Monday, June 11, 2018
Tax reminds me of the children’s poem that starts “I have a little shadow.” Tax is the shadow (sometimes not so little) that follows all of us throughout life. Put another way, every activity in life throws a tax shadow. And life is not simple. I submit that much of tax complexity is a reflection of life’s complexity, including people’s relationships with one another. And we all know how relationships can get complicated. Last week’s case of Joseph Engesser v. Commissioner, TC Summary Opinion 2018-29 (June 4, 2018), not only illustrates this idea, but it also shows how certain parts of the Tax Code’s complexity hits lower income taxpayers particularly hard. They must deal with one of the gnarliest tax issues in the Code: §152, the section that defines who is a dependent.
June 11, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, June 4, 2018
Four cases from the last couple of weeks illustrate the continued fallout from the Tax Court’s recent about-face in its reading of §6751(b)(1). Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)(commonly called Graev III because it was the Tax Court’s third published opinion regarding Mr. Graev’s case). The good folks at Procedurally Taxing have been following Graev III’s impact here, here and here (to name a few). These four cases add a new wrinkle.
In all four cases, the Service had failed to produce evidence in the initial trial that it had complied with §6751(b)(1). And for good reason. All four cases had gone to trial before the Court issued its opinion in Graev III. At the time of trial the Tax Court’s fully reviewed position on §6751(b)(1) was that consideration of penalty approval was premature when contesting an NOD.
In all four cases the Service asked the Tax Court to re-open the record to allow it to introduce the theretofore-unrequired-but-now-required evidence. The cases were heard by three different Tax Court judges. In two cases, the Court allowed the record to be reopened and in two cases the Court refused. Taken together, the cases illustrate how the fallout from the Tax Court’s Graev decision continues to elevate procedure over substance. As a result, similarly situated taxpayers receive very different outcomes based both on which IRS attorneys work the cases, what information the attorneys have, perhaps most importantly, which Tax Court judge decides. Four cases, three judges, two opposing outcomes, all in one discussion, waiting for you below the fold.
June 4, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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The 4th Annual Texas Tax Faculty Workshop at Texas Tech on June 1st went splendidly with robust discussion fueled by plenty of caffeine and carbs. I thought it would be fun to post a picture of the 11 of us when ended up being able to attend. After all, tax profs are usually just names on a page. But we are persons too! Here's proof. From left to right are: Bret Wells (UH); Bryan Camp (Texas Tech); Denney Wright (UH and NYU); Andy Morris (A&M); Bruce McGovern (South Texas); Cal Johnson (UT); Terri Helge (A&M) standing behind Dennis Drapkin (SMU); Bill Byrnes (A&M)(giving thumbs up); Steve Black (Texas Tech) standing behind Jack Manhire (A&M).
June 4, 2018 in Bryan Camp, Conferences, Scholarship, Tax, Tax Profs | Permalink
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Friday, June 1, 2018
A baker's dozen tax professors are gathering in Lubbock, Texas, at Texas Tech University School of Law today for the fourth annual Texas Tax Faculty Workshop. Susan Morse (UT) started the gatherings---you guessed it---four years ago. Here is the agenda for this year:
Session #1: Paper from Terri Helge (A&M) (tax exempt orgs)
Lead Commentators: Dennis Drapkin (SMU), Alyson Outenreath (TTU)
Session 2: Paper from Jack Manhire (A&M) (tax compliance)
Lead Commentator: Steve Black (TTU)
Session #3: Paper from Brett Wells (UH) (§355)
Lead Commentators: Bruce McGovern (South Texas), Mark Cochran (St. Mary's)
Session #4: Open Discussion of Current Projects
Session #5: Paper from Cal Johnson (UT) (tax and economics)
Lead Commentator: William Byrnes
Session #6: Paper from Andy Morriss (A&M) (English tax rule)
Lead Commentator: Jack Manhire (A&M)
For abstracts of each paper, see below the fold.
June 1, 2018 in Bryan Camp, Conferences, Scholarship, Tax, Tax Profs | Permalink
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Tuesday, May 29, 2018
A truism is a saying that is so commonly accepted as true that it needs no further explanation. For example: "never get involved in a land war in Asia.” Today’s lesson shows us a tax truism: never take tax advice from the person selling you the deal. In RB-1 Investment Partners, Eric Reinhart, Tax Matters Partner v. Commissioner, T.C. Memo. 2018-64 (May 14, 2018), the taxpayer received millions of dollars from the sale of a business and invested in a complex transaction that the promoter promised would magically wipe away the gain with no actual economic loss (except fees). When the taxpayer got caught, it conceded the merits, but attempted to avoid imposition of a 40% penalty under §6662 by arguing reasonable reliance on an opinion letter from the law firm promoting the scheme. I explain below the fold the taxpayer’s argument, why it failed, and what we can learn.
May 29, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, May 21, 2018
The United States Legal system is as hard to learn as the English language. One of the more difficult aspects of the system is the existence and interplay of 51 sovereignties. The Tax Code is not immune from that difficulty. Even though federal tax is governed in the first instance by federal law, state law can still be quite important to the resolution of a federal tax controversy, whether the dispute is about the amount of tax owed or the collection of an undisputed amount. The recent case of Vincent C. Hamilton and Stephanie Hamilton v. Commissioner, T.C. Memo. 2018-62 (May 8, 2018) teaches a lesson about the role of state law in determining a federal tax liability.
May 21, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, May 14, 2018
Justice Holmes famously said that people “must turn square corners when they deal with the government.” It is no coincidence that he said that in this 1920 tax case. Tax law has many sharp corners that frustrate both taxpayers and the IRS alike. For an example of where the sharp corners of procedure caused the IRS to lose a $10 million assessment, see Philadelphia-Reading Corp. v. Beck, 676 F.2d 1159 (3rd Cir. 1982).
But equity can sand down some of those sharp corners. Last week's post looked at the innocent spouse case of the Commie L. Minton a.k.a. Connie L. Keeney v. Commissioner, T.C. Memo. 2018-15 (Feb. 5, 2018). That case illustrated how Congress had inserted a statutory command for the IRS and the Tax Court to use equity to relieve a spouse of an otherwise jointly owed liability. This week, the case of Emery Celli Cuti Brinckerhoff & Abady, P.C. v. Commissioner, T.C. Memo. 2018-55 (Apr. 24, 2018), teaches another lesson about equity in the Tax Law. Here, there is no Congressional command to use equity. Instead, the Tax Court uses a long-standing principle of equity created and apply by the courts. It is called equitable recoupment.
May 14, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, May 7, 2018
For various reasons that legal historians can drone on about for hours, the United States legal system started out in 1789 as not one system of courts but two systems of courts. One was system was made up of courts of law, staffed by folks with titles like “Judge” or “Justice.” The other system was made up of courts of equity, staffed by folks with titles like “Chancellor” or “Vice Chancellor.” The basic idea was that each system had its own set of powers and you could only get to the equity courts if the law courts lacked the power to give you the relief you sought.
This was a really awkward relationship and a constant source of embarrassment and confusion. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules.
One awkwardness was that often the same individual would wear both hats. For example, you might file an action at law and have proceedings before the “Judge” sitting as a court of law. The Judge had power to award damages but did not have power to order depositions. So you would need to file a completely separate proceeding in equity, seeking a “Bill of Discovery” from the Vice Chancellor because the Vice Chancellor had the power to order depositions (but had no power to award damages). But you would file that in the same building and be heard by the same individual. So one day the “Judge” would say “I have no power to order discovery” but the next day the very same individual, sitting as “Vice Chancellor,” would suddenly have the power to grant your Bill.
I tell you all this because although the two systems have been merged in federal courts since 1938 (although some states, such as Delaware and Mississippi, keep the two systems separate) federal judges still tend to compartmentalize the two. The Tax Court in particular has wrestled with the role of equity from its inception. Two recent Tax Court cases teach useful lessons about the role of equity in Tax Court proceedings. This week I will look at the innocent spouse case of the Connie L. Minton a.k.a. Connie L. Keeney v. Commissioner, T.C. Memo. 2018-15 (Feb. 5, 2018). Next week I will discuss the very interesting case of Emery Celli Cuti Brinckerhoff & Abady, P.C. v. Commissioner, T.C. Memo 2018-55 (Apr. 24, 2018), a case that will introduce us to the doctrine of equitable recoupment.
May 7, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, April 30, 2018
One of the first clients I had after graduating from law school in 1987 was a fellow in the construction business. I forget what dispute brought him to us, but I will never forget the “records” he brought: a truckload of paper bags. Turns out that each year he would set a paper grocery bag on the floor and, as the year went by, he would dump anything he thought important into the grocery bag ... if he remembered to do so. You can guess who got to go through all his paper bags.
I am sure many of you have encountered clients with similar, if not more pathetic, record-keeping practices. Readers well know that taxpayers bear the burden of production to show why they are entitled to claimed deductions. To do that they need to keep good records.
If taxpayers don’t keep good records, however, they can sometimes get lucky under what is commonly called the Cohan doctrine. For those interested, my blog here explains the doctrine and its history. Basically, the doctrine says that if the taxpayer can prove the fact of an expense, but not the exact amount of the expense, the Tax Court will make its own estimate of the amount, “bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).
Two weeks ago I blogged here about a taxpayer who got lucky when the Tax Court judge spotted an issue that both the taxpayer’s attorneys and the IRS attorneys had overlooked, saving the taxpayer some $42,000 in taxes. This week we look at a case, Stanislav Antoniev Dimitrov v. Commissioner, T.C. Summary Opinion 2018-21, that teaches a lesson about the limits to getting lucky under the Cohan doctrine.
April 30, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, April 23, 2018
Several features of the Tax Court make it a unique institution in U.S. law. For example, no other court has (or needs) the Golsen rule. Here’s a post where I explain why. And no other federal court uses the Tax Court’s quasi-en banc process. Kandyce Korotky over at Procedurally Taxing has a nice post here describing how that process sometimes produces opinions where more judges join the concurrence than the opinion of the Court.
But the Tax Court still hews to that greatest feature of the U.S. legal tradition: the adversarial process, where each side takes responsibility for presenting its own case and the Court simply judges between the cases presented. That is the lesson I see in last week’s decision in Aaron Keith Nicholson v. Commissioner, T.C. Summary Opinion 2018-24 where the taxpayer was representing himself and the IRS was represented by not one but FIVE attorneys of record. Really. I think the case should have been a lesson about the hobby loss rules, but it turns into a lesson that tax litigation rests on an adversarial process where the parties’ concessions, no matter how lame they appear, will bind them. This is true even in the small case procedure. Here, it benefitted the taxpayer.
April 23, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, April 16, 2018
Most of us who are either preparing our returns last week (or today), or reviewing the returns prepared for us, honestly want to get it right. We try to be good. But just as life is complex, so is the tax shadow created by life activities and decisions. Last week’s decision in Stacey S. Marks v. Commissioner, T.C. Memo. 2018-49, is not so much a lesson about being good as it is a lesson that sometimes—just sometimes—you can get lucky.
Details below the fold.
April 16, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, April 9, 2018
Last week the Tax Court issued 19 opinions, including one articulate opinion on Collection Due Process that teaches an interesting, albeit esoteric, lesson about the bulk-processing nature of tax administration. I will save that case, Scott T. Blackburn, v. Commissioner, 150 T.C. No. 9, for another week, or perhaps our colleagues over at Procedurally Taxing will blog it.
In today’s post I want to look at two of last week’s opinions that I think teach a more basic lesson about the important way in which each tax year is separate from all others. The two cases are: (1) Shane Havener and Amy E. Costa v. Commissioner, T.C. Sum. Op. 2018-17 (Apr. 4, 2018); and (2) Gary K. Sherman and Gwendolyn L. Sherman v. Commissioner, T.C. Sum. Op. 2018-15 (Apr. 2, 2018).
Notice that both of these are what are called “Summary” Opinions. That means the taxpayer in each one elected the small case procedures allowed by IRC §7463 and implemented by Tax Court Rules 170 et. seq. As most readers no doubt know, the upside of that election is relaxed procedural rules (notably rules of evidence) and the downside is that the loser may not appeal to a higher court. The idea is that these are cases where the dispute between the taxpayer and the IRS is really one about factual matters and not about the law. That is why when you access these cases through the Tax Court website, the website pops up the following message in all-caps: “Pursuant To Internal Revenue Code Section 7463(b), This Opinion May Not Be Treated As Precedent For Any Other Case.”
The very reason why these cases make for lousy precedent, however, is why they often make for good lessons about basic tax concepts. The lesson I see in these two cases is about the appropriate accounting period, a particularly timely lesson this week since April 16th (the deadline for filing returns this year since April 15th falls on a Sunday) is right around the proverbial corner.
To economists, the most accurate accounting period is one’s lifetime. That is, the best measure of income is what happens over our lifetime. But because governments need revenue sooner, because not all taxpayers die (think corporations), and because even if tax revenue would even out in the long, long, long run, the transition costs to a lifetime accounting period would be untenable, Congress created a yearly accounting period for income tax (and shorter accounting periods for excise taxes such as the employment tax).
That yearly period ends on December 31st for most of us mere mortals. The yearly questions we ask are “how much income did I have during the last year?” and “what expenditures did I make that I can deduct from the income I made?” The point of today's lesson is that we must ask those questions every year and just because we get a wrong answer in one year does not entitle us to continue using that wrong answer in later years.
More below the fold.
April 9, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, April 2, 2018
The Tax Court issued no opinions last week, likely because it was holding its Judicial Conference at Northwestern School of Law in Chicago. Our colleagues over at Procedurally Taxing attended and blogged about it here. Les Book reports (here) that the last session of the Conference was looking forward to the future of the Tax Court.
Future, Schmoocher. My love of history keeps my head buried firmly in the sands of the past. For not only is the past prologue, it’s also epilogue. That’s the lesson I take away from this Tax Court classic: Harold Jenkins v. Commissioner, T.C. Memo. 1983-667, a case I teach as an epilogue to the Supreme Court's classic Welch v. Helvering, 290 U.S. 111 (1933).The Jenkins case deserves your attention not only because of its lesson about the difference between business and personal deductions but also because of the poetry (?) it inspired both from Tax Court Judge Leo H. Irwin and from the IRS Office of Chief Counsel
All that, and more, below the fold.
April 2, 2018 in Bryan Camp, Celebrity Tax Lore, Miscellaneous, Tax | Permalink
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Monday, March 26, 2018
I mow my own lawn. Most of the other houses in my neighborhood pay a lawn service to do that. But I’m too cheap to pay someone $40 to do what I can do perfectly well. To some economists, my act of mowing my own lawn is income to me. As the great economist Benjamin Franklin might say, the $40 saved is $40 earned. Thank goodness I do not have to count that imputed income as gross income!
The point is that my labor may have a market value. I could go into the lawn care business and others would pay. But until I actually get paid, how do you know whether my labor is worth $40 or $35 or $45? And when I labor instead at my desk at Tech Law, my labor is rewarded with a decent salary. But does the fact that I get paid for my labor mean that when I perform labor above and beyond—such as writing this blog post for example—such uncompensated labor is an expense? Have I “incurred” an expense that, if performed in the carrying on of my trade or business, is deductible under §162? That is the question posed by the case of James Edward Bradley Jr. and Margaret Letitia Hayes-Hunter v. Commissioner, T.C. Summary Op. 2018-13 (Mar. 19, 2018). There, Judge Panuthos teaches a seemingly simple lesson: a taxpayer may not deduct the value of the uncompensated labor they put into their business. Unpaid labor is not deductible. Underneath this seeming simplicity, however, lies some interesting complexities.
More below the fold.
March 26, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, March 19, 2018
Despite the adage “ignorance of the law is no excuse,” the Tax Court issued an opinion last week suggesting that sometimes ignorance of the tax law can indeed be an excuse, at least to escape the §6662 accuracy-related penalties. In Karl F. Simonsen and Christina M. Simonsen v. Commissioner, 150 T.C. No. 8 (Mar. 14, 2018), the Tax Court held that a California couple who messed up the tax treatment of a short sale of their former residence were not liable for accuracy-related penalties. Judge Mark “I’m No Caligula” Holmes wrote for the Court. The actual basis for the holding was that the IRS “failed to meet [its] burden of production on the accuracy-related penalty” because it did not introduce any evidence of compliance per the Tax Court’s newly discovered reading of §6751(b)(1). Our colleagues over at Procedurally Taxing have been following the §6751 issue for some time. If you are interested, here’s a good post by Professor T. Keith Fogg to start you out.
But immediately after throwing out the penalty for the IRS’s failure to produce the required evidence, Judge Holmes wrote four pages of dicta about how even if the IRS had met its burden, the taxpayers here acted with “reasonable cause and in good faith” within the meaning of the exculpatory language of §6664(c)(1). Why did he spend so much time doing this? Because he wanted the world to know that “we will not penalize taxpayers for mistakes of law in a complicated subject area that lacks clear guidance.” And one of the factors that went into the “good faith” conclusion was that Mrs. Simonsen not only consistently used TurboTax for over 11 years to prepare the couple’s returns, but had to upgrade to “a CD-ROM version of TurboTax instead of the usual online version because she needed a special form...to properly report the...income.” That caused my colleague Gregg Polsky to email me with this query: “So this case means that taxpayers that follow Turbo Tax to a completely illogical result are immune from penalties?”
Well, maybe...but then again remember this is just dicta. And while the Tax Court is correct that tax is a “complicated subject area” I do not think it was correct in finding that the taxpayers here had no “clear guidance.” But reasonable minds may disagree.
Along with the penalty lesson, this case teaches a nice lesson on the tax treatment of a short sale of property encumbered with a non-recourse loan. I’ll run through that first because it may help us understand why the Tax Court here was willing to let ignorance of the law be a defense to accuracy-related penalties.
Details below the fold.
March 19, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, March 12, 2018
When I go abroad and introduce U.S. law and legal systems to lawyers from civil law countries, they are generally surprised that U.S. judges have so much power. They rightly perceive that the “common law” is really a license of power to judges, a power that is only broadly constrained by other government actors. This power allocation to the judicial branch is, however, an essential part of the U.S. political system, a system designed to resist a corrosive and corrupting concentration of power into any one person or small group of people. Our system carves up power both horizontally—think legislative v. executive v. judicial—and vertically—think state v. federal.
Our law schools inculcate the common law tradition into our students starting in the first year. In fact, despite nods to leg/reg courses, the first year curriculum is still mostly about the common law. And the Socratic method is, in large measure, a method that works to establish common law thinking methods in our students, notably in how it forces students to pay attention to facts. Facts matter in the common law. We teach them to matter to students. And some of those students eventually become Tax Court judges.
We tax lawyers tend to forget the great common law tradition that undergirds the U.S. legal system. After all, we work from that Bodacious Compendium of rules in the Internal Revenue Code and associated regulations. But even in such a textually bounded area of law as tax, the common law persists. For example, the tax question about “who” must pay tax on an item of income is largely common law, even when it intertwines with various tax statutes, notably the grantor trust rules in §671 et seq. When I teach assignment of income, I tell my students to leave their statutory supplements at home. We're in common law country.
The importance of common law to tax is the lesson I draw from the Tax Court’s opinion last week in the consolidated cases of Celia Mazzei v. Commissioner and Angelo L, and Mary E. Mazzei v. Commissioner, 150 T.C. No. 7 (March 5, 2018). The taxpayers in these cases played around with various entity structures to try and avoid the contribution limits to their Roth IRAs. The IRS caught them out. The Tax Court sustained the IRS NOD and the Judges wrote three opinions totaling 104 pages. The majority, in an opinion by Judge Thornton (joined by 11 others) uses common law rules developed in the assignment of income area to sustain the IRS’s Notice of Deficiency. Judges Paris and Pugh, who joined the majority, also pen a concurring opinion that emphasizes the common law question (and are joined by three of the others who also joined the majority). Judge Holmes (joined by three others) dissents, believing that the relevant tax statutes trump the common law.
The clash of opinions are good reading, not only for their very satisfying lesson about the role of common law in our system of taxation but also because they really do clash: Judge Holmes basically accuses the majority of channeling the Emperor Caligula and Judge Thornton labels some of Judge Holmes’s claims “bizarre.”
Details below the fold.
March 12, 2018 in Bryan Camp, Legal Education, New Cases, Tax | Permalink
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Monday, March 5, 2018
During the first week of teaching federal income tax I give a homework assignment where I ask students to compare the 2011 tax returns of Mitt Romney and Hillary Clinton. Students must decide who had the heavier tax burden. You can find these returns (and many more) on the Tax Analyst Tax History website. Here’s what we usually come up with in class:
||% of Total Inc.
||% of Taxable Inc.
My students are surprised by this result. Although they had similar total incomes, Romney and Clinton paid hugely different amounts and percentages of taxes no matter how you measure tax burden. But there is nothing nefarious about it. It simply reflects Congressional choice to tax capital gains at a lower rate than ordinary income.
To get the lower tax rate the gain must come from a sale or exchange of something called a “capital asset” that has been held for more than one year. Romney’s income came mostly from sales or exchanges of capital assets while Clinton’s came mostly from her labor. That difference in source made the difference in tax. Whatever one thinks about Clinton’s speaking fees, they still resulted from her labor and so were taxed at significantly higher rates than Romney’s capital gain income, even though dollars derived from labor have the same purchasing power as dollars derived from capital.
This preferential tax treatment for capital gains over labor income is a subsidy whereby Congress shifts dollars from one set of taxpayers (those like Clinton) to another set of taxpayers (those like Romney). It’s a subsidy just like the Earned Income Tax Credit (EITC) except that the EITC shifts dollars from higher earning taxpayers to lower earning taxpayers. So who does Uncle Sugar love more? Why, folks like Romney!! In 2016 the federal government spent about $106 billion to subsidize taxpayers who, like Romney, received income from capital sales or exchanges. In comparison, it spent $63 billion on the EITC subsidy. You can see these figures in the JCT’s latest Estimates of Federal Tax Expenditures.
Congress does put some restrictions on this rate subsidy. For example, §1211 generally prevents taxpayers from deducting capital losses against ordinary income. After all, if a gain from the sale or exchange of a capital asset gets a lower rate, then a resulting loss should not be able to shelter otherwise higher taxed gain but only similarly taxed gains.
So when taxpayers have gain from the sale of some kind of property held for more than one year, they really want that lower tax rate. They want their gains to be from the sale of a capital asset. Contrariwise, when taxpayers have losses from the sale of some kind of property, taxpayers would really like to deduct those losses from their ordinary income, the kind that gets taxed at a higher rate. They want those losses to be from the same of property that is not a capital asset.
So what the heck is a “capital asset”? That is the lesson in Sugar Land Ranch Development, LLC, Sugar Land Advisors, LLC, Tax Matters Partner v. Commissioner, T.C. Memo 2018-21 (February 22, 2018). There, the taxpayers were able to transform properties that did not qualify as capital assets before 2008 into properties that did qualify as capital assets when they sold the properties for a net gain in 2012. So they got the rate subsidy. How’d they do that? Details below the fold, along with the Tax Lawyer’s Wedding Toast.
March 5, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, February 26, 2018
Last week’s lesson was about the tax consequences to the borrower when the lender cancels the debt. This week’s case looks at the other side of the transaction to teach a lesson about what constitutes debt. Section 166 allows a lender who gives up trying to get back borrowed money to deduct the bad debt, effectively treating current income as a return of the lost capital. Similarly, a lender who sells debt to a third party for less than basis can calculate a loss under §1001 and may be able to treat that loss as a long-term capital loss.
But to have either a bad debt under §166 or a loss under §1001, there must be a “debt” in the first place. That is the lesson from last week’s case of Michael J. Burke and Jane S. Burke v. Commissioner, T.C. Memo. 2018-18. There, the taxpayer attempted to take both long-term and short-term capital losses in 2010 and 2011 through a mix of §166 deductions and claimed capital losses from sale of debt at less than basis. The alleged bad debts arose in connection with a scuba diving business in Belize. On audit, the IRS disallowed the deductions, creating a deficiency in taxes totaling some $444,000. The dispute was whether the Burkes had “debt” to lose. Judge Holmes’ opinion does a deep dive into the meaning of “debt” and shows why the taxpayer’s arguments here were all wet. If you think I’ve gone overboard in my water metaphors, Judge Holmes’ opinion is drenched with them. Makes for a splashy opinion.
More below the fold.
February 26, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Sunday, February 25, 2018
Here at Texas Tech University School of Law we are gearing up for our ABA site inspection. In the past few years the ABA has required law schools to create "Learning Outcomes." Here's the language from Section 3.02:
A law school shall establish learning outcomes that shall, at a minimum, include competency in the following:
(a) Knowledge and understanding of substantive and procedural law;
(b) Legal analysis and reasoning, legal research, problem-solving, and written and oral communication in the legal context;
(c) Exercise of proper professional and ethical responsibilities to clients and the legal system; and
(d) Other professional skills needed for competent and ethical participation as a member of the legal profession.
This is the first year that the site teams will be evaluating a law school's compliance with the new standard. We knew it was coming and I have been on a committee for the past three years that has been trying to translate this standard into operation. While I believe we have done a good job with it, I also believe the standard to be of questionable value.
I read with pleasure this New York Times op-ed by Molly Worthen, The Misguided Drive to Measure 'Learning Outcomes'. I especially like its concluding line: "[T]here's just no app for that."
February 25, 2018 in Bryan Camp, Legal Education, Teaching | Permalink
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Monday, February 19, 2018
The Tax Court issued two opinions on January 16, 2018, where taxpayers got hit by what I call the Phantom of the Tax Code: Discharge of Indebtedness (DOI), also known as Cancellation of Debt (COD). I will first tell you about each case, and then discuss what we can learn about this Phantom.
In John Anthony Glennon v. Commissioner, T.C. Memo. 2018-4, Mr. Glennon got unlucky in Las Vegas, but not in the usual way. He was at the airport and was enticed by the offer of a $59 fly-anywhere ticket to sign up for a Southwest Airlines credit card issued by Chase Bank. Like most of us, he just wanted the enticement and after using it planned to cancel the card. But times got bad and he needed the card to pay living expenses. He fell behind in payments and in 2014 the bank contacted him with an offer to settle the debt. He took the offer, and his payment left him with a balance due of just under $9,686. The bank then cancelled that remaining debt and in 2015 sent him a Form 1099-C. Mr. Glennon did not report the COD income and thanks to its nifty computer matching system, the IRS discovered the resulting deficiency in tax. Mr. Glennon’s main argument before the Court seems to be that “the debt had been resolved by his settlement.” The Court responded: “petitioner did not understand the concept of cancellation of indebtedness income.”
In Michelle Keel v. Commissioner, T.C. Memo. 2018-5, Ms. Keel’s 2015 COD income kicked her over the income limit to receive health insurance premium assistance tax credits. Those credits are given to taxpayers on a monthly basis in the form of direct payments to insurers to help pay for the taxpayer’s health insurance. Their purpose is to help with cash flow problems. In Ms. Keel’s case, she claimed the credit for 2015 and the federal government paid $335 per month to her insurer.
Only taxpayers whose income falls below a ceiling can get the health insurance premium assistance credits. And while taxpayers are allowed to estimate their income for the year, they must reconcile the amount of credits received with their actual income. In 2015 the ceiling for Ms. Keel was $46,680. In 2015 Ms. Keel had wage income of $39,000 and if that were her only income, she would qualify. However, in 2015 the Bank of America discharged some $16,000 of indebtedness. If you add that to the wage income, it took her well above the ceiling. While Ms. Keel properly reported the COD income on her return, she failed to reconcile. The IRS did it for her and Ms. Keel protested the resulting NOD. She asserted in her petition that the COD should not count in computing her eligibility for the premium assistance tax credits. But she failed to otherwise appear or argue the matter. The Tax Court granted Summary Judgement to the IRS.
Each cases teaches us something about the Phantom of the Tax Code: a basic lesson and a more advanced one. Both lessons are below the Fold
February 19, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Friday, February 16, 2018
This is the time of year when tenure decisions get finalized at most institutions. Usually, law faculty vote their recommendations in the Fall semester and then the tenure packages work their way through the various levels of review. Final approval by the relevant governing body happens sooner or later during the Spring Semester, depending on how bulbously bureaucratic the institution is. It will likely happen here at Texas Tech later rather than sooner.
Here at Tech Law the law faculty recommended promotion and tenure for seven professors last fall, a record number. I was chair of the tenure committee for one of them, my colleague Robert Sherwin.
Rob’s a pretty amazing guy. In addition to serving as the Director of Tech Law’s Advocacy Programs, Rob personally coaches anywhere between six to ten advocacy teams a year. And he teaches doctrinal courses. And he is creating a serious body of scholarship on litigation subjects.
It’s the scholarship part that I want to focus on for just a paragraph. I am not sure that his scholarship would be fully appreciated at some institutions because it is heavily doctrinal. You can see for yourself at his SSRN page. But here at Tech Law we take a big-tent approach to scholarship and doctrinal is all right by us. Rob writes to help courts or legislatures solve problems in the law. That is a worthy enterprise. And one of Rob’s articles, a careful exploration of problematic language in anti-SLAPP legislation, led the National Conference of Commissioners on Uniform State Laws to select him as Reporter of the Drafting Committee on the Anti-SLAPP Legislation Act. Few of us academics get this kind of opportunity to have such a direct effect on law. The Tech Law faculty are quite proud of Rob for this. Other faculties may not share that appreciation. They have a much narrower vision of what it means to be a legal scholar.
So Rob’s tenure decision was never really in doubt. In fact, in writing Rob’s Tenure Report, each of the three members of his tenure committee vied with each other to see who could use the most superlative superlative to describe Rob’s teaching, scholarship, and service. This was the winner: “if contemporary moot court had a Nick Saban (the University of Alabama’s wildly successful football coach), it would be Rob Sherwin.”
When it came time for the faculty meeting, I was given the last slot to present Rob’s tenure report. That’s kinda like going 30th in the Giant Slalom. After the other six candidates were presented to the faculty, I decided enough was enough. So in lieu of the usual, I offered to summarize our report to the faculty in one of three forms: a haiku, a doggerel, or a limerick. Being the sophisticated faculty they are, my colleagues asked for the haiku.
It’s below the fold.
February 16, 2018 in Bryan Camp, Legal Education, Scholarship | Permalink
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Monday, February 12, 2018
One common error my students make is to confuse asserting an argument with supporting the argument. For example, a student on my Civil Procedure exam might write “We will argue that the Plaintiff’s domicile is in Texas and not Oklahoma.” That sentence tells me only that an argument exists. It does not support the argument with an explanation about why Plaintiff’s domicile might be thought to be in Texas. I try to teach my students they must connect assertions with the evidence necessary to show why the assertions are true. So I feel like a failure when I read exam answers like that. I think most profs have similar feelings when grading.
Lawyers sometimes make a similar error when representing clients in court: they make assertions and even spin a plausible story, but neglect to support those assertions or the story with credible evidence. To be fair, sometimes an attorney has no choice: the client may simply not have provided the needed information, and the attorney must nonetheless argue something! But arguments are not evidence.
Last week’s decision in Brandon Brown and Christi Cloaninger Brown v. Commissioner, T.C. Sum. Op. 2018-6 (Feb. 5, 2018), teaches this lesson. Sure, it’s “just” an S case, but even if those cases are not formal precedent, they can still teach valuable lessons. Here, the case is also a nice illustration of when it makes sense to use the §7463 Small Case procedures and how the burden shift in §7491(a) can sometimes actually be important.
I’ll consider each lesson below the fold.
February 12, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, February 5, 2018
Law is often a mixture of form and function. Formalist rules help create order and certainty but sometimes do so at the expense of justice and meaning. Discerning and following the function or purpose of the law may create juster outcomes but sometimes does so at the expense of certainty. All can agree that there is a time and a place for each mode of analysis, but the devil is in the details.
The speed limit sign to the right illustrates the difference. It's a sign you might have encountered driving through Montana up until 1999 when the Montana Supreme Court ruled that the "reasonable & prudent" rule was unconstitutionally vague. It gives two rules for drivers: a bright-line night rule that you may not drive faster than 65 mph and a fuzzy day rule that gives no set speed limit but just says you may not drive unreasonably or imprudently.
In applying the speed limit sign, formalists and functionalist might disagree on when the night rule applies. A formalist might look to the dictionary definition of night as the period between sunset and sunrise and so apply the night rule at the minute after sunset. But a functionalist might say that the purpose of the night rule is to set a limit when night-time conditions make it presumptively unsafe to drive faster. So a functionalist might not apply the night rule until later after sunset, and might also apply it during the “day” when a weather event, such as a haboob or an eclipse, creates sufficiently night-like conditions. Of course, formalist thinkers might disagree among themselves if they use different dictionary definitions of “night." Likewise, functionalist thinkers might disagree among themselves if they have different ideas about the purpose of the night rule.
Last week’s reviewed opinion Melissa Coffey Hulett a.k.a. Melissa Coffey, et al v. Commissioner, 150 T.C. No. 4 (January 20th, 2018) is a case where the Tax Court takes a largely functional approach to IRC §6501(a) statute of limitations on assessment and yet the functionalists on the Court disagree with each other about the proper outcome. Section 6501(a) says that the IRS has a period of three years “after the return was filed” to assess “any tax imposed by this title.” The opinion for the Court, authored by Judge Holmes, is a mix of formalism and functionalism, using the passive voice in the statutory language as an opening to implement one important purpose of §6501: closure. A concurring opinion by Judge Thornton gives a more robustly functionalist view, resting entirely on the closure purpose of the statute. And a spirited dissent, authored by Chief Judge Marvel, also presents a functionalist analysis but one that focuses on a different purpose of the statute to come to a different outcome in the case.
What I find particularly interesting about this case is how all three approaches seem to be inconsistent with the Tax Court’s approach to interpreting the §6501(c) exception to §6501(a)’s general three year rule. That statute presents a similar question of statutory interpretation but all of the opinions in last week’s case are contrary to the Tax Court’s rationale in Allen v. Commissioner, 128 T.C. 37 (2007).
Details below the fold.
February 5, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, January 29, 2018
Country music teaches us lots of tax lessons. Here’s a list of country music songs about taxes. I especially like Johnny Cash’s lesson about the difference between gross pay and net pay in “After Tax”:
You can dream about a honeymoon for two
You can dream but that's about all you can do
'Cause by the time old uncle Sam gets through with you
You can buy her a pair of hose
A little powder for her nose
And take her down to Sloppy Joe's for beer and stew
Them are the facts after tax
The folks who sing country music also teach us many lessons about basic principles of taxation. One day I’ll blog the classic Jenkins v. Commissioner. Today, however, I draw your attention to last week’s Joy Ford v. Commissioner, T.C. Memo. 2018-8 (Jan. 25, 2018). Its lesson fits well with standard country music themes about love and broken dreams, about making money and making friends. Details below the fold.
January 29, 2018 in Bryan Camp, New Cases, Tax | Permalink
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Monday, January 22, 2018
No doubt there is a lot of dirty bathwater in the Treasury Regulations, codified in title 26 of the Code of Federal Regulations (CFR). The upside of the current administration’s anti-regulation focus is that it is allows Treasury to prioritize scrubbing unneeded regulations. Treasury reported on its progress in October noting that “the IRS Office of Chief Counsel has already identified over 200 regulations for potential revocation, most of which have been outstanding for many years.”
To be sure, it’s a small upside. Some regulations become outdated because they are simply overtaken by statutory changes. For example, Treas. Reg. 1.217-2(b)(1) allows taxpayers to deduct the cost of meals when moving to start a new job. That was fine under the statute Congress originally enacted in 1969, but it became obsolete when Congress modified the statute in 1986 to specifically disallow meal expenses as a deductible item. And now, of course, Congress has repealed the moving expense deduction entirely, but the regulations will still be there.
Other regulations become outdated because of societal change. My favorite example is former Treas. Reg. 1.162-6 which started off this way: “A professional man may claim as deductions the cost of supplies used by him....” To modern eyes, that regulation obviously denied deductions to taxpayers not in the trade or business of being a “professional man” ...such as anyone who was only a man as a hobby and not as profession. Think Victor, Victoria. Treasury nuked that reg in 2011.
The scrubbing effort carries a small upside because outdated regulations generally do little harm. I tell my students that is why you have to read the actual statutory language first. In real life, of course, tax practitioners rely on the commercial services like BNA, CCH or RIA to summarize the rules and those services keep current. Taxpayers reporting their 2017 taxes are unlikely be blindsided by the moving regulations into trying to deduct meal expenses in a move. Likewise, taxpayers reporting their 2018 taxes are unlikely to try and deduct moving expenses at all, much less in reliance on the regulations.
But the focus on throwing out the bathwater presents an obvious danger to the baby. The ham-fisted 2-for-1 requirement of Executive Order 13711 is not just focused, it’s myopic. Another danger is posed by the myopic thinking that the word “regulation” has the same meaning for all agencies and that the Administrative Procedure Act (APA) applies in lock-step to all agencies. Both myopias ignore the vast difference in purpose of regulations issued by different agencies.
Last week’s Tax Court opinion in SIH Partners LLLP, et al. v. Commissioner, 150 T.C. No. 3, January nicely illustrates the purpose and use of tax regulations. In it, the taxpayer tried to invalidate a 45 year old regulation for failing to meet APA requirements. The Tax Court has a nice opinion applying the APA with sensitivity to the tax regulation process and suggests a clearer view of what makes tax regulations different from those of many other agencies.
More below the fold.
January 22, 2018 in Bryan Camp, IRS News, New Cases, Tax, Tax Practice And Procedure | Permalink
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Friday, January 19, 2018
Machines are cheap. Humans are expensive. The IRS depends upon both to administer the fiendishly complex tax code that Congress tirelessly re-scrambles every year. This year is, of course, much, much worse. And everyone seems at least aware that a government shutdown will hurt the IRS’s ability to implement the new law. Here’s a recent WaPo article on the subject.
But the effect of a government shutdown on IRS operations is worse than is being reported. More below the fold.
January 19, 2018 in Bryan Camp, IRS News, Miscellaneous, News, Tax, Tax Policy in the Trump Administration | Permalink
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Monday, January 15, 2018
I tell my students to be careful with personal pronouns, especially now that the pronoun “they” may properly refer to a singular antecedent. An unclear antecedent can confuse readers.
Today I may have confused you. When you read this post's title, you may have thought “they” refers to “Tax Court.” Maybe you thought this would be a critique of a Tax Court opinion like last week’s post. It’s not. Sorry.
The “they” in the title is deliberately ambiguous, however, because it points to two different antecedents, neither being the Tax Court. First, it points to three taxpayers whose cases were decided last week by the Tax Court. Each case has at least one fact that is so amazing it will leaving you shaking your head (or "SMH" in modern texting parlance) and asking yourself “what were they thinking.”
Second, “they” means Congress. For the past 8 years Congress has adopted a policy of “starving the beast” and forcing the IRS to reduce its workforce. I wrote about that a couple of years ago here. These cases teach us why that Congressional policy is a thoughtless one.
Each of these three cases shows an educated middle-class taxpayer trying to game the tax system in ways that require significant human resources to combat. In two cases it took human IRS employees to spot the games and defeat them. In the third case, the taxpayer is “winning” his game, at least temporarily, thanks to the Collection Due Process provisions. It will likely take significant additional human effort to collect this taxpayer’s unpaid tax liabilities.
More below the fold.
January 15, 2018 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, January 8, 2018
My daughter worked part-time this past year for a woman who paid her about $500 cash. My daughter was not happy to learn from me that she has to report that as gross income. My daughter says “but my employer is not giving me a W-2 or 1099!” I am sure many of us have heard that from clients. Last week, the Tax Court issued an opinion that may give unintended support for my daughter’s assertion that there is no obligation to report income unless there is a concomitant obligation to file a related information return.
In 2010 Congress enacted the Hiring Incentives to Restore Employment Act (HIRE), 124 Stat. 71. Subtitle A of HIRE (§501 et. seq.) implemented what had been a separate bill called the Foreign Account Tax Compliance Act (FATCA). FATCA requires many individuals to report their foreign financial assets under certain circumstances. Violation of the reporting requirements carries several consequences, including monetary penalties and an extension of the limitation period for the IRS to audit a return. That’s the issue in last week’s case of Mehrdad Rafizadeh v. Commissioner, 150 T.C. No. 1 (January 2, 2018). In Rafizadeh, the IRS seemed to try and use that latter consequence to crack open otherwise closed years. At least that is what the Tax Court appears to believe. The sticking point was that the years at issue were years before the FATCA reporting requirements took effect. See below the fold for why the IRS thought that the FATCA provisions extending the limitation period applied, and why the Tax Court held otherwise.
January 8, 2018 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Friday, December 22, 2017
Once upon a time in West Texas there lived a farmer. In addition to raising crops, he kept a collection of interesting animals as a hobby. Always keen to make some money, however, he used the output of the animals for compost and sold the excess to surrounding farms. More about that below the fold. But first I need to tell you about the farmer’s pickup truck, “Iris.”
The farmer’s dad had bought a fine Ford F250 in the early 2000’s. His dad was very fond of the truck and called it “Iris.” But the farmer did not like Iris and so he used it exclusively to haul the animal product to market. Of course that meant Iris stank. The stink offended people, who thought Iris was to blame for payload the farmer asked Iris to carry.
When the farmer took over farming operations from his dad in 2008 he began neglecting Iris by not putting in the money to make needed upkeep and repairs. For example, he used a really cheap motor oil because he liked its name “Liberty,” and he liked the pennies he saved. But that oil actually did the exact opposite of what oils are supposed to do: it exacerbated the wear on the engine Then the farmer started using an even cheaper lubricant: chicken grease. When the once proud 5.2L Voodoo V8 engine failed, the farmer replaced it with an 4-cylinder engine taken from a Ford Fiesta, ‘cause that was cheap. More pennies saved! As parts failed, Iris became increasingly unreliable. Still, the farmer kept relying on Iris to carry the load for him.
And now, for the Elephant part, below the fold.
December 22, 2017 in Bryan Camp, IRS News, Tax, Tax Policy in the Trump Administration, Tax Practice And Procedure | Permalink
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Thursday, December 14, 2017
I try to tell my students that where the rubber hits the road for many tax issues is in valuation. Here's a great story about one aspect of valuation disputes from the Washington Post Magazine: "The Secretive Panel of Art Experts That Tell the IRS How Much Art is Worth"
Each year, bequests and donations of art generate tens of millions of dollars in potential tax revenue. But to be accurately taxed, an artwork needs to be accurately valued, and the owner who has to pay the tax can’t be expected to provide the last word. When an artwork is sold outright, the Internal Revenue Service needs no help in determining how much to tax; it has the purchase price and the sale price and it knows how to subtract. (The maximum federal tax rate on profits from the sale of art and collectibles is 28 percent, higher than the 15 to 20 percent for stocks.) Things get trickier, however, when an artwork passes to an heir or is given to a museum. The agency still needs to know, as of the date of death or donation, how much the art is worth, but without a current sale price that figure can be debatable.
December 14, 2017 in Bryan Camp, IRS News, Tax | Permalink
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Monday, December 11, 2017
Note: Due to my need to grade exams and turn in grades by January 2nd, this will be my last “Lesson From the Tax Court” post this year. I plan to resume on January 8th.
In law, “SOL” is an all too appropriate acronym for “Statute Of Limitations.” Tax law is full of SOL traps for taxpayers. A couple of weeks ago the Tax Court issued two opinions addressing a common SOL trap for taxpayers: the §6213 rule that taxpayers within the U.S. have 90 days from the date the IRS sends out a Notice of Deficiency (NOD) to petition the Tax Court for a redetermination of the deficiency. Of course, we all know the period is really shorter than 90 days on the front end because the 90 days starts running on the day the IRS sends the NOD not the day the taxpayer opens the NOD after returning from vacation and says “OMG”!
The reason §6213 is a trap is because the general rule for filing is the “physical delivery rule”: a petition is not filed until is had been physically received by the Tax Court’s Clerk’s office before the 90th day is over. Tax Court Rule 22. If that were the only rule, then taxpayers who cannot personally file their petitions by walking into the Tax Court Clerk’s office at 400 2nd St. S.W. in Washington D.C., would live in uncertainty about whether their mailed petitions would reach the Tax Court in time.
That’s where §7502 comes in. It is true that if the Tax Court Clerk’s office receives a petition after the 90 period, that petition is late, but Tax Court Rule 22 provides that the Tax Court will pretend the petition is timely if the reason for the late delivery falls under “the circumstances under which timely mailed papers will be treated as having been timely filed, see Code section 7502.” Section 7502 is one of those rescue rules you hope never to have to use, but if you need it, you really need to know how to make it work for you, to beat the SOL.
The cases of Lincoln C. Pearson And Victoria K. Pearson v. Commissioner, 149 T.C. No. 40 (Nov. 29, 2017) (before Judge Lauber) and Matthew Eric Baham and Jennifer Michelle Baham v. Commissioner, T.C. Summ. Op. 2017-85 (Nov. 29, 2017) (before Judge Wherry) both teach a lesson in how the Tax Court interprets §7502 and how taxpayers can use that statute to turn a late-filed petition into a timely-filed petition. Section 7502 is a pretty confusing statute and the Treasury regulations appear very strict. These cases show the wiggle room in the regulations and give guidance on how taxpayers should approach using §7502. I will explain §7502 and the interesting take-aways from these cases below the fold.
December 11, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Monday, December 4, 2017
You might think that with the potential impending demise of the alimony deduction, a Tax Court case about that deduction would not teach a useful lesson. But note that it’s the House Bill that repeals the §71/§215 regime. The Senate Bill leaves those sections alone (at least I cannot find any repeal provisions searching for "alimony" with ctrl-f, but I also did not read all the handwritten stuff). Traditionally, it’s the House that caves in conference (for all the reasons you hear in long lingering lectures from political science folks). So there may be hope for payor spouses yet!
Even if the alimony deduction is repealed, however, I hope to convince you that the lesson in last week’s case of Gary A. Wolens v. Commissioner, T.C. Memo. 2017-236 (Nov. 27, 2017), is worth your time. I consider it a useful lesson for lawyers about the level of care one needs in drafting agreements, particularly those relating to divorce. It also has a neat choice-of-law lesson. More below the fold.
December 4, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Tuesday, November 28, 2017
Monday, November 27, 2017
Last week’s lesson was about “self-assessment.” The idea was that even though it’s the IRS’s job to assess taxes, our system nonetheless depends upon taxpayers truthfully reporting the substance of their financial affairs.
Undergirding that idea is another idea: that for every taxpayer there exists a correct tax liability. The goal of tax administration is to get to the substance of taxpayer’s transactions to determine that correct amount of taxes due. For those interested, I explore this idea in my article Tax Administration as Inquisitorial Process ..., 56 Fla. L. Rev. 1 (2004).
The process of getting to that truth involves many forms, and not just the famous 1040. In 2016 the IRS processed over 244 million tax returns of various sorts. 2016 IRS Data Book Table 2, And that figure does not include all the other Forms that are important to tax administration.
This week’s lesson is about one of those other Forms. The case of Craig K. Potts and Kristen H. Potts v. Commissioner, T.C. Memo. 2017-228 (Nov. 20, 2017), teaches the importance the Form 870-AD, both to taxpayers and to tax administrators. The Form has a purpose and that purpose can, as it did in this case, trump substance. More below the fold.
November 27, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Sunday, November 26, 2017
The Socratic method is much maligned these days. I do not personally use it when teaching Tax. I use a problem method where I lecture on a topic then assign homework problems to the students which we then go over in the next class period.
But I do use the Socratic method of teaching when I teach my first year students Civil Procedure. I confess I am not great at it, but I think that, properly used, it really helps students learn how law is both determinate and indeterminate at the same time. It's not determinate when you are trying to predict the legal outcome (is the deduction allowable or no? does the court have personal jurisdiction over the defendant or no?). But it becomes determinate once the legal authority rules! That was the point of my post the other week about the power of fact-finding.
Here's a nice opinion piece in the Washington Post about how Socrates would not make it as a teacher in today's high schools.
November 26, 2017 in Bryan Camp, Legal Education, Teaching | Permalink
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Monday, November 20, 2017
Myths are not reality, even if they do reflect basic truths. A cherished myth in tax law is that ours is a system of “voluntary self-assessment.” Last week’s opinion in Ramsay v. Commissioner, T.C. Memo. 2017-223 (Nov. 15, 2017), teaches a lesson about that myth.
This myth is not reality. Despite the rhetoric of hobbyists, it is not as though taxpayers have any legal choice in the matter: the law requires them to file returns, report their income and deductions, calculate their taxes, and pay any amounts owed when the return is filed. IRC §§ 6201-6204. Congress weaves together civil and criminal penalties to enforce these duties and leaves the ever unpopular IRS to swing the net. Like Bentham’s Panopticon, the discipline of self-reporting and payment cannot be divorced from the constant coercive threat of discovery and the resulting civil or criminal sanctions.
But there is a basic truth behind the myth. Tax administration rests on taxpayers truthfully disclosing their financial affairs and paying what they owe — through withholding or otherwise — without overt government compulsion. It is “voluntary” in the same sense that stopping one’s car at a red light — at midnight with no traffic and no one looking — is voluntary. It is each citizen’s self-enforcement of the legal duty that keeps both the tax and transportation systems running smoothly. With hundreds of millions of returns filed each year, the system depends on the veracity, not the kindness, of taxpayers.
The myth exists because of IRS decisions just after World War I to start accepting initial returns as presumptively accurate if properly filed. For those interested I explain both the history of tax return processing, and how it started the myth in Theory and Practice in Tax Administration, 29 Va. Tax Rev. 227 (2009).
Mr. Ramsay appears to be the kind of taxpayer who helps the system work. He filed his returns timely. He was careful to be in an overpayment posture at the end of each year. He cautiously directed that part of each year’s overpayment be applied to the following year’s tax liability. He appears to be a model of a taxpayer working within the system.
But when Mr. Ramsay made two mistakes on his 2011 return, he discovered he was unable to fix one of them precisely because ours is not a “self-assessment” system. When a taxpayer attempts to correct a mistake by amending a return, the IRS does not use the same presumption it uses when processing the initial return. Mr. Ramsay learned that lesson the hard way. You can learn it by clicking below the fold.
November 20, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Monday, November 13, 2017
In the old Dragnet series, Jack Webb’s character was famous for declaring that “all we want are the facts, ma’am.” As if “the facts” are pristine jigsaw pieces that, if you find enough, give you an objective truth. Lawyers know better. Every “fact” comes from a point of view. Even police body cams are viewpoint-dependent, as seen this this nifty experiment. The lawyer’s job is to assemble together facts which, if believed, tell the story from the point of view most favorable to the client’s interest. They promote “a” truth. The fact-finder has to decide on “the” truth.
Most courses in law school are not structured to teach this lesson. We tend to focus our students on appellate opinions where the facts are a given, not a mystery. Still, in both my Civil Procedure course and my Tax course I take what opportunities I can find to show how the finders of fact have huge power in deciding how a case resolves.
In Tax Court, most facts are usually stipulated by the parties. But sometimes the Tax Court judge is called upon to decide the “facts” from witness testimony. A pair of opinions issued last week illustrate the power of fact-finding. One came out well for the taxpayer. The other did not. More below the fold.
November 13, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Tuesday, November 7, 2017
This is the first of what I hope to be a series of small posts about small annoyances in the Tax Cuts and Jobs Act. Thus the pun. So if you think these posts resemble an Andy Rooney whine or a Seinfeldian rant please remember that I’m just a simple tax professor from West Texas, and a proceduralist to boot.
My first pique is with the proposed mortgage interest reform. It completely ignores a great opportunity to fix a problem in the current statute. The problem is with how the debt limit applies. Current law uses the passive voice to limit the size of the loans that can generate the mortgage interest deduction. For example, the $1,000,000 limit for acquisition indebtedness is written like this: “The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return)” § 163(h)(3)(B)(ii). The language limiting home equity indebtedness is similar.
The problem with the passive voice is that you cannot tell whether the limit applies to each qualified residence or to each taxpayer. In Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), the 9th Circuit complained that “Discerning an answer ... requires considerable effort on our part because the statute is silent as to how the debt limits should apply in co-owner situations.” When Andy Rooney says it, it’s a whine, but when the 9th Circuit says it, it’s a problem.
November 7, 2017 in Bryan Camp, News, Tax | Permalink
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Monday, November 6, 2017
Last week, the Court decided Carlos Alamo v. Commissioner, T.C. Memo. 2017-215 (Oct. 31, 2017). This is a case worth remembering for at least two reasons. First, it teaches a lesson about how sticking to your guns can get very expensive because of the accumulation of penalties and interest. No matter how hard to work to contest a tax, penalties and interest work harder.
In this case Mr. Alamo worked very hard to contest his 2009 taxes. But his refusal to ever file a 2009 return resulted in some astonishing additions to his basic liability of $86,651 in unpaid taxes for that year. The Service's levy CDP notice, issued on November 1, 2012, reflected accumulated penalties and interest of $46,474. That equals 54% of his unpaid taxes. And who knows what the total looks like now, some five years later.
The lesson, then, can borrow from the great American roots musician Ry Cooder’s classic “The Taxes on The Farmer Feed Us All.” It might go like this:
We worked through Spring and Winter, through Summer and through Fall
But those penalties and interest worked the hardest of us all
They worked on nights and Sundays, they worked each holiday
They settled down among us and they never went away
The second lesson is about how the Service proves compliance with § 6212 notice requirements. It appears that Mr. Alamo is a hobbyist, albeit more clever than most. He tried to play the proof game. He lost. Still, his stubborn refusal to concede that the Service had properly sent him a Notice of Deficiency (NOD) is a great lesson in how to attack the adequacy of notice but also a warning that an obdurate refusal to cooperate during the CDP hearing can destroy the last chance to get the correct tax liability. By insisting on his perceived “right” to make the Service prove compliance with procedure, Mr. Alamo lost this chance to get his tax liability corrected. For more details on this second lesson, see below the fold:
November 6, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Thursday, November 2, 2017
Wednesday, November 1, 2017
Tuesday, October 31, 2017
The IRS does not have an easy job. Remember, it's NOT the "IRS Code" because the IRS is just the agency stuck with the task of carrying out the will of Congress. And the IRS must do this job all while being a political soccer ball — and since the mid-1990's the Republican team has hogged that ball, kicking with more enthusiasm than enlightenment. So it was nice to see a positive story about tax administration picked up by USA Today, especially because USA stories also appear in little town newspapers, like the one I read here in Lubbock, Texas (the Lubbock Avalanche-Journal: IRS: Public-private Crackdown Slashes Identity Theft, Tax Refund Fraud, the story comes from a press release by the IRS that explained:
October 31, 2017 in Bryan Camp, IRS News, Tax, Tax Practice And Procedure | Permalink
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Monday, October 30, 2017
The married taxpayers in Partyka v. Commissioner, T.C. Sum. Op. 2017-79 (Oct. 25, 2017), fell prey to scammers who scheme was to rent a furnished house and then steal the furnishing. The scammers stole a substantial amount of household furnishings from the taxpayers and the taxpayer pegged the value of the stolen items at just under $30,000 for which they claimed a §165 loss deduction.
There was an interesting timing issue in the case, but what struck me was the long discussion of substantiation, and how what may be sufficient documentation of loss for one purpose (police investigation, prosecution) may not be enough for tax purposes. Indeed, the Tax Court found that the taxpayers were potentially liable for the §6662 accuracy-related penalty. I question, however, whether the Tax Court properly applied the Cohan rule. For details, see below the fold.
October 30, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Saturday, October 28, 2017
On October 19th the Tax Court was in Lubbock in the person of Chief Judge Paige Marvel. The Court’s involvement with the ABA Tax Section is well known, but I did want to give a shout-out to its equally important involvement with legal education. Each year the tax faculty at Tech Law (myself, Alyson Outenreath, Steve Black, Vaughn James, and Terri Morgeson) hold a Tax Careers Panel at the Law School (graciously sponsored in recent by the Texas State Bar Tax Section). We always time it so that we can invite the Tax Court Judge to be on the panel. We are delighted that every judge has participated.
October 28, 2017 in Bryan Camp, Law School, Legal Education, Miscellaneous, Tax, Tax Profs, Teaching | Permalink
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Wednesday, October 25, 2017
It is always a pleasure to read a well-crafted opinion and I am writing this post to give a shout-out to Judge David Gustafson’s work in Palmolive Building Investors v. Commissioner, 149 T.C. No. 18, filed October 10, 2017. For the substance of the case, see Peter Reilly’s great post last week. He also links to other coverage in the blogosphere. What I want to point out, however, is how well this opinion is written and, more importantly, why.
I try to teach my students to think of law as a slow-moving conversation between the various sources of law: courts, legislatures, agencies. In particular, I encourage them to focus on trial court opinions when they seek to understand a particular area of law because trial courts are in conversation with the particular Court of Appeals that will review them. So trial courts tend to give very thorough explanations of their decisions when they believe the decision addresses an important point of law that will probably be the subject of Appellate review. True, their conversation with their supervising court is kind of one way in that trial courts are bound the decisions made by their supervising Courts of Appeals.
In performing its trial court function the Tax Court is unlike any other trial court in the United States because its decisions are potentially reviewable by every single one of the 12 geographic federal Courts of Appeals. In effect, it has 12 supervising courts. Brutal. 12 Bosses??
That brutal fact creates a problem. What should the Tax Court do when one Court of Appeals reverses the Tax Court on a legal issue and then the legal issue comes up again? This opinion by Judge Gustafson is a beautiful illustration of the Tax Court’s answer, an answer that may surprise you, even if you think you know the Golsen rule. To learn the one weird trick the Tax Court uses, I invite you to dive beneath the fold. Gee, I hope that click-bait works.
October 25, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Monday, October 23, 2017
Everyone needs a hobby. Psychology Today explained why here. But some hobbies grow and grow until they become all-consuming. As Benjamin Franklin reportedly put it: beware the hobby that eats. Protesting your taxes for stupid reasons is one of those hobbies that eat.
Bob Wood once wrote a great blog post about stupid tax protest arguments. The legal term for “stupid” is, of course, “frivolous.” Bob rightly says it’s one of the worst names you can be called in the tax world. I really love his line: “In IRS lingo, it’s about as bad as you can get, just shy of the other “f” word, fraudulent.”
The case of Henry M. Jagos and Kathy A. Jagos v. Commissioner, T.C. Memo. 2017-202 (Oct. 16, 2017), teaches such a lesson. It appears from the opinion that the Jagoses are among those lucky taxpayers who do not have to work for their money because their money works for them. Of their total taxable income in 2012 of $544,000, $520,000 seems to have come from investments. At least it came from payments they received from Fidelity Investments and Fidelity withheld about $98,000 in taxes.
With that kind of income, one has plenty of time for hobbies. It appears from this case the Jagoses decided that tax protesting would be a good hobby to have. In 2012 they filed a return to get back the $98,000 in withheld taxes. They reported zero income, claiming the payments they received were not taxable income because they “are private-sector citizens (non-federal employee) employed by a private-sector company (non-federal entity) as defined in 3401(c)(d).”
In old-fashioned texting parlance my reaction to that statement vacillates between OMG, LOL and WTF. For the more measured IRS and Tax Court reaction, see below the fold.
October 23, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Tuesday, October 17, 2017
Nina Olson, the National Taxpayer Advocate (as if you did not know), had a great blog last week describing a really cool study her office conducted on how to improve taxpayer compliance with the Earned Income Tax Credit (ETIC ... again, as if you did not know).
The basic idea was to see if a simple letter mailed to taxpayers who had demonstrated some identifiable error in their 2014 EITC claims would result in them making fewer errors in their 2015 EITC claims. Not only that, but the study compared that group to a control group of similar taxpayers who made similar errors but who were not sent a letter explaining where they went wrong.
Certainly, my intuition as a teacher is that when you give feedback on what students do wrong, they tend to do better. The study supports that intuition’s application to taxpayers: tell them what they were doing wrong and they will do better overall and will certainly do better than those who get no such feedback.
What struck me as particularly interesting and worth further comment was the feature of just how the Taxpayer Advocate Service sent the letter to the taxpayers. Nina gives this description:
October 17, 2017 in Bryan Camp, Gov't Reports, Tax, Tax Practice And Procedure | Permalink
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Saturday, October 14, 2017
These would seem to be fat times for organizations that want tax-exempt status. As everyone and their little dog seems to know, Service resource constraints have made recognition as a tax-exempt organization “virtually automatic” for most applicants on the front end. Even the National Taxpayer Advocate complained that it was too easy for organizations to obtain approval.
This week’s lesson from the Tax Court is that the upside of easy approval on the front end may carry a significant downside on the back end. In the reviewed opinion Creditguard of America, Inc. v. Commissioner, 149 T.C. No. 17, Judge Lauber expressed the Tax Court’s opinion that when the Service revokes an organization’s tax exempt status retroactive to a given year, interest starts running from that retroactive year’s return due date, and not just from the date when the Service made its determination to revoke or actually assessed the tax liability. Why is this such a downside? Because the very resource constraints that make for easy application approval on the front end also create significant delays in completing examinations on the back end. In the Creditguard case, the examined year was 2002, the audit was opened in 2003, completed in 2012 and the resulting deficiency assessed in 2013. And now it’s 2017. That’s a lotta interest. More below the fold.
October 14, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Monday, October 9, 2017
It takes money to make money. I use that adage to teach my students the basic idea behind the §162 deduction: the money it takes to make money should be deductible from the money made. On October 2, 2017 the Tax Court decided the case of John S. Barrett and Maria T. Barrett v. Commissioner, T.C. Memo 2017-195. The case illustrates a common problem with that adage: how to know when the costs of traveling away from home are deductible business expenses under §162.
Section 162 allows a deduction for “traveling expenses...while away from home in the pursuit of a trade or business.” In contrast, §262 denies deductions for “personal, living or family expenses.” So that is the tension: is an expense business or personal? The more a taxpayer can connect expenses to business needs and away from personal preferences, the more likely the taxpayer can deduct those expenses.
Travel expenses that are more closely connected to taxpayer’s personal preferences are called “commuting” costs and are not deductible. The idea is that everyone has to live somewhere. And our personal choice of where to live should not allow us a deduction in the cost of going to work. That is the idea of your “tax home.” However, expenses for travel away from the “tax home” that are incurred because of business needs, and so duplicate otherwise personal living expenses, are deductible. The IRS has a really good explanation of this distinction in Rev. Rul. 99-7. The classic case on the subject is Commissioner v. Flowers, 326 U.S. 465 (1946), where the Court held that when a taxpayer’s job moved to a different city, his choice to continue living in the old city and travel 165 miles to the new job was a personal choice. His “tax home” was the new city where his employer required him to work. So his choice to remain in the old city just created a long commute.
On the surface, the Barrett case looks like Flowers. In Barrett, the married taxpayers liven in Las Vegas. For some 20 years Mr. Barrett had a business of providing video recording to one client: the American Israel Public Affairs Committee (AIPAC) and did so using a studio in Las Vegas. But when AIPAC built a new building in Washington D.C., it built its own video recording and production studio. So now instead of travelling across town, Mr. Barrett had to travel to D.C. each year, spending two or more months either in hotels or in a rented condo. The issue was whether Mr. Barrett’s expenses of travel, lodging, and meals were deductible under §162. The IRS thought Mr. Barrett just had a long commute, that his “tax home” was now Washington D.C. The Tax Court disagreed.
October 9, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Monday, October 2, 2017
In a fully reviewed 28 page opinion released Thursday, September 28, 2017, the Tax Court gave full attention to an important problem: when a married taxpayer files a return with an impermissible filing status (such as single or head of household) can the spouses later still elect to file jointly or do the restrictions in §6013(b)(2) apply?
The case is Fansu Camara and Aminata Jatta v. Commissioner. The opinion is worth your time not only for the well-reasoned outcome, but also for its neat demonstration of how precedent sometimes operates like a game of telephone. First I will need to sketch out the facts and holding for you. And then I will have one tax policy observation about the outcome. But I promise it won’t be 28 pages. So, if you are brave, you will continue reading below the fold.
October 2, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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