Craft & Sheppard's Supreme Court Review

Taxes

The Internal Revenue Code (IRC) allows individuals to subtract from their taxable income certain itemized deductions (below-the-line) that exceed 2% of adjusted gross income (AGI). A trust may claim those deductions subject to the 2% floor, except that costs incurred in administering the trust, which would not have been incurred if the property were not held by a trust, may be deducted without regard to the floor.  For individuals, investment advisory fees are subject to the 2% floor.  In Knight v. Comm'r, the trust lost.  When investment advisory fees are incurred by a trust, they, too, are subject to the 2% floor.   In U.S. v. Clintwood Elkhorn Mining Co., the Court held that taxpayers seeking a refund of taxes unlawfully assessed under the Constitution’s Export Clause must comply with the IRC’s tax refund procedures, which requires filing an administrative claim with the IRS and limits refund suits to three years.  The Court rejected the taxpayers’ plea to permit recovery of taxes up to six years via the Tucker Act.  In Boulware v. U.S., the Court considered criminal tax liability.  To willfully attempt to evade federal tax is a felony.  Tax evasion requires a tax deficiency and an affirmative act to evade or attempt to evade a tax.  The IRC, 26 U.S.C. §§ 301, 316(a), allows treating certain distributions as returns of capital.  A return of capital is nontaxable to the taxpayer.  A taxpayer charged with criminal tax evasion may defend by a claim a return-of-capital treatment without showing he or the corporation intended a capital return when the distribution occurred.  Economic reality, not subjective intent, dictated tax treatment.