A Constitutional Commitment to Access to Literacy: Bridging the Chasm Between Negative and Positive Rights

EVAN CAMINKER

Michigan Law dean emeritus Evan Caminker discusses a decision by the U.S. Court of Appeals for the Sixth Circuit, in which that court held that the Fourteenth Amendment’s Due Process Clause secures schoolchildren a fundamental right to a “basic minimum education” that “can plausibly impart literacy.” Caminker—one of the co-counsel for the plaintiffs in that case—explains why the decision is so remarkable and why the supposed dichotomy between positive and negative rights is not as stark as canonically claimed.

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Taylor Lohmeyer Law Firm. P.L.L.C. v. United States

Court: US Court of Appeals for the Fifth Circuit

Docket: 19-50506

Opinion Date: April 24, 2020

Judge: Rhesa Hawkins Barksdale

Areas of Law: Civil Procedure, Legal Ethics, Tax Law

The IRS served a John Doe summons on the Texas Law Firm, which provides tax-planning advice, seeking documents for “U.S. taxpayers," who, during specified years, used the Firm's services "to acquire, establish, maintain, operate, or control" a foreign financial account, asset, or entity or any foreign or domestic financial account or assets in the name of such foreign entity. A John Doe summons, described in 26 U.S.C. 7609(c)(1), does not identify the person with respect to whose liability the summons is issued. The government made the required showings that the summons relates to the investigation of a particular person or ascertainable group or class, there is a reasonable basis for believing that such person or group or class may fail or may have failed to comply with any provision of internal revenue law, and the information sought and the identity of the person or persons is not readily available from other sources. The Firm moved to quash, claiming that, despite the general rule a lawyer’s clients’ identities are not covered by the attorney-client privilege, an exception exists where disclosure would result in the disclosure of confidential communication. The Fifth Circuit affirmed in favor of the government. Blanket assertions of privilege are disfavored. The Firm's clients’ identities are not connected inextricably with privileged communication. If the Firm wishes to assert privilege as to any responsive documents, it may do so, using a privilege log to detail the foundation for each claim.

Barse v. United States

Court: US Court of Appeals for the Eighth Circuit

Docket: 19-1543

Opinion Date: April 27, 2020

Judge: Grasz

Areas of Law: Tax Law

After C&W failed to remit employment taxes, the IRS assessed the balance owed against C&W's former's owner. C&W's former owner filed suit alleging that the IRS misallocated funds it had levied from C&W, leaving him personally liable for the outstanding taxes. The Eighth Circuit affirmed the district court's dismissal of the complaint based on lack of subject matter jurisdiction. The court held that because the owner argued that his payment was made in 2006 when the IRS allegedly misallocated levied funds, his attempted administrative claim in 2015 was more than two years after the tax was paid. Therefore, the owner's claim was untimely and the United States retains its sovereign immunity.

Wells Fargo & Company v. United States

Court: US Court of Appeals for the Eighth Circuit

Docket: 17-3578

Opinion Date: April 24, 2020

Judge: Bobby E. Shepherd

Areas of Law: Tax Law

Wells Fargo, a U.S. corporation, entered into a structured trust advantaged repackaged securities transaction (STARS) with Barclays, a United Kingdom corporation. Wells Fargo asserts its purpose was to borrow money at a favorable interest rate, to diversify its funding sources, to reduce its liquidity risk, and to provide a stable source of funding for five years. The government claimed that STARS was an unlawful tax avoidance scheme, designed to exploit the differences between the tax laws of the two countries and generate U.S. tax credits for a foreign tax that Wells Fargo did not, in substance, pay. Wells Fargo claimed foreign-tax credits on its 2003 federal tax return arising from STARS. The IRS disallowed those credits and notified Wells Fargo that it owed additional taxes. Wells Fargo paid the resulting deficiency and sued to obtain a refund. The government sought to impose a “negligence penalty” as an offset defense because Wells Fargo underpaid its 2003 taxes after claiming this credit. The Eighth Circuit affirmed that Wells Fargo was not entitled to a tax credit and was liable for a “negligence penalty.” The "sham-transaction" or "economic-substance" doctrine allows the IRS and courts “to distinguish between structuring a real transaction in a particular way to obtain a tax benefit, which is legitimate, and creating a transaction to generate a tax benefit, which is illegitimate.” STARS’s trust component had no real potential for profit outside of its tax implications and Wells Fargo had no valid purpose other than tax considerations.

Badgley v. United States

Court: US Court of Appeals for the Ninth Circuit

Docket: 18-16053

Opinion Date: April 28, 2020

Judge: Lucero

Areas of Law: Tax Law, Trusts & Estates

Under 26 U.S.C. 2036(a)(1), a grantor's interest in a grantor-retained annuity trust (GRAT) is a sufficient "string" that requires the property interest to be included in the gross estate. The Ninth Circuit affirmed the district court's grant of summary judgment to the IRS in an action brought by plaintiff, challenging the inclusion of her mother's GRAT in a gross estate for purposes of the estate tax. The panel explained that the annuity flowing from a GRAT falls within the class intended to be treated as substitutes for wills by section 2036(a)(1). In this case, the panel held that the grantor retains enjoyment of a GRAT and thus it is properly included in the gross estate. Finally, even if plaintiff's challenges to 26 C.F.R. § 20.2036-1(c)(2), which includes the formula the IRS uses to calculate the portion of the property includable under section 2036(a) were not waived, the formula would not apply in this case.

Walby v. United States

Court: US Court of Appeals for the Federal Circuit

Docket: 19-2406

Opinion Date: April 29, 2020

Judge: O'Malley

Areas of Law: Tax Law

Walby was born in Michigan, and, in 2014-2018, lived and worked in Michigan. For the 2014 taxable year, Walby’s employer, Baker, withheld $9,751.60 in federal income taxes. In 2015, Walby claimed exemption from all withholdings and executed an “Affidavit of Citizenship,” which she submitted to the State Department, declaring that she was a sovereign citizen of the state of Michigan and, “because she was not restricted by the 14th Amendment ... she was not a United States citizen thereunder but rather a nonresident alien not subject to income taxes.” In 2016, at the direction of the IRS, Baker resumed withholding. Walby did not file federal tax returns for 2014–2018 but, in 2019, filed claims for refunds of the taxes withheld from her 2014 and 2016–2018 paychecks. The Federal Circuit affirmed the dismissal of Walby’s tax refund lawsuit concerning her 2014 return as untimely. A timely administrative refund claim must be filed within two years of the taxes being paid. The claims for the years 2016–2018 were timely but were properly dismissed as meritless. Walby could not establish a loss of U.S. nationality and even if she were a nonresident alien, Walby qualified as a U.S. resident for tax purposes under I.R.C. 7701 by virtue of her substantial presence. The court rejected a request for sanctions.

County Inmate Telephone Service Cases

Court: California Courts of Appeal

Docket: B291341(Second Appellate District)

Opinion Date: April 28, 2020

Judge: Elizabeth A. Grimes

Areas of Law: Tax Law

Inmates in county jails in nine California counties challenged the exorbitant commissions paid by telecommunications companies to the nine counties under contracts giving the telecommunications companies the exclusive right to provide telephone service for the inmates. The inmates contend that the fees are unlawful taxes under Proposition 26. The Court of Appeal affirmed the trial court's decision sustaining a demurrer by the counties without leave to amend, because the inmates do not have standing to contend the commissions are an unconstitutional tax. The court explained that no precedents support the inmates' claim that a consumer who pays charges to a third party vendor—including one that has inflated its prices to recover the cost of a tax it pays to a local government—has standing to seek a refund of those charges from the taxing authority. Finally, the court rejected the inmates' claims under Government Code section 11135 and the Bane Act.