ROUTE 231, LLC, JOHN D. CARR, TAX MATTERS PARTNER v. COMMISSIONER OF INTERNAL REVENUE, NO. 14-1983
Decided: January 8, 2016
The Fourth Circuit affirmed the decision of the Tax Court
This case stemmed from Route 231’s filing of its federal tax return in 2005, and the Commissioner of the IRS issued a Final Partnership Administrative adjustment (“FPAA”) stating that one of its transactions from its member Virginia Conservation Tax Credit FD LLLP (“Virginia Conservation”) should have been listed as gross income and not as a capital contribution. Route 231 challenged this determination, and the Tax Court found that the transaction was a “sale” and should have been listed as gross income. Route 231 appealed.
The Fourth Circuit first looked at Route 231’s argument that the “Virginia tax credit transaction with Virignia Conservation constituted a nontaxable capital contribution followed by a permissible allocation of partnership assets to a bona fide partner.” In making its determination, the Court first looked at whether the transaction was a “disguised sale,” and listed seeral relevant factors to look at when amking this determination. The Court also noted that there was a presumption of a sale created in regulation § 1.707-3(b)(2) when the partner/partnership transfers occurred within a two-year period, unless the facts and circumstances established otherwise, a presmption that placed a high burden on a partnership to disprove that a sale had occurred. Although Route 231 attempted to distinguish the previous Virginia Historic from this case and say that because Virginia Conservation is a bona fide partner, the partner/partnership transactions are immune from the scope of § 707. However, the Court says this argument misses the point, because the analysis under § 707 looks at the nature of the transaction itself and not the nature of the participants in the transaction. In looking at the transaction, the Court first determined whether the Virginia tax credits are property within the scope of § 707, and agree with the Tax Court that they are. It next looked at whether the transfer of the property was a “sale,” and because the exchange of tax credits for money occurred within a two-year period, the sale presumption applied. The Court listed the Tax Court’s list of factors that showed the transaction was a “sale,” and agreed with the Tax Court that those factors point to the conclusion that the transaction was a “sale,” and therefore should have been listed as “income.”
Furthermore, the Court agreed with the Tax Court that the tax year in which the income should have been reported was 2005, not 2006 as Route 231 contended. First, the Court noted that Route 231 listed on its 2005 tax form that it received the money from the sale in 2005. Under the principles of the tax code, the Court firmly stated that a “taxpayer may be barred from taking one factual position in a tax return and then taking an inconsistent position later in a court proceeding in an effort to avoid liability based on the altered tax consequences of the original position.” Additionally, the Court found that Virginia Conservation had “legal title in, an equity interest in, and the right to possess the tax credits as soon as Route 231 earned them,” according to the terms of the agreement between them. Finally, the Court said that Route 231’s use of the accrual method of accounting showed that the sale occurred in 2005. For these reasons, the Fourth Circuit affirmed the finding of the Tax Court.
NAT’L ORG. FOR MARRIAGE v. U.S., NO. 14-2363
Decided: December 2, 2015
The Fourth Circuit affirmed the district court’s denial for the National Organization for Marriage (NOM) to collect attorneys’ fees because the government’s litigation position was “substantially justified” showing NOM was not a “prevailing party” under the statute.
NOM is a tax-exempt, nonprofit organization that works to protect and sustain marriage and faith throughout the United States. NOM is required to annually file Internal Revenue Service (IRS) Form 990, which includes names, addresses, and contribution amounts of donors who give $5,000 or more during the year. The IRS is required to disclose this information to the public but must redact the names and addresses. However, an IRS clerk released a copy of the unredacted donor list, and it eventually was published online by the Human Rights Campaign (HRC) and the Huffington Post.
NOM filed suit against the IRS seeking damages for the unlawful inspection and disclosure of confidential tax information by agents of the IRS in violation of 26 U.S.C. § 6103. NOM sought statutory damages, actual damages, punitive damages, and costs and attorneys’ fees under § 7431(c). The government conceded that its release of the information entitled NOM to a single recovery of statutory damages but not actual damages, punitive damages, costs, or attorneys’ fees. After discovery, the government moved for summary judgment. The district court granted partial summary judgment to the government. The court found that NOM was not entitled to punitive damages and NOM’s claim of unlawful inspection failed due to a lack of evidence. However, the district court determined NOM was entitled to actual damages, and the parties entered into a consent judgment for the government to pay NOM $50,000 to resolve its claims for actual damages and costs. NOM then moved for $691,025.05 in attorney’s fees. The district court denied this motion, and NOM appealed.
Reasonable attorneys’ fees, when the defendant is the United States, are available under § 7430(c)(4). Section 7430(c)(4)(B)(i) requires that if the government is the defendant, the plaintiff “shall not be treated as the prevailing party…if the United States establishes that [its] position…in the proceeding was substantially justified.” The district court determined that the government “reasonably contested NOM’s unfounded willful disclosure and inspection allegations that would have supported a claim for punitive damages if properly proven.” However, the court did not comment on whether the government’s position regarding actual damages was substantially justified. Here, NOM argues there was an abuse of discretion.
The litigation position of the government is “substantially justified” if it has a “reasonable basis in law and fact” or if it is “justified to a degree that could satisfy a reasonable person.” The burden is on the government to show that it was substantially justified. In determining whether the government’s position was substantially justified, the court looked at the available objective indicia of the strength of the government’s position and conducted an independent assessment of the merits of the government’s position with respect to actual damages.
Here, NOM sought statutory, actual, and punitive damages. The Fourth Circuit concluded that the government adopted a reasonable strategy in conceding statutory damages, but challenging both actual and punitive damages. The government had substantial justification to argue that the proximate cause had been broken. If the government would have conceded actual damages early on, this could have hurt the government’s position later if NOM had been able to submit evidence enabling it to proceed on the punitive damages issue. Therefore, the Fourth Circuit could not say that the government acted unreasonable prior to the summary judgment stage of the litigation by waiting to see what NOM’s evidence was and then challenging its sufficiency. The Fourth Circuit held that the government’s position was substantially justified, making NOM not entitled to attorney’s fees because it was not a prevailing party.
Austin T. Reed
Montgomery County v. Federal National Mortgage Association, Nos. 13-1691; 13-1752
Decided: January 27, 2014
The Fourth Circuit combined two similar cases from the district courts of South Carolina and Maryland to consider whether the Federal National Mortgage Associate (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are exempt from paying state and local taxes on the transfer of real property. Both district courts held that Fannie Mae and Freddie Mac were exempt from paying transfer taxes. The Fourth Circuit affirmed. In addition, the Fourth Circuit held that Congress acted within its power under the Commerce Clause in exempting Fannie Mae and Freddie Mac from property transfer taxes.
During the Great Depression, Congress created Fannie Mae to provide banks with more capital for mortgage lending with the intent that additional capital would increase credit stability and to provide additional access to residential mortgages throughout the country. In 1970, Congress established Freddie Mac as a competitor to Fannie Mae, with similar purposes. Fannie Mae and Freddie Mac met these goals by purchasing mortgages originated by third-party lenders, pooling the mortgages into securities, and then selling those mortgage-backed securities to fund further purchases. Ideally, these activities promote access to mortgage credit and stabilize the residential lending market. To help accomplish their goals, Congress exempted Fannie Mae and Freddie Mac generally from all state and local taxes “except that any real property [of Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” Like many other states, South Carolina and Maryland impose taxes on the ownership and the transfer of real property. The Counties of South Carolina and Maryland charged with collecting property transfer taxes (“Counties”) claim that the exemption did not apply to the transfer taxes because of Congress’ real property exception to the tax exclusion. On the other hand, Fannie Mae and Freddie Mac claim that the real property exception is sufficiently narrow to only cover the payment of property ownership taxes and thus, does not extend to similarly require the payment of property transfer taxes. The district courts of South Carolina and Maryland agreed with Fannie Mae and Freddie Mac, upholding the exemption. The Counties appealed.
On appeal, the Fourth Circuit first affirmed the district court’s determination that the tax exemption applied to property transfer taxes. Courts have consistently distinguished general property taxes from taxes levied on the transfer of property. The Fourth Circuit noted the extensive Supreme Court precedent providing that recording taxes are distinct from property taxes, explaining that “a privilege tax is not converted into a property tax because it is measured by the value of the property.”
Secondly, the court affirmed the constitutionality of the tax exemption. The court began by noting that Congress only needed a “rational basis” to grant the exemption from state taxation. The Counties argued that Congress did not have a rational basis to grant such an exemption because the transfer tax was purely a local, intrastate activity beyond Congress’ control. The Fourth Circuit disagreed, emphasizing the substantial economic effect that Fannie Mae and Freddie Mac had on the nationwide mortgage market. The 2008 mortgage collapse provided ample evidence of the extensive impact that local mortgages have on the entire nation’s economy.
Convinced that mortgage lending has a substantial effect on the nation’s economy, the Fourth Circuit then considered whether Congress’ tax exemption was necessary and proper to Congress’ legitimate exercise of its power under the Commerce Clause. The Court held that “Congress could rationally have believed that state taxation would substantially interfere with or obstruct the legitimate purposes of Fannie Mae and Freddie Mac of regulating and stabilizing the secondary mortgage market.” First, imposing excessive taxes on Fannie Mae and Freddie Mac could undermine their ability to purchase mortgages by reducing their access to capital. Second, the inconsistencies in state property transfer taxes would impose varied transactions costs between states that may undermine the ability to provide the same mortgage liquidity to all parts of the country. Third, without such an exemption, the large volume of the mortgage portfolios held by Fannie Mae and Freddie Mac would pose an attractive target for large taxes by states and localities. Thus, the Fourth Circuit held that the tax exemption was a necessary and proper exercise of Congress’ Commerce Clause power.
– Wesley B. Lambert
Corr v. Metropolitan Washington Airports Authority, No. 13-1076
Decided: January 21, 2014
The Fourth Circuit Court of Appeals affirmed the district court’s dismissal of plaintiffs’ complaint attacking the legality of the toll charged by the Metropolitan Washington Airports Authority (“MWAA”) for use of the Dulles Toll Road. The Fourth Circuit held that the tolls were user fees, not taxes, under Virginia law.
In 1950, Congress authorized the construction of the Washington Dulles International Airport. The federal government acquired a right-of-way on which it constructed the Dulles Airport Access Highway, which runs exclusively to service traffic to and from the airport, and has no exits or tolls. In 1980, the Virginia Department of Transportation received an easement on which to construct a toll road within the right-of-way to serve non-airport traffic, known as the Dulles Toll Road. In 1984, the United States Secretary of Transportation proposed the formulation of a regional airport authority which would take over control of Ronald Regan Washington and Dulles International Airports from the United States. Congress passed legislation approving the compact and leased the two airports to the newly formed MWAA. Congress explicitly granted MWAA the power “to levy fees or other charges.” Nonetheless, the Dulles Toll Road continued to be operated not by MWAA but by the Virginia Commonwealth Transportation Board (“CTB”). In the ensuing decades, the Virginia General Assembly repeatedly authorized CTB to use toll revenue to fund mass transit projects within the Dulles Corridor. In 2004, it granted CTB open-ended authority to issue revenue bonds to fund a mass-transit rail project in the Dulles Corridor, to be paid with revenue s from the Dulles Toll Road. CTB then raised the Dulles Toll Road rates. Meanwhile, MWAA shared Virginia’s goal of extending the Metrorail system to Dulles Airport, which the FAA master plans called for. So that MWAA could fulfill this mandate, Virginia transferred control to MWAA, giving it the power to set tolls on the Dulles Toll Road, so long as they were exclusively used for transportation improvements within the Dulles Corridor. On appeal, plaintiffs argued that the toll paid by users of the Dulles Toll Road was an illegal tax.
Before reaching the substance of plaintiffs’ argument, the Fourth Circuit addressed the question of standing. The Fourth Circuit concluded that the plaintiffs did have standing because they suffered the concrete harm of having paid what were, in their view, inflated tolls. They sought tangible and particularized relief: they wanted their money back. Moreover, they were not so numerous, and their grievance was not so attenuated.
The substance of plaintiffs’ argument was based on the premise that, under the Virginia Constitution, the state legislature is unable to delegate its taxing authority to an independent body, like MWAA. The Fourth Circuit therefore addressed what fund-raising powers the General Assembly could have delegated to the MWAA under Virginia law, and whether the toll charged was even a tax.
To determine whether a given exaction is a tax, Virginia courts ask whether it is a bona fide fee-for-service. The “fee-for-service” inquiry does not focus narrowly on whether the fee is calculated to defray just the costs actually incurred by the user. Rather, Virginia law requires only that there be a “reasonable correlation between the benefits of the service provided and burdens of the fee paid.”
According to the Fourth Circuit, the tolls paid by drivers on the Dulles Toll Road are not taxes for precisely the reasons articulated by the Virginia Supreme Court in Elizabeth River Crossings. First, the Court reasoned that it was clear that toll road users pay the tolls in exchange for a particularized benefit not shared by the general public. The planned expansion adds multiple stops both before and after the airport, on a route that closely follows the Dulles Toll Road for the evident purpose of serving the commuters who normally travel that route. Second, the Fourth Circuit explained that drivers were not compelled by government to pay the tolls or accept the benefits of the Project facilities. The fee is both voluntarily paid and the resulting benefits are voluntarily received. Nobody is forced to drive on the Dulles Road and, therefore, the toll is voluntarily paid. Funds raised for the Metrorail expansion project directly benefit only travelers who use the Dulles Corridor, not the community as a whole. Therefore, receipt of the benefit is voluntary in that it only accrues to those who have chosen to travel in the corridor. Finally, the Court decided that the tolls were collected solely to fund the Project. The Metrorail expansion is part of the same project as the Dulles Toll Road. They run through the same narrow transit corridor, serve many of the same areas, and will benefit many of the same commuters. Because they are parts of the same project, tolls charged on the Dulles Toll Road are not transformed into taxes merely by being used to fund the Metrorail expansion. No evidence exists that the surplus tolls were diverted outside those confines or are treated, in any sense, as general revenue.
– Sarah Bishop
United States v. Under Seal, No. 13-4267
Decided: December 13, 2013
The Fourth Circuit affirmed the district court and held that the required records doctrine superseded the Fifth Amendment privilege against self-incrimination and required production of certain foreign bank records.
John and Jane Doe (collectively “Appellants”) were targeted under a grand jury investigation to determine whether they used secret Swiss bank accounts to conceal assets and income from the IRS. Evidence presented to the grand jury indicated that, in 2008, John Doe opened an account at a Swiss investment bank in the name of a corporation, the name of which was redacted. The Swiss firm Beck Verwaltungen AG (“Beck”) managed the account, valued in excess of $2.3 million. In January 2009, Doe closed the account and transferred $1.5 million to Beck’s account at a different Swiss private bank. In May 2012, Appellants were served grand jury subpoenas. The subpoena requested that Appellants produce certain foreign bank account records that they were required to keep pursuant to Treasury Department regulations governing offshore banking. Appellants, however, citing the Fifth Amendment, moved to quash the subpoenas. The district court denied Appellants’ motion, finding that the required records doctrine overrode Appellants’ Fifth Amendment privilege against self-incrimination. Appellants refused to comply with the district court’s order to produce the requested records. The district court, therefore, held Appellants in civil contempt. Appellants filed this appeal and the district court stayed execution of the contempt order until this matter was adjudicated.
On appeal, the Fourth Circuit first noted that the Supreme Court has held that the privilege against self-incrimination does not bar the government from imposing recordkeeping and inspection requirements as part of a valid regulatory scheme. It then summarized the requirements of the required records doctrine as follows: (1) the purposes of the United States’ inquiry must be essentially regulatory; (2) information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and (3) the records themselves must have assumed public aspects which render them at least analogous to public document. Noting that it was joining in the consensus of the courts of appeals to have considered the issue, the court then concluded that the records required to be maintained under the Bank Secrecy Act (“BSA”) fall within the required records doctrine. In so holding, the court addressed, in turn, Appellants’ argument that the BSA record keeping provisions failed to meet each requirement under the required records doctrine, primarily focusing on the first requirement—that the records be “essentially regulatory.” Appellants argued that the BSA’s recordkeeping provision is criminal, rather than regulatory, in nature. The court, however, rejected this contention and found that the BSA’s recordkeeping requirements do not apply exclusively to those engaged in criminal activity. Rather, the requirements serve many purposes, a number of which are unrelated to criminal law enforcement. Therefore, it held that the requirements were in fact “essentially regulatory.”
-W. Ryan Nichols
Philip Morris USA, Inc. v. Vilsack, No. 12-2498
Decided: November 20, 2013
The Fourth Circuit held that (1) there is no clear statement of Congressional intent in the Fair and Equitable Tobacco Reform Act (FETRA), 7 U.S.C. §§ 518 et seq., regarding the applicable excise tax rates to be used in determining the total national FETRA assessment paid by the collective manufacturers of each class of tobacco product, and that (2) the United States Department of Agriculture (USDA) permissibly interpreted FETRA by using only 2003 tax rates to determine this assessment allocation. The Fourth Circuit therefore affirmed the United States District Court for the Eastern District of Virginia’s decision to grant the USDA’s motion for summary judgment.
FETRA created the Tobacco Trust Fund (the Fund), which funds “a temporary system of periodic payments to tobacco growers and other holders of tobacco quotas.” The Fund is administered by the Commodity Credit Corporation (CCC), which is funded with CCC assets and assessments taken from manufacturers of tobacco products. Under FETRA, the USDA—which administers the CCC—must annually determine the total funds that must be raised through the assessments (the initial allocations). This determination involved two steps: determining the total national assessment to be paid by the collective manufacturers of each class of tobacco product (inter-class allocations)—including cigarettes and cigars—and determining the individual liability of each manufacturer. FETRA provides that the assessment burden for each class—measured in percentages of the total nation assessment—must be adjusted “to reflect changes in the share of gross domestic volume” held by each class of tobacco product. FETRA includes specific percentages of the initial allocations to be applied to the respective classes of tobacco products in fiscal year 2005, 7 U.S.C. § 518d(c)(1), and the USDA determined that, to calculate these allocations, Congress converted the applicable class volumes into dollars “by multiplying each class’s volume by the maximum excise tax rate applicable to that class.” However, FETRA does not actually direct the USDA to use this method of calculating initial allocations.
Congress subsequently passed the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA), which increased excise taxes on each class of tobacco product and equalized the tax rates for small cigars and cigarettes. The equalization resulted in a much larger relative increase in tax rates for cigars than cigarettes. Because the USDA’s regulations implied that inter-class allocations would be determined with current tax rates, CHIPRA would have increased the liability of the cigar industry and decreased the liability of the cigarette industry. However, the USDA subsequently promulgated a technical amendment to 7 C.F.R. § 1463.5, in which the USDA stated it would continue to apply 2003 tax rates—which Congress used to set the initial allocations for fiscal year 2005.
Philip Morris contented that, under the new calculation framework, it would experience higher assessments than it would have if the USDA had applied current tax rates. After unsuccessfully appealing the assessment and pursuing rulemaking from the USDA, Philip Morris brought the present lawsuit, arguing that the technical amendment was inconsistent with FETRA. The district court granted summary judgment to the USDA, finding that the USDA calculation method “faithfully adjust[s] the percentage of the total amount required to be assessed against each class of tobacco product” and “reasonably reflects the congressional intent underlying FETRA.” Philip Morris appealed.
Applying the two-part test from Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, the Fourth Circuit first determined that Congress had not “directly spoken to the precise question at issue.” The Fourth Circuit noted that FETRA does not direct the USDA to use any specific tax rate to calculate the inter-class allocations. The Fourth Circuit also concluded that Philip Morris’s various arguments did not meet its burden of proving the USDA’s decision “contrary to the unambiguously expressed intent of Congress.” The Fourth Circuit then determined that the USDA’s interpretation of FETRA was reasonable, given Congress’s intent in passing it. The Fourth Circuit stated that “there is no evidence that Congress intended for FETRA to do anything more than provide a workable methodology for the allocation of assessments across manufactures of tobacco product,” and found that Philip Morris could not provide anything more than a plausible alternative reading of the applicable statutes.
– Stephen Sutherland
Johnson v. United States, No. 12-1739
Decided: November 5, 2013
The Fourth Circuit affirmed the district court’s grant of summary judgment against Mary Johnson (“Mrs. Johnson”) and her husband, Ford Johnson (“Mr. Johnson”), individually, to reduce to judgment the remaining balance of the trust fund recovery penalties assessed against them.
Mr. Johnson formed a non-profit corporation, Koba Institute, Inc. (“Koba Institute”) in 1969 to perform various government contracts in conjunction with Koba Associates, Inc. (“Koba Associates”), a for-profit corporation that he owned and managed. Koba Associates failed to pay its payroll taxes in the mid-1990s and the IRS assessed trust fund recovery penalties against Mr. Johnson. This ultimately led Mr. Johnson to close Koba Associates and severely limited his ability to obtain credit for Koba Institute. Subsequently, Mr. and Mrs. Johnson restructured Koba Institute so as to facilitate its continued existence. As part of that restructuring, in 1998, Koba Institute converted to a for-profit corporation under Maryland law, with Mrs. Johnson as its sole shareholder, chair of its board of directors, and president. Koba Institute’s payroll account expressly provided that Mrs. Johnson had the power to sign singularly on that account. This enabled Koba Institute to operate unencumbered by a lien. However, because Mrs. Johnson was the primary caregiver of the couple’s children, Mrs. Johnson delegated and entrusted her authority in the corporation to Mr. Johnson, and thereafter elected him president of Koba Institute in 2001 despite a contrary bylaw requirement. Mrs. Johnson’s actual involvement at Koba Institute was limited during the period between 2001 and 2004, only coming to work once per month. Yet, she received a significant annual salary, as well as a corporate car and cell phone. Given her limited involvement in the corporations daily operation, Mrs. Johnson only signed checks that Mr. Johnson had already approved.
Near the end of 2004, however, Mrs. Johnson received a notice from the IRS that Koba Institute had not paid its payroll taxes for several quarters from 2001 to 2004. Upon learning this, Mrs. Johnson fired the finance director and directed Mr. Johnson to personally handle all future tax payments and to provide her with visual proof of all withholding tax payment made subsequently. Additionally, with regard to the payroll account, Mrs. Johnson no longer required instruction from Mr. Johnson before writing checks herself from the payroll account for payment of the taxes. Koba Institute then began paying its post-2004 payroll taxes in full. However, it did not pay the outstanding delinquent payroll taxes although it continued to pay its other business debts. Subsequently, the IRS assessed trust fund recovery penalties against Mr. and Mrs. Johnson individually, pursuant to 26 U.S.C. § 6672. On March 30, 2009, Mrs. Johnson filed suit seeking a refund of the portion of the penalty that she had paid, asserting that the assessment against her was erroneous. The Government filed a counterclaim against both of the Johnsons in order to reduce its assessments to judgment. The district court granted the Government’s motion for summary judgment. This appeal followed.
On appeal, the Fourth Circuit first summarily affirmed the district court’s judgment with respect to Mr. Johnson. Next, it addressed Mrs. Johnson’s contention that the district court erred in granting summary judgment against her because she was not a “person responsible” for Koba Institute’s withholding tax payments, and, alternatively, because she did not “willfully” fail to pay over those taxes. The court, however, disagreed. Finding that, despite delegating her authority to Mr. Johnson, Mrs. Johnson remained a “responsible person” because she maintained effective power to pay the trust fund taxes and to direct the corporation’s business choices during the relevant tax periods as evidenced by her conduct upon receiving notice of delinquency from the IRS. Having found that Mrs. Johnson was a “responsible person,” the court then found that her conduct was “willful” because Koba Institute continued to make payments to other creditors using unencumbered funds following Mrs. Johnson’s receipt of the IRS notice while the payroll taxes for numerous quarters during the relevant tax period remained unpaid. Consequently, the Fourth Circuit affirmed.
-W. Ryan Nichols
United States v. Woods, No. 11-4817
Decided: March 18, 2013
Woods was convicted of numerous charges arising from a tax fraud scheme. On appeal, he argued that his trial was prejudiced by three errors: (1) that the district court improperly restricted his constitutional right to testify in his own defense, (2) that the prosecutor committed reversible error by making an improper statement during closing argument, and (3) that the district court’s instructions to the jury were improper. The Court of Appeals found that, while two errors occurred during the Woods’ trial, neither constituted reversible error. As such, the Court affirmed Woods’ convictions.
Woods first argued that he was effectively denied his constitutional right to testify in his own defense because the district court repeatedly sustained the government’s objections during his testimony and otherwise limited his presentation of evidence. The Court of Appeals reviewed the entire record and concluded that the district court did not abuse its discretion in its evidentiary rulings, did not act arbitrarily, and did not impose limitations on Woods’ testimony that were disproportionate to the legitimate evidentiary and trial management concerns. As such, the Court held that the district court did not deprive Woods of his constitutional right to testify in his own defense.
Woods also alleged that he was prejudiced by an improper statement that the prosecutor made during closing argument; specifically, by the prosecutor’s argument that Woods had lied under oath. The Court first noted that since Woods did not object to the prosecutor’s statement at trial, plain error review applied, under which Woods must show that the district court committed plain error and that the error affected his substantial rights thereby impacting the outcome of the trial. The Court then reviewed the record and found that, in light of the volume of evidence of Woods’ guilt, the one improper statement by the prosecutor did not violate Woods’ substantial rights and thus did not warrant reversal of his convictions.
Woods also contested the jury charge on the grounds that the district court improperly declined to include his requested character evidence instruction and improperly instructed the jury on the statutory elements of an offense. The Court of Appeals rejected these arguments finding that, in light of the strength of the government’s case in comparison to the defense evidence, the jury would have returned guilty verdicts with or without the requested character instruction, and that, considering the jury charge as a whole, the instructions accurately stated the statutory elements of the offense at issue.
Finally, Woods argued that his convictions should be vacated because the cumulative effect of the alleged errors prejudiced the outcome of his trial. The Court of Appeals rejected this argument holding that it could not conclude that the two errors that occurred during Woods’ trial prejudiced his case so as to justify the unusual remedy of reversal based on cumulative error.
In summary, the Court of Appeals found that Woods’ trial was affected by two errors, but held that those errors, when considered both individually and cumulatively, do not warrant reversal of Woods’ convictions.
– Kassandra Moore
Municipal Association v. USAA General Indemnity, Nos. 11-2220, 2221, 222, and 2223
Decided: March 1, 2013
The Municipal Association of South Carolina (the “MASC”) sought a declaration in district court that South Carolina municipalities are entitled to assess “municipal business taxes” against insurance companies. The taxes are measured by the total flood insurance premiums collected in the particular municipality by insurance companies under an arrangement with the Federal Emergency Management Agency (“FEMA”). Various insurance companies filed motions for summary judgment challenging the declaratory judgment. The district court denied the motions. On appeal, the Fourth Circuit Court of Appeals held that the taxes violated principles of sovereign immunity. Therefore, the court reversed the district’s court’s decision.
The MASC consists of almost all of the municipalities in South Carolina, and one of its primary duties is to collects business license taxes from insurance companies that conduct business within the participating municipalities. The business license tax imposed on each insurance company is two percent of the gross premiums received by the insurance company in the prior calendar year in a particular municipality. The party-insurance companies write and sell policies in South Carolina, and they offer and collect premiums on Standard Flood Insurance Policies (“SFIPs”) pursuant to the FEMA National Flood Insurance Program (the “NFIP”). At the district court proceedings, the insurance companies argued that the municipal business taxes would violate principles of sovereign immunity and preemption because the flood insurance premiums were federal property. The district court disagreed, and the insurance companies appealed.
On appeal, the Fourth Circuit held that the flood insurance premiums collected by the insurance companies were federal property and therefore could not be taxed by the state of South Carolina. The court also held that since the insurance companies participated in the NFIP, they are federal instrumentalities are therefore immune from taxation. Therefore, the court reversed the district court’s denial of the insurance companies’ summary judgment motions.
Hire Order Ltd. v. Marianos, No. 11-1802
Decided: October 18, 2012
The Fourth Circuit Court of Appeals affirmed the district court’s judgment that granted the Government’s motion to dismiss a challenge to Revenue Ruling 69-59, which limits firearms being sold at out-of-state gun shows.
Hire Order Ltd. is in the business of dealing firearms and has been doing so in Virginia since 2008. Privott is also in the firearm business and resides in North Carolina. Both attended the Nation’s Gun Show in Virginia, and both refrained from transferring firearms to one another because of Revenue Ruling 69-59. Revenue Ruling 69-59 prohibits the sale of firearms at out-of-state gun shows. Hire Order and Privott brought an action challenging the Revenue Ruling’s interpretation of the Gun Control Act. Defendant moved to dismiss the complaint, and the district court granted the motion because the six-year statute of limitations barred the suit. The district court did not rule on the merits of the case.
The court of appeals noted that Hire Order and Privott made no claim that the district court relied upon the wrong statute of limitations, but that the district court erred in applying the date on which their claim accrued. In a facial challenge to an agency ruling the limitations period begins to run when the regulation is published by that agency. Revenue Ruling 69-59 was published in 1969, therefore the limitations period ran long before plaintiffs filed this cause of action.
United States v. Jinwright, No. 10-5289 and No. 10-5290
Decided: June 22, 2012
The Fourth Circuit Court of Appeals affirmed the convictions of Anthony and Harriet Jinwright, former co-pastors of Greater Salem Church (“GSC”) in North Carolina, for conspiracy to defraud the United States and tax evasion. Mr. Jinwright served as senior pastor of GSC; his wife, Mrs. Jinwright, played an active role in church life, but only began drawing a salary in 2000, 19 years into the Jinwright’s church leadership. Between 2001 and 2007, GSC provided Mr. Jinwright with benefits outside his salary including housing allowances of between $130,000 and $160,000 a year, travel allowances, payments for his children’s tuition, use of a luxury car leased by the church, and an additional vehicle allowance. He received annual bonuses of $35,000 to $50,000 and a separate Christmas bonus. Additionally, he was reimbursed for unsubstantiated business expenses. Mr. Jinwright’s total compensation for 2001 to 2007 totaled nearly $3.9 million. During the same timeframe, Mrs. Jinwright received similar compensation totaling nearly $1 million. The Jinwrights also established an organization known as A.L. Jinwright Ministries, Inc. (“ALJM”) purportedly to receive income for their outside speaking engagements. However, GSC paid the operating expenses and the defendants kept the income. The IRS Revenue Agent who investigated their case testified that the defendants understated their income by $2,486, 771 between 2002 and 2007, resulting in a tax deficiency of $664,352.
On appeal, the defendants challenged the jury instructions related to willful blindness. The doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant “deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances.” Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068-69 (2011). Reviewing the evidence presented at trial, the court held the evidence supported the instructions even under the standard laid out by the Supreme Court in Global-Tech which was decided since the Jinwrights’ convictions.
The defendants also challenged the jury instructions regarding the tax treatment of payments from an employer to an employee. GSC employees testified that certain payments from the church to the Jinwrights were gifts. The court gave the jury a clarifying instruction that payments from employer to employee are income and such payments are not gifts under the IRS Code and limited the Jinwrights’ ability to cross-examine the witnesses about this subject. The Jinwrights contended that this impermissibly shifted the burden of proof to them. However, the Court of Appeals applied the principle used in other circuits that in criminal tax cases the burden is on the defendant to prove that he had deductions not in his return once the Government establishes unreported income. And, the decision to limit the cross examination was reasonable in light of potential confusion to the jury.
Mr. and Mrs. Jinwright also contended that the court erred in the calculation of the sentencing and restitution, but reviewing the relevant precedent, the court affirmed the sentence and amount of restitution.