TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 11, 2017

Lesson From The Tax Court: Using § 7502 To Beat The Statute Of Limitations

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.

Tax Court (2017)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.

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December 11, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (2)

Monday, December 4, 2017

Lesson From The Tax Court: The Perils Of Poor Drafting

Tax Court (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.

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December 4, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (0)

Sunday, December 3, 2017

Supreme Court Hears Oral Argument In Accreditation Battle Over Canada's First Christian Law School

Tuesday, November 28, 2017

Why Taxpayers Should File Timely Returns Even if Owed A Refund

Taxpayer sometimes believe that they can blow off the filing deadline if they are simply filing a return that will show an overpayment.  That's poor thinking as Professor Les Book explains over at Procedurally Taxing blog.  See “I Thought I Was Getting a Refund” is An Inadequate Excuse for Late Filing"  

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November 28, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Monday, November 27, 2017

Lesson From The Tax Court: Forms Over Substance

Tax Court (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.

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November 27, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (0)

Monday, November 20, 2017

Lesson From The Tax Court: It's Not Really Self-Assessment

Tax Court (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.

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November 20, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (1)

Tuesday, November 14, 2017

Judge Kozinski On The 'Timeless And Tiresome' Debt/Equity Distinction

Hewlett-Packard v. Commissioner, Nos. 14-73047 &  14-73048 (9th Cir. Nov. 14, 2017) (Kozinski, J.):

Summary:  The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies that turned on whether an investment by taxpayer Hewlett-Packard (HP) could be treated as equity for which HP could claim foreign tax credits.

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November 14, 2017 in New Cases, Tax | Permalink | Comments (0)

Monday, November 13, 2017

Lesson From The Tax Court: The Power Of Fact-Finding

Tax Court (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.

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November 13, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (12)

Thursday, November 9, 2017

IRS Power Is Challenged In Marijuana Dispensary's Supreme Court Petition

National Law Journal, IRS Power Is Challenged in Marijuana Dispensary's Supreme Court Petition:

The IRS has no authority to declare that a taxpayer has violated federal anti-drug laws, a Colorado marijuana dispensary tells the U.S. Supreme Court in a new petition that takes the justices into a dispute over state legalization schemes and federal taxation.

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November 9, 2017 in New Cases, Tax | Permalink | Comments (1)

Monday, November 6, 2017

37 Tax Professors Urge Supreme Court To Overrule Quill v. North Dakota

Debra Greenberg (Emery Celli) filed an amicus brief at the Supreme Court yesterday on behalf of 37 tax professors supporting the petitioner in South Dakota v. Wayfair. The brief calls on the Court to grant South Dakota's petition and overrule its 1992 decision in Quill v. North Dakota, which prohibits states from collecting sales taxes from out-of-state retailers. From the summary of the brief:

While the Supreme Court is rightly reluctant to overrule its own precedents under any circumstances, the force of stare decisis is less powerful in some contexts than in others. Specifically, stare decisis exerts a weaker pull when judicial doctrine in the relevant area is based not on statutory interpretation but on changing competitive circumstances and evolving economic understandings.

Antitrust law is a paradigmatic example of an area in which these conditions are met, but the argument for a flexible application of precedent is similarly strong with respect to dormant Commerce Clause tax cases such as this one. In Quill Corp. v. North Dakota, the Court emphasized that its dormant Commerce Clause analysis was based on “structural concerns about the effect of state regulation on the national economy.” 504 U.S. 298, 312 (1992). The Court was especially concerned about the effect of taxation on the mail-order industry, and it believed that maintaining the physical presence rule would “foster[] investment by businesses and individuals.” Id. at 315-18. It also believed that its rule would reduce compliance costs for businesses and individuals engaged in commerce across state lines. See id. at 313 n.6. For those reasons, the Court reaffirmed the physical presence rule first announced in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).

The Court’s decision in Quill was predicated on then-current competitive circumstances and economic understandings. And in the quarter century since Quill, those circumstances and understandings have evolved. While the Quill Court was focused on the mail-order industry, it could not and did not foresee the meteoric rise of online retail, which has magnified the revenue losses that result from the physical presence rule. In the age of online retail, the physical presence rule has become a drag on economic efficiency and a potential impediment to investment across state lines. Meanwhile, the development of tax automation software over the past quarter century has led to a dramatic reduction in sales tax compliance costs for multistate retailers—so much so that overruling Quill would likely reduce aggregate compliance costs for individuals and firms seeking to abide by state tax laws.

Thus, to overrule Quill now based on changed competitive circumstances and evolving economic understandings would be to take it on its “own terms.” See Kimble v. Marvel Entm't, LLC, 135 S. Ct. 2401, 2413 (2015). It would be to acknowledge that — regardless of whether Quill was rightly decided at the time — the factual assumptions upon which it was based do not apply to the Internet age. The Court should grant South Dakota’s petition so it can revisit those assumptions and update its dormant Commerce Clause jurisprudence to a new technological and economic environment.

Tax profs who joined the brief are:

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November 6, 2017 in New Cases, Tax | Permalink | Comments (2)

Lesson From The Tax Court: Remember The Alamo

Tax Court (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:

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November 6, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Friday, November 3, 2017

$6.8 Billion Hedge Fund Tax Dispute Moves to IRS Appeals Office

RenaissanceFollowing up on my previous post, Senate Report Criticizes Hedge Funds' Use of Basket Options Tax Strategy:  Bloomberg, Mercer Hedge Fund Tax Dispute Moves to IRS Appeals Office:

A tax dispute involving Renaissance Technologies, the hedge fund firm whose co-chief executive officer is a prominent backer of President Donald Trump, is advancing to a new phase.

Members of the Internal Revenue Service’s Office of Appeals are scheduled to meet with lawyers for Renaissance in New York on Nov. 7, according to a person with knowledge of the matter. The meeting kicks off a review by an independent branch of the tax agency and suggests a resolution may be years away.

Although the dollar amount at issue has never been made public, Senate investigators estimated that Renaissance employees may have pocketed about $6.8 billion through what a bipartisan panel in 2014 called an “abusive” tax shelter. Renaissance executives maintain the transactions at issue were within the law and weren’t driven by tax savings.

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November 3, 2017 in IRS News, New Cases, Tax | Permalink | Comments (0)

Tuesday, October 31, 2017

Davis: Morrissey And The IRS's Hostility To Reproductive Choice

Following up on my previous posts:

Tessa Davis (South Carolina), Morrissey v. U.S. and the IRS's Hostility to Reproductive Choice:

I’ll begin with what the court of appeals got right. First, the court did not read a “disease” requirement into the “structure or function” route to a medical expense deduction. Second, the court did not summarily reason that ARTs are unrelated to a “function of the body.” The court of appeals thus avoided two errors that plagued the earlier Magdalin v. Comm’r  case (a Tax Court memorandum opinion summarily affirmed by the First Circuit, and which I’ve written about here).

Unfortunately, the court of appeals got just about everything else wrong.

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October 31, 2017 in IRS News, New Cases, Tax | Permalink | Comments (2)

Monday, October 30, 2017

Lesson From The Tax Court: Substantiation And The Cohan Rule

Tax Court (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.

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October 30, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (7)

Thursday, October 26, 2017

Pratt: Morrissey Creates New Uncertainty Regarding Tax Deductions For IVF, Egg Donation, And Surrogacy

Pratt (2017)Following up on my previous post, 11th Circuit: Gay Man Cannot Deduct Costs To Father Children Through In Vitro Fertilization As Medical Expenses:  TaxProf Blog op-ed:  Morrissey Creates New Uncertainty Regarding Tax Deductions for IVF, Egg Donation, and Surrogacy, by Katherine Pratt (Loyola-L.A.):

Morrissey v. United States (11th Cir. Sept. 25, 2017) creates new uncertainty regarding “medical” expense tax deductions for various types of fertility treatment costs.  Internal Revenue Code § 213(a) allows taxpayers to deduct the costs of “medical care” above a certain threshold.  Section 213(d) defines the term “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body of the taxpayer, his spouse, or dependent.” 

Fertility treatment costs include the costs of diagnostic tests and medical treatment performed on the “body” of “the taxpayer, or his spouse.” The most common assisted reproductive technologies (ARTs) are:

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October 26, 2017 in New Cases, Tax | Permalink | Comments (4)

Wednesday, October 25, 2017

The Tax Court As An Excellent Conversationalist

Tax Court (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.

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October 25, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (7)

Monday, October 23, 2017

Lesson From The Tax Court: Tax Protesting Is A Hobby That Eats

Tax Court (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.

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October 23, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (0)

Tuesday, October 17, 2017

Hickman: Altera Meets Chamber Of Commerce

Hickman (2017)TaxProf Blog op-ed:  Altera Meets Chamber of Commerce, by Kristin Hickman (Minnesota):

Last week, a Ninth Circuit panel heard oral arguments in the government’s appeal from Altera Corp. & Subs. v. Commissioner, 145 T.C. 91 (2015).  Frequent readers of this blog will recall that the appeal concerns the Tax Court’s decision to invalidate regulations under Section 482 regarding cost-sharing arrangements on grounds that the regulations were not the product of reasoned decisionmaking as required by the arbitrary and capricious standard of Administrative Procedure Act (APA) § 706(2)(A) and Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983).  For the most part, the oral argument considered the substantive reasonableness of the regulations in question as an interpretation of Section 482, although there was also some discussion of whether the IRS adequately explained its reasoning in the regulatory preamble.  Judge Kathleen O’Malley of the Federal Circuit, sitting by designation, asked a question that in turn raises an interesting issue, particularly in light of recent coverage of Chamber of Commerce v. IRS, in which a federal district court in Texas interpreted the Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a), as allowing pre-enforcement judicial review of an APA procedural challenge against Treasury regulations addressing inversion transactions.

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October 17, 2017 in New Cases, Scholarship, Tax | Permalink | Comments (0)

Saturday, October 14, 2017

Lesson From Tax Court: The Downside of Easy Tax Exemption Approval

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.

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October 14, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (0)

Tuesday, October 10, 2017

Camp: Misapplication Of The Anti-Injunction Act In Chamber Of Commerce v. IRS

Camp (2017)TaxProf Blog op-ed:  Misapplication Of The Anti-Injunction Act In Chamber Of Commerce v. IRS, by Bryan Camp (Texas Tech):

This is a follow-up to some good blogs on a recent decision by the District Court for the Western District of Texas in Chamber of Commerce v. IRS. See these posts by Professors Les Book, Kristin Hickman, Daniel Hemel and Andy Grewal. All are worth reading.

The more I think about this opinion, the more convinced I am that the court misapplied the Anti-Injunction Act. What I want to point out in this post is what I see as a logical disconnect between the court’s ruling on standing and its ruling on the Anti-Injunction Act. My contention is that the court’s rationale for finding standing necessarily poisons the plaintiffs’ ability to avoid the Anti-Injunction Act. In brief, I just don’t think the plaintiffs here can have it both ways. If they have standing because the disliked regulation will hurt them by potentially increasing their taxes, the Anti-Injunction Act applies. But if, in order to avoid §7421, they claim that striking down the disliked regulation will have no effect on the assessment or collection of taxes from them (or anyone else) then they lose standing.

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October 10, 2017 in New Cases, Tax | Permalink | Comments (1)

Monday, October 9, 2017

Lesson From The Tax Court: What Is 'Away From Home'?

Tax Court (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. 

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October 9, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (0)

Sunday, October 8, 2017

District Court: § 107 Housing Allowance For 'Ministers Of The Gospel' Violates The Establishment Clause

Gaylor v. Mnuchin, No. 16-cv-215 (W.D. WI Oct. 6, 2017):

The question in this case is whether Congress may give a subset of religious employees an income tax exemption for which no one else qualifies. At issue is the constitutionality of 26 U.S.C. § 107(2), which excludes from the gross income of a “minister of the gospel” a “rental allowance paid to him as part of his compensation.” (Although the phrase “minister of the gospel” appears on its face to be limited to Christian ministers, the Internal Revenue Service has interpreted the phrase liberally to encompass certain religious leaders of other faiths as well. ...

As to the merits, I will deny defendants’ motions for summary judgment and grant summary judgment in plaintiffs’ favor. I adhere to my earlier conclusion in Lew that § 107(2) violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.

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October 8, 2017 in New Cases, Tax | Permalink | Comments (3)

Thursday, October 5, 2017

Hickman: Chamber of Commerce v. IRS — The Post-Mayo Shake Out Continues

Hickman (2017)Following up on Monday's post, U.S. District Court Strikes Down Obama-Era Anti-Inversion Regulation, Limiting IRS's Power To Make Rules That Skirt The APA:

TaxProf Blog op-ed:  Chamber of Commerce v. IRS:  The Post-Mayo Shake Out Continues, by Kristin Hickman (Minnesota):

Here we go again.  In 2011, the Supreme Court in the Mayo Foundation case declared that it was “not inclined to carve out an approach to administrative review good for tax law only.”  Since then, courts and scholars have been engaged in an ongoing enterprise of debating just how far to take that suggestion.  Last week, in Chamber of Commerce v. IRS, a federal district court in Texas offered up the latest installment in the ongoing post-Mayo shake out when it invalidated a set of Treasury regulations —this time, Temp. Treas. Reg. 1.7874-8T regarding inversion transactions — on Administrative Procedure Act (APA) grounds.  The court’s opinion addressed several issues concerning the relationship between the IRC and general administrative law principles.  And, as with Cohen, Home Concrete, Altera, and other cases in this line, the Chamber of Commerce decision has inspired cheers from some, hand wringing by others, and a great deal of curiosity as tax specialists and administrative law generalists again try to understand one another.

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October 5, 2017 in IRS News, New Cases, Tax | Permalink | Comments (0)

Monday, October 2, 2017

U.S. District Court Strikes Down Obama-Era Anti-Inversion Regulation, Limiting IRS's Power To Make Rules That Skirt The APA

Chamber of Commerce v. IRS, No. 1:1 6-CV-944 (W.D. TX Sept. 29, 2017) (citations omitted):

In April 2016, the Internal Revenue Service and the United States Department of the Treasury (the "Treasury Department") (together, the "Agencies") issued a rule identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to categorization for federal-tax purposes because the stock is attributable to prior domestic-entity acquisitions. 26 C.F.R. § 1 .7874-8T (the "Rule"). The Rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. 26 C.F.R. § 1.7874-8T(j); Prop. Treas. Reg. § 1.7874-8.

Plaintiffs, the Chamber of Commerce of the United States of America (the "Chamber") and the Texas Association of Business, now bring this lawsuit asserting Defendants, the Internal Revenue Service, Treasury Department, John A. Koskinen, and Jacob J. Lew, violated the Administrative Procedures Act (the "APA") by promulgating the Rule.

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October 2, 2017 in IRS News, New Cases, Tax | Permalink | Comments (1)

Lesson From The Tax Court: When Precedent Is A Game Of Telephone

Tax Court (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.

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October 2, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Friday, September 29, 2017

Lesson From The Tax Court: The Overlooked Power Of Offset

Tax Court (2017)Last week the Tax Court issued an opinion in Williams v. Commissioner, T.C. Memo 2017-182.  Although it involves small amounts, the opinion teaches a big lesson about the IRS power of offset

Mr. Williams filed his 2013 return reporting $503 of taxable income and withholding of $1,214.  So he claimed an overpayment of $711.  The IRS accepted his return as filed but did not refund the $711.  Instead, it used its offset powers under section 6402(a) to credit that supposed $711 overpayment against Mr. Williams' unpaid tax liabilities from 2011.  Later, the IRS audited Mr. Williams' return and proposed a deficiency of $1,403.  Mr. Williams' protest to Tax Court was not the usual one.  He agreed with the amount of the deficiency, but he thought that since there was not actually an overpayment, per the audit, then the IRS should not have credited that $711 to his 2011 liability but should instead apply it to his 2013 liability.  After all, it was part of the wage withholding for 2013.  Note that it was to Mr. Williams' benefit to pay off the most recent tax liabilities to increase the chances that the older ones would age out.

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September 29, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (2)

Tuesday, September 26, 2017

11th Circuit: Gay Man Cannot Deduct Costs To Father Children Through In Vitro Fertilization As Medical Expenses

Morrissey v. United States,  No. 8:15-cv-02736 (11th Cir. Sept. 25, 2017)(citations omitted):

This is a tax case. Fear not, keep reading. In determining whether the IRS properly denied a taxpayer’s claimed deduction on his 2011 return, we must decide two important and (as it turns out) interesting questions. First up: Was the money that a homosexual man paid to father children through in vitro fertilization — and in particular, to identify, retain, compensate, and care for the women who served as an egg donor and a gestational surrogate — spent “for the purpose of affecting” his body’s reproductive “function” within the meaning of I.R.C. § 213? And second: In answering the statutory question “no,” and thus in disallowing the taxpayer’s deduction of his IVF-related expenses, did the IRS violate his right to equal protection of the laws either by infringing a “fundamental right” or by engaging in unconstitutional discrimination?

We hold that the costs of the IVF-related procedures at issue were not paid for the purpose of affecting the taxpayer’s own reproductive function — and therefore are not deductible — and that the IRS did not violate the Constitution in disallowing the deduction. ...

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September 26, 2017 in New Cases, Tax | Permalink | Comments (2)

Saturday, September 23, 2017

Helicopter Pilot Lands In Tax Court, Successfully Establishes That His Tax Home Is In Iraq

Forbes, Helicopter Pilot Lands In Tax Court, Successfully Establishes That Tax Home Is In Iraq

Cowardice, it seems, is not a trait Jesse Linde and I share. A two-time Army helicopter pilot, after struggling to find work in the private sector, Linde jumped at the opportunity to relocate to the Middle East in order to continue flying. To date, he has successfully navigated the many dangers to be found in Iraq, but even halfway across the globe, he couldn't escape one domestic menace: the IRS.

Yesterday, Linde found himself in the Tax Court, and it's a decision that all tax professionals would be wise to review, as it addresses a fascinating area of the law:

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September 23, 2017 in New Cases, Tax | Permalink | Comments (2)

Monday, September 18, 2017

An Emotionally Distressing Lesson From The Tax Court

Tax Court (2017)Last week, in the Summary Opinion of Collins v. Commissioner, the Tax Court agreed with the Service that a taxpayer could not exclude $85,000 under section 104(a)(2) for payments received for "emotional distress" even though that distress resulted in physical sickness.  It's a case that not only teaches an important basic lesson about 104(a)(2) but also exposes a distressing gap in current tax law.  More below the fold. 

Mr. Collins had sued his employer for workplace discrimination and retaliation.  One of his allegations was that he had "suffered severe emotional distress and anxiety, with physical manifestations, including high blood pressure."  The case settled, with $85,000 of the settlement was allocated to "emotional distress."  Could Mr. Collins exclude that $85k under section 104(a)(2)?  Mr. Collins---like many of my basic tax students---thought he could because he had undeniably physical sickness stemming from the stress of his workplace situation.  The Service and Tax Court properly said "no exclusion" based on current law.  

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September 18, 2017 in Bryan Camp, New Cases, Tax | Permalink | Comments (10)

Friday, September 15, 2017

Online Sales Tax Case Is Headed To The Supreme Court

Bloomberg Technology: Internet Tax Ruling Worth Billions Poised for Supreme Court Review, by Jef Feeley:

The South Dakota Supreme Court brought the question of whether online retailers should pay sales tax back into sharp focus.

The Mount Rushmore state’s highest court ruled Thursday that companies selling wares over the Internet can’t be forced to collect South Dakota’s 4.5 percent tax on purchases, laying the groundwork for a U.S. Supreme Court appeal that could change law across the country. A decision forcing online retailers to collect such taxes could be worth billions in revenue to state and local governments.The court backed an appeal by online retailers Overstock.comWayfair and NewEgg challenging a state law that required companies that do more than $100,000 worth of business in online sales in the state to collect sales taxes.

The law ran afoul of the U.S. Supreme Court’s 1992 decision in Quill Corp v. North Dakota, which forbade states from requiring retailers without a physical presence to collect sales tax. Justice Anthony Kennedy has suggested in later rulings that the court reconsider the decision.

Daniel Hemel (Chicago), The Common Law and the Commerce Clause

South Dakota’s highest court, in a unanimous decision released this morning, struck down a 2016 state law requiring out-of-state retailers to collect sales taxes on transactions with state residents.

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September 15, 2017 in New Cases, Tax | Permalink | Comments (0)

Monday, September 11, 2017

Contesting Tax Liability In A Collection Due Process Hearing

Broadly speaking, tax administration (as currently structured) consists of two main functions:  determining tax liability and collecting the tax liabilities so determined.   There is, however, some overlap because taxpayers sometimes have the opportunity during the tax collection process to get a re-determination of the underlying tax liability.  The main opportunity comes in the Collection Due Process (CDP) hearing.  This is an administrative hearing conducted by the IRS Office of Appeals and is subject to judicial review by the Tax Court.   Two recent Tax Court cases — Mohamed v. Commissioner (TC Sum. Op. 2017-69) and Bruce v. Commissioner (TC Memo. 2017-172) — illustrate just how narrow this opportunity is for taxpayers.  To me, they teach the take-home lesson that the best shot taxpayers have at getting the most favorable result is to respond early and often to tax notices.  Taxpayers who wait are the taxpayers who cry.  For a lesson that Mohamed teaches about tax return preparer penalties see Les Book's great post here.  More below the fold.

 

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September 11, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (3)

Monday, September 4, 2017

The Evilness Of Section 6511

Tax Court (2017)Last week, in Borenstein v. Commmissioner, 149 T.C. No. 10 (Aug. 30, 2017), the Tax Court was asked to apply Section 6511 contrary to its very, very intricate terms.  The Court declined to do so.  That meant that a taxpayer lost out on a $30k+ refund.   Ms. B. had paid about $112k in taxes by the due date of her 2012 return (April 15, 2013), but she did not file the return.  While she did get the 6 month extension she still failed to file a return by October 15, 2013.  The months went by — 22 of them— before the Service was kind enough in June 2015 to send her an NOD but was unkind in slamming her with an asserted $1.2m deficiency.   You know that drill.  Ms. B. then quick-like-a-bunny filed a return that September, showing a $79k liability.  The Service said "oh, ok, that's good" and accepted her return as accurate.  So she now only needed to get her refund, right?  Wrong.  See below the fold for why.

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September 4, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (4)

Sunday, August 20, 2017

6th Circuit Rejects Rand Paul's Constitutional Challenge To FATCA On Standing Grounds

FATCAFollowing up on my recent posts (links below):   Crawford v. U.S. Treasury Dep’t, No. 16-03539 (6th Cir. Aug. 18, 2017) (citations omitted):

In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), a law aimed at reducing tax evasion by United States taxpayers holding funds in foreign accounts. FATCA imposes account-reporting requirements (and hefty penalties for noncompliance) on both individual taxpayers and foreign financial institutions (FFIs). FFIs are further required to deduct and withhold a "tax" equal to 30% of every payment made by the FFI to a noncompliant (or "recalcitrant") account holder. To implement FATCA worldwide, the United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) have concluded intergovernmental agreements (IGAs), which facilitate FFIs' disclosure of financial-account information to the United States government, with more than seventy countries. Separately from FATCA and the IGAs, the Bank Secrecy Act imposes a foreign bank account reporting (FBAR) requirement on Americans living abroad who have aggregate foreign-account balances over $10,000; willful failure to file an FBAR invites a penalty of 50% of the value of the reportable accounts or $100,000, whichever is greater.

Plaintiffs — who include Senator Rand Paul and several individuals who claim to be subject to FATCA and the FBAR — sought to enjoin the enforcement of FATCA, the IGAs, and the FBAR, and they now appeal the dismissal of their lawsuit for lack of standing. For the reasons that follow, we affirm the judgment of the district court. ...

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August 20, 2017 in New Cases, Tax | Permalink | Comments (4)

Wednesday, July 19, 2017

Tax Court Denies Billionaire's $33m Charitable Deduction; Did University Of Michigan 'Rent Its Brand To Brazen 10:1 Tax Avoidance Scheme'?

Michigan LogoForbes, Billionaire Miami Dolphins Owner Gets Shut Out At Tax Court:

Billionaire Stephen Ross, owner of the Miami Dolphins, who thanks to a $200 million donation (largest in the history of the school) was described as Leader, Visionary, Philanthropist, Wolverine by the Universtiy of Michigan. ... Mr. Ross got his start in real estate based on his knowledge of federal tax garnered as a tax attorney for Coopers and Lybrand. ... I have to wonder whether the name of his flagship Related Companies is a tax geek joke.

Forbes, Billionaire Stephen Ross And The Ten For One Charitable Deduction:

The brazenness of the charitable plan with the University of Michigan designed to benefit Wolverine Billionaire Stephen Ross revealed in the Tax Court RERI Holdings I  decision is stunning.

The bare bones of the plan are that RERI, whose principal investor was Mr. Ross, bought an asset (call it "the thing") which it donated to the University of Michigan toward a $5 millon pledge that Mr. Ross had made.  Under the gift agreement UM had to hold onto "the thing" for two years, then sell it.  The amount that UM received would be credited to Mr. Ross's pledge. Round numbers RERI acquired "the thing" for $3 million.  When it came time to sell it UM had it appraised at $6 million.  UM sold it to a partnership for $2 million under pressure from Mr. Ross who threatened to count that amount towards his pledge, if they ended up getting less.  How large was the charitable deduction taken by RERI, of which Ross was the principal investor? That would be $33,019,000.

Mr. Ross is a prominent philanthropist.  It is tough to characterize this particular transaction as philanthropic as the claimed tax savings dwarf the amount out of pocket or the amount netted by the University of Michigan.  You have to wonder to what extent University development officers knew what was going on. Was University of Michigan seeking charitable donations or renting its brand to a tax avoidance scheme?

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July 19, 2017 in Celebrity Tax Lore, Legal Education, New Cases, Tax | Permalink | Comments (0)

Sunday, July 16, 2017

Tax Court Denies Business Expense Deductions To Minister/Author Due To Lack Of Profit Motive

Tax Court (2017)Forbes, IRS Rejects Minister Tax Write-Offs For Lack Of Profit Motive:

The U.S. Tax Court has agreed with the IRS that a minister and author could not deduct business expenses. Why? He was not engaged in a trade or business for profit. To top it off, the reverend also wasn't allowed any deductions under the more liberal hobby loss rules, because he had no gross income from these activities. The case is Lewis v. Commissioner, involving a minister and author named Willie Lewis. He occasionally performed weddings, attended meetings, and conducted seminars. On his 2011 tax return, he claimed business expenses from these activities. The IRS said no, assessed more taxes, and added penalties. So Mr. Lewis went to Tax Court.

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July 16, 2017 in New Cases, Tax | Permalink | Comments (0)

Tuesday, July 11, 2017

WSJ:  In Face-off With IRS, The Boston Bruins Win Big

BruinsFollowing up on last month's post, The Boston Bruins (And Other Pro Sports Teams) Can Deduct 100% Of Meal Expenses At Away Games:  Wall Street Journal Tax Report, In Face-off With IRS, the Boston Bruins Win Big:

The Boston Bruins ruled the world of professional hockey six years ago when they last won the Stanley Cup. But the team’s victory last week over the Internal Revenue Service will likely resonate far beyond the rink.

In Jacobs v. Commissioner, [148 T.C. No. 24 (June 26, 2017),] the owners of the National Hockey League’s Bruins argued the team should be able to deduct 100% of the cost of certain meals they provided to players and staff. Under current law, only 50% of the cost of many business meals is tax-deductible.

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July 11, 2017 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (0)

Monday, July 10, 2017

NY Times:  Supreme Court May Use Tax Case To Narrow Definition Of 'Obstruction'

NY Times Dealbook (2013)New York Times DealBook:  What Constitutes Obstruction? A Tax Case May Narrow the Definition, by Peter J. Henning (Wayne State):

Prosecutors have enormous discretion in the American criminal justice system, aided greatly by catchall provisions in statutes.

Congress often adopts broadly worded laws to catch a wide range of conduct, especially for white-collar crimes, and regularly tacks on a section to catch actions that might otherwise slip through the cracks.

Over the past few years, the Supreme Court has shown a conspicuous concern when the Justice Department seemed to push the envelope of what constitutes a crime in a way that could reach ostensibly innocent acts, or at least conduct that does not deserve the severe punishment meted out under federal law.

Last week, the justices agreed to review the conviction of Carlo J. Marinello II for obstructing the administration of the tax laws, presenting another opportunity to cut back on the scope of white-collar prosecutions under a catchall section.

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July 10, 2017 in New Cases, Tax | Permalink | Comments (1)

Thursday, June 29, 2017

The Boston Bruins (And Other Pro Sports Teams) Can Deduct 100% Of Meal Expenses At Away Games

BruinsFollowing up on my previous post, Tax Court Petition: Can Boston Bruins (And Other Pro Sports Teams) Deduct 100% Of Meal Expenses At Away Games; Is Hotel A Team's 'Business Premises'?:  Journal of Accountancy, Boston Bruins Can Deduct Full Cost of Meals for Team’s Away Games:

Pregame meals provided to Boston Bruins players and personnel before away games qualify as a de minimis fringe benefit under Sec. 274(n)(2)(B) and are not subject to the 50% limitation under Sec. 274(n)(1), the Tax Court held (Jacobs, 148 T.C. No. 24 (6/26/17)). The petitioners, Jeremy and Margaret Jacobs, co-own the Boston Bruins National Hockey League (NHL) team through two S corporations. The IRS had disallowed 50% of the Bruins’ deduction for expenses for meals provided to the Bruins’ employees when traveling to away games, which resulted in deficiencies of $45,205 and $39,823 in the Jacobses’ 2009 and 2010 federal income taxes.

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June 29, 2017 in New Cases, Tax | Permalink | Comments (1)

Friday, April 28, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a rare Tax Court victory for a taxpayer who succeeded in being treated as a real estate professional for purposes of the passive loss rules.

KristanA.M. real estate pro, P.M. stockbroker

The IRS wins most cases in Tax Court involving taxpayers whose real estate rental losses have been disallowed. The tax law, after all, is stacked against taxpayers wanting those losses. They are automatically passive unless the taxpayer passes two stern tests:

  • The taxpayer has to work at least 750 hours during the year in a “real estate trades or businesses,” and
  • The taxpayer has to work more in real estate than in anything else.

This “real estate professional” rule usually filters out taxpayers with day jobs outside of real estate.

Yesterday’s taxpayer victory in Tax Court on this issue is a notable exception. The taxpayer worked mornings on her rentals. Then she went to her other job. Judge Paris takes up the story:

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April 28, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Saturday, March 25, 2017

Amazon Beats IRS In $1.5 Billion Tax Court Case

Amazon logoSeattle Times, Amazon Wins $1.5 Billion Tax Battle With IRS:

Amazon.com scored a big victory Thursday against the IRS in a case that the company says could have cost it about $1.5 billion [Amazon.com v. Commissioner, 148 T.C. No. 8 (Mar. 23, 2017)].

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March 25, 2017 in IRS News, New Cases, Tax | Permalink | Comments (1)

Saturday, February 25, 2017

Is Sixth Circuit Approval Of Funding Roth IRAs With DISC Commissions A Harbinger Of Greater IRS Adherence To Language Of Tax Code?

Following up on last week's post, Sixth Circuit Reverses IRS, Tax Court: 'Citizens Can't Comply With Tax Laws They Can’t See':  Wall Street Journal Tax Report, The Secret to Avoiding Taxes on $6 Million: Exports and an IRA:

In less than a decade, two brothers turned a $3,000 investment into $6 million. Thanks to a federal appeals court, they won’t owe income taxes on this monster return.

To lower their taxes, the brothers paired a common retirement account with an obscure export incentive. The Internal Revenue Service challenged these moves in court, arguing that even if the transactions didn’t break the letter of tax law, they violated the spirit of it.

But the transactions were upheld by the U.S. Sixth Circuit Court of Appeals. The decision, Summa Holdings Inc. v. Commissioner, provides new ballast for taxpayers who use legal techniques in ways the Internal Revenue Service objects to. 

“It says that if there are two ways to structure a transaction and one incurs less tax, then the IRS can’t force the taxpayer into the other one,” says Robert Willens, an independent tax expert based in New York. ...

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February 25, 2017 in New Cases, Tax | Permalink | Comments (1)

Monday, February 20, 2017

Sixth Circuit Reverses IRS, Tax Court:  'Citizens Can't Comply With Tax Laws They Can’t See'

CaligulaSumma Holdings v. Commissioner, No. 16-1712 (Feb. 16, 2017):

Caligula posted the tax laws in such fine print and so high that his subjects could not read them. Suetonius, The Twelve Caesars, bk. 4, para. 41 (Robert Graves, trans., 1957). That’s not a good idea, we can all agree. How can citizens comply with what they can’t see? And how can anyone assess the tax collector’s exercise of power in that setting? The Internal Revenue Code improves matters in one sense, as it is accessible to everyone with the time and patience to pore over its provisions.

In today’s case, however, the Commissioner of the Internal Revenue Service denied relief to a set of taxpayers who complied in full with the printed and accessible words of the tax laws. The Benenson family, to its good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower its taxes.

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February 20, 2017 in IRS News, New Cases, Tax | Permalink | Comments (11)

Saturday, February 18, 2017

Michael Jackson Estate's $700 Million Tax Court Thriller Turns On Value Of Star's Name At Time Of Death

ThrillerWall Street Journal, Michael Jackson’s Estate Faces Demand for Big Tax Payment: Dispute With IRS Centers on Valuation of the Singer’s Name and Likeness Rights at Time of His Death:

When pop star Michael Jackson died in 2009, weeks before a planned comeback tour, how much was the man in the mirror worth? The answer is far from black and white.

After coming to agreements on the value of some of the King of Pop’s more concrete assets in a legal fight that began four years ago, the estate’s executors are facing off with the Internal Revenue Service in U.S. Tax Court on Monday, primarily over the valuation of the singer’s name and likeness rights at the time of his death.

Depending on the outcome of the case, the estate could be on the hook for more than $500 million in taxes and $200 million in penalties, according to the IRS’s notice to the estate of its deficiency.

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February 18, 2017 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (1)

Saturday, February 4, 2017

Tax Court Upholds President Trump's Authority To Fire Judges

Tax Court (2017)Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017):

Ps filed a motion to disqualify all Tax Court Judges and to declare unconstitutional I.R.C. sec. 7443(f), which authorizes the President to remove Tax Court Judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”

In the Tax Reform Act of 1969 (1969 Act), Pub. L. No. 91-172, sec. 951, 83 Stat. at 730, Congress deleted from I.R.C. sec. 7441 the designation of the Tax Court as an independent agency within the executive branch. In 1971 we said that under the 1969 Act the Tax Court is no longer within the executive branch. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392 (1971). Ps also adopt the view that the Tax Court is not within the executive branch and contend that, as a result, the President’s limited removal authority violates separation of powers principles. In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), the Court of Appeals held that the Tax Court is within the executive branch. The following year Congress amended I.R.C. sec. 7441 because of concerns about statements made by the Court of Appeals in Kuretski.

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February 4, 2017 in New Cases, Tax | Permalink | Comments (9)

Friday, January 20, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes how the Tax Court's treatment of a plastic surgeon's claim that his interest in a surgery center was a passive activity, distinct from his medical practice.

KristanPlastic surgeon gets his passive loss reconstructed

Losing for Winning.  A plastic surgeon convinced the Tax Court that his interest in a surgery center was “passive,” defeating an IRS attempt to group it with his medical practice. But the IRS got a partial win out of the deal.

The surgeon, who we will refer to as Dr. H., performed much of his surgery on an outpatient basis. He could not perform surgery requiring general anesthesia in his office. Hospital surgery space was scarce so he began plans to build a surgery center to accommodate patients needing anesthesia, but not an overnight hospital stay.

He dropped the plans when he was approached by a group of other surgeons asking him to invest in a surgery center, MBJ, that they were building. He ended up with a 1/8 interest in it. Tax Court Judge Buch explains how that works:

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January 20, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Wednesday, January 4, 2017

9th Circuit Affirms Tax Court's Denial Of California Law Firm's Claimed $3.4 Million Travel Expense Deduction For 24-Hour Standby Use Of Private Jets

Gulfstream IVNational Law Journal, Plaintiffs Firm Stuck With $1M Tax Bill After Trying to Deduct Private Jet Travel:

California plaintiffs firm Engstrom, Lipscomb & Lack owes more than $1 million in federal corporate taxes and penalties relating to business expenses from two personal aircraft, according to a federal appeals court’s ruling this week.

The U.S. Court of Appeals for the Ninth Circuit on Wednesday upheld a finding by a U.S. Tax Court judge that Los Angeles-based Engstrom owed $1.12 million after claiming unsubstantiated travel expense deductions relating to 119 flights taken from 2008 to 2010 [Engstrom, Lipscomb & Lack v. Commissioner, No. 15-70591 (9th Cir. Dec. 28, 2016), aff'g T.C. Memo. 2014-221].

Engstrom founding partner Walter Lack and Thomas Girardi, of Los Angeles plaintiffs firm Girardi Keese, made payments to a corporation they set up called G&L Aviation in order to split the cost of a Gulfstream IV and a Beechcraft King Air 350 turboprop. Lack and Girardi have partnered on several cases including the litigation portrayed in the 2000 film “Erin Brockovich.”

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January 4, 2017 in New Cases, Tax | Permalink | Comments (1)

Friday, December 30, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how deductions of a zombie corporations eventually die. 

KristanCorporations may have an indefinite life, but not their deductions.

I’ll just keep that company around in case I need it for something. Sometimes clients who sell a business want to preserve the corporation that held the business. While there are occasionally reasons to do so — for example, to deal with potential liabilities — more often such zombie corporations become an annoyance, and clients dissolve them when they realize they have to pay annual state charter fees and tax return fees.

Other taxpayers have other ideas. A human relations consultant who lost his primary client kept his S corporation around for years after the revenue stopped coming in. While there was no revenue, there was no shortage of expenses. The taxpayer claimed a 2009 loss on his K-1 of $5,795 on revenue of zero. Without revenue, what kind of expenses would there be? This kind, according to Tax Court Judge Morrison:

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December 30, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, December 16, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how Sec. 263A can apply to a cash-basis farmer.

KristanSec. 263A – it’s not just for inventories.

Nuts. Few farmers worry much about the so-called “inventory capitalization” rules of Sec. 263A. After all, they don’t have inventories. A California almond grower learned in Tax Court yesterday how Sec. 263A can sneak up even on a cash-basis farmer.

Most farmers deduct their input costs when they buy them under “cash basis” accounting. That’s a sweet deal, as other producers have to capitalize their input costs — raw materials, supplies, labor, etc. — into the cost of the goods they produce, recovering the costs only at the time the production is sold.

Sec. 263A, enacted with the 1986 tax reforms, requires producers to capitalize indirect costs into inventory that formerly were expensed. Most farmers aren’t required to keep inventories, so they don’t waste time worrying about inventory capitalization.

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December 16, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, November 25, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of not paying other creditors before you pay payroll taxes to the IRS.

KristanNo good deed goes unpunished if you owe payroll taxes.

IRS>Employees. Pay the payroll taxes to the IRS, no matter who else you have to stiff. That’s the lesson of a sad court case out of Houston last week.

Dr. McClendon ran Family Practice Associates for 20 years. Sometime along the way his CFO started keeping the payroll taxes the practice was supposed to remit to the IRS for himself, until by 2009 $10 million was unpaid. The U.S. District Court Judge takes up the story (my emphasis, citations omitted):

Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. Dr. McClendon made a $100,000 personal loan to Family Practice “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” Family Practice used that loan to pay its employees.

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November 25, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Saturday, October 22, 2016

Retired U.S. Tax Court Judge Pleads Guilty To Tax Fraud While She Sat On The Court

TCKFollowing up on my previous posts:

Minneapolis Star Tribune, Former Tax Court Judge From Twin Cities Pleads Guilty to Tax Fraud:

A former U.S. Tax Court judge pleaded guilty Friday to conspiring with her husband to fraudulently omit nearly $1 million of income from their tax returns while she served as judge, using the gains on personal expenses like international trips and Pilates classes.

Diane Kroupa, 61, faces up to five years in prison after pleading guilty to conspiracy to defraud the United States in federal court in St. Paul. A federal grand jury indicted Kroupa and her then-husband, Robert Fackler, 63, in April.

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October 22, 2016 in New Cases, Tax | Permalink | Comments (3)