Articles Posted in U.S. Court of Appeals for the First Circuit

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After a merger in 1995, William and Patricia Cavallaro received 38 shares of stock in Camelot, the merged company. Their three sons received 54 shares each. When Camelot was subsequently acquired, the Cavallaros received a total of $10,830,000, and each son received $15,390,000. The IRS issued notices of deficiency to the Cavallaros for tax year 1995, determining that Camelot had a pre-merger value of $0 and that when the merger occurred, William and Patricia each made a taxable gift of $23,085,000 to their sons. Therefore, each of the Cavallaros incurred an increase in tax liability in the amount of $12,696,750. The Tax Court ultimately concluded that William owed $7,652,980 and that Patricia owed $8,009,202. The Cavallaros appealed, arguing that the Tax Court erred by failing to shift the burden of proof to the Commissioner. The First Circuit affirmed in part, reversed in part, and remanded, holding (1) the Tax Court correctly determined that the burden of proof was on the Cavallaros; but (2) the Tax Court misstated the nature of the Cavallaros’ burden of proof. Remanded. View "Cavallaro v. Koskinen" on Justia Law

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Pursuant to a merger agreement, Sellers agreed to indemnity Buyer for the tax liabilities of the company being sold. The tax bills for indemnification purposes, however, were to be calculated as if certain deductions were not going be taken when both parties knew they would be. These deductions reduced the company’s tax liability to zero. After the merger, the company’s tax prepayments and credits were refunded in their entirety, thus benefitting Buyer. Because the calculation of the indemnity obligation was based on a counterfactual measure of tax liability, that calculation resulted in Sellers’ owing Buyer a substantial amount of liability. Buyer filed this complaint asserting claims for declaratory relief and breach of contract. At issue in this case was whether the prepayments and credits affected the tax indemnification obligation of Sellers. The district court entered judgment on the pleadings in favor of Sellers, concluding that the indemnification provision unambiguously required that the indemnity obligation be offset by the amount of the refunded prepayments and credits. The First Circuit vacated the judgment of the district court, holding that the indemnification provision was ambiguous as to how the tax refunds affect the indemnification obligation of Sellers. Remanded. View "Mercury Sys., Inc. v. S’holder Representative Servs., Inc." on Justia Law