonso did not hold a “sufficient” property interest in the common area of the apartment building to qualify for the deduction.

The Second Circuit vacated the Tax Court holding that although Ms. Alphonso’s interest in the damaged common area was not exclusive with respect to her fellow tenant shareholders it was still a property right. Thus, the “property” element of section 165(c)(3) was satisfied. The Second Circuit remanded the case to the Tax Court for further proceedings on whether the claimed damages qualified as a casualty loss.

Read the Second Circuit’s opinion here:
Alphonso v. Commissioner, No. 11-2364 (2d Cir. Feb. 6, 2013)

Read the Tax Court opinion here.

Second Circuit: DOMA Unconstitutional In Estate Tax Case

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The Second Circuit Court of Appeals has affirmed the ruling of the U.S. District Court for the Southern District of New York that Clause 3 of the Defense of Marriage Act (DOMA) is unconstitutional.

The case originated with a refund claim for overpaid estate taxes. Edie Windsor and Thea Spyer were a married homosexual couple from New York. Upon Thea’s death, Edie paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC Section 2056(a) – a benefit routinely applied to married couples of different sexes. When Edie’s claim for refund of the estate taxes was denied she filed a refund action in U.S. District Court.

The trial court held that DOMA denied Ms. Windsor equal protection under the law as guaranteed by the 5th Amendment to United States Constitution. The three judge appellate panel agreed. It added that “homosexuals have suffered a history of discrimination” and thus the proper legal standard for determining Constitutional protections is intermediate scrutiny. The court held that DOMA could not meet that standard and thus Edie’s 5th Amendment right to equal protection under the law was violated when the provisions of the Internal Revenue Code applied differently to her than to other surviving spouses.

Read the opinion here:
Windsor v. U.S., No. 12-2335 (2d Cir. Oct. 12, 2012)

Second Circuit: Exxon Mobil Entitled to Retrospective Interest Netting

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The Second Circuit Court of Appeals has affirmed the decision of the Tax Court holding that Exxon Mobil is entitled to net interest for periods of overlapping underpayments and overpayments even where the statute of limitations for one “leg” of the overlapping periods has expired.

Congratulations to the taxpayer’s lead counsel and fellow blogger, Alan Horowitz, and our friend on the brief, Kevin Kenworthy.

Read the entire opinion here:
Exxon Mobil v. Commissioner, No. 11-2814 (2d Cir. August 8, 2012)

Altria Settles 14 Years of SILO/LILO Transactions for $500 Million

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On May 22, Altria announced that it executed a closing agreement with the Internal Revenue Service settling the federal income tax treatment of fourteen years of leveraged lease transactions (commonly known as lease-in/lease-out (LILO) and sale-in/lease-out (SILO) transactions) entered into by Altria’s wholly-owned subsidiary, Philip Morris Capital Corporation.

Altria had defied the IRS challenges to these transactions in a number of pending cases. In October 2006, Altria filed a complaint in the United States District Court for the Southern District of New York to claim refunds related to its LILO and SILO transactions for 1996 and 1997. In July 2009, following an eleven day trial, a jury returned a unanimous verdict in favor of the IRS. Altria filed motions for judgment as a matter of law or, in the alternative, for a new trial. On March 17, 2010, the court denied Altria’s post-trial motions and, on April 19, 2010, entered final judgment in favor of the IRS.

Altria appealed the final judgment to the United State Court of Appeals for the Second Circuit. In an opinion released on September 27, 2011, the Second Circuit affirmed the District Court’s ruling, and the jury’s findings, against Altria. Altria had a similar tax refund claim pending in the Southern District of New York for the same transactions applicable to the 1998 and 1999 tax years.

According to the press release issued by Altria, the settlement included the 1996 through 1999 tax years and tax years through 2003, in all of which the IRS had disallowed the tax benefits claimed from these transactions. The settlement also covered the tax years 2004 through 2009 for which Altria claimed tax benefits generated by the LILO and SILO transactions but which the IRS was expected to disallow. Altria did not claim tax benefits pertaining to the LILO and SILO transactions in the 2010 and 2011 tax years and, under the terms of the settlement agreement, will not claim such benefits in future tax years.

Altria expects to pay approximately $450 million in federal income taxes and related estimated interest with respect to the 2000 through 2010 tax years. The payment is net of federal income taxes that Altria paid on gains associated with the sales of assets leased in the LILO and SILO transactions from January 1, 2008 through December 31, 2011. Of the $500 million, Altria also expects to pay approximately $50 million of state taxes and related estimated interest. The tax component of these payments represents an acceleration of federal and state income taxes that Altria would have otherwise paid over the lease terms of the LILO and SILO transactions. Pursuant to the settlement agreement, the IRS will not assess penalties against Altria for the LILO and SILO transactions in any tax year, open or closed, through the 2010.

Read the Altria Group, Inc. press release here:
Altria PMCC Press Release May 22, 2012

Read the Second Circuit’s Opinion here:
Altria Group v. US, No 10-2404 (2d Cir. 2011)

2nd Circuit: Entire Transferred Interest in Home Not Included in Estate

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In a decision that prompted a 20 page dissent, the Second Circuit reverses the Tax Court on the application of Section 2036 to the transfer of a 49% interest in a home that the donor continued to occupy.

Estate of Stewart v. Commissioner, Docket 07-5370-ag (2d Cir. August 9, 2010)

For additional commentary click here.

U.S. Supreme Court: Deferential Standard Owed to ERISA Administrator’s Interpretation

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The United States Supreme Court reversed the Second Circuit Court of Appeals, holding that the District Court should have applied a deferential standard of review to the ERISA Plan Administrator’s interpretation of the qualified plan.

Read the opinion here:
Conkright v. Frommert, Docket 08-810 (U.S. Sup. Ct. 2010)