Lesson From The Tax Court: Effect Of Lump Sum SSI Election On Premium Tax Credit

Last year I blogged about one unhappy feature of the Affordable Care Act (ACA):  §36B has no wiggle room in it to deal with reasonable taxpayer errors in calculating their Premium Tax Credit (PTC).  As a result, taxpayers sometimes get hit with really big deficiencies, even when the error is someone else’s fault.

Section 36B(f)(2)(B) tries to limit the harshness.  For families whose income is less than 400% of the relevant poverty line, that provision puts a cap on how much an error will cost them.  But that is no help to families who are just outside of the 400% threshold.  Nor does the law permit the Tax Court or the IRS to distinguish between good faith errors and taxpayer negligence.  I like how Christine Speidel put it in this post: “The problem for taxpayers hoping to avoid strict reconciliation is that section 36B simply does not have a mechanism to consider equity in the reconciliation of APTC.”

The good folks at Procedurally Taxing have really been on top of this §36B problem.  Here’s a list of their blog posts on the subject.  In particular, Christine Speidel has a good summary of the law here, and Samantha Galvin illustrates two recent §36B cases here. 

Two recent Tax Court decisions reveal a new dimension to §36B harshness: it’s interplay with the lump-sum SSI election in §86(e).  In Charles W. Monroe and Rebecca A. Monro v. Commissioner, T.C. Memo. 2019-41 (Apr. 24, 2019) (Judge Ruwe), and in Levon Johnson v. Commissioner, 152 T.C. No. 6 (Mar. 11, 2019) (Judge Gerber), the question was whether an SSI lump sum catch-up payment had to be counted in calculating PTC eligibility when the taxpayers had made an election under §86(e) to reallocate the lump-sum payment from current year into prior years.  The Court looked at the text of §36B and said “yep, gotta include the lump sum.” 

I doubt the Court enjoyed coming to its conclusion because the harsh result turns the tax law into a “gotcha” game that even reasonable taxpayers will lose.  But if you learn the lesson these cases teach, you can at least help your clients who are in similar situations. 

There was an alternative interpretation here, however, that practitioners might press upon the Tax Court in future cases.  A closer look at the §36B language suggests it may well have room for a different "plain language" interpretation consistent with the §86(e) policy.  While the Court's holding was not unreasonable, neither was was it desirable, and it was sure as heck not inevitable.  Details below the fold.

Continue reading

Lesson From The Tax Court: When Does A Business Start?

It takes money to make money.  Generally Congress allows taxpayers to deduct the money it takes from the money they make.  That’s the idea in §162.  But §162’s deceptively simple language----allowing a deduction for all “the ordinary and necessary expenses paid or incurred in carrying on a trade or business”---has gaps, to be filled by other statutes.  For example, §§183 and 212 apply the §162 idea to activities that are not a “trade or business” but still produce income and have associated costs.  And then there is that pesky timing issue: which costs are “expenses” that should be deducted in the current year and which costs should only allowed to be deducted over a longer period of time?  Sections 168(k) and 179 allow taxpayers to accelerate deductions of certain capital costs that otherwise would not qualify as “expenses” under §162’s simple language.

Section 195 deals with another gap:  how to treat the costs of starting a business.  Section 162 does not permit deductions until such time as the taxpayer is actually “carrying on” the business.  Section 195 allows taxpayers to reach back to the time before the business started and deduct their start up costs.  But to get to use §195 a taxpayer must actually start their business.  Last week’s case of Steven Austin Smith v. Commissioner, T.C. Sum. Op. 2019-12 (July 1, 2019) (Judge Vasquez) teaches a nice lesson about what it means to start a business.  There, the court found that a taxpayer was indeed carrying on his business even in a year where he had no sales income.  To be sure, he still lost because he was unable to substantiate his expenses.  There’s a bit of a lesson there as well.  But the main lesson is about when a business starts.

Continue reading

Lesson From The Tax Court: Yachts Are Pigs

.You can put lipstick on a pig, but it’s still a pig.  According to Wikipedia, that is a late 20th century update to an older expression "A hog in armour is still but a hog.”  Both convey the same idea: superficial alterations do not change the essence of a thing.   

Two recent cases from the Tax Court teach a tax version of that lesson: no matter how much you dress up a yacht in a business suit, it’s still a pleasure boat.  First, in Carlos Langston and Pamela Langston v. Commissioner, T.C. Memo. 2019-19 (Mar. 21, 2019) (Judge Nega), we once again learn a lesson from the Langstons, the same taxpayers who tried to convince Judge Nega that they had converted their home into an income-producing asset.  That was the subject of this prior lesson.  Here, in the same case, they also tried to pass off a modest 58’ 2006 Meridian 580 yacht as a business asset.  I say "modest" advisedly because the second case is Charles M. Steiner and Rhoda L. Steiner v. Commissioner, T. C. Memo 2019-25 (April 2, 2019)(Judge Ruwe) and it involves a decidedly immodest 155’ Super Yacht called “Triumphant Lady.”  After the Steiners decided to sell that yacht they first tried to dress it up as a leasing venture to reduce their considerable carrying costs pending sale. 

Turns out, size did not matter.  Both taxpayers floundered on two of the several sharp shoals in the Tax Code that sink attempts to pass off pleasure boats as businesses.  Taxpayers lured by the siren song of tax breaks should learn the lessons you will find below the fold.

Continue reading

Tax Profs Weigh In On Supreme Court's Decision On Constitutional Limits Of State Taxation Of Trusts

Following up on Saturday's post, Unanimous Supreme Court: State Cannot Tax Out-Of-State Beneficiary On Undistributed Trust Income:

• Daniel Hemel (Chicago), A Constitutional Right To Skirt State Income Tax?
• Erin Scharff (Arizona State), Presence of In-State Beneficiaries Alone Insufficient For State to Assert Jurisdiction to Tax Trust 
• Carla A. Spivack (Oklahoma City), Due Process, State Taxation of Trusts and the Myth of the Powerless Beneficiary: A Response to Bridget Crawford and Michelle Simon, 67 UCLA L. Rev. Disc. 46 (2019)

Lesson From The Tax Court: Ipse Dixit Cannot Fix It

Mitchel Skolnick and Leslie Skolnick, et al. v. Commissioner, T.C. Memo. 2019-64 (June 3, 2019) (Judge Lauber) teaches an important lesson about the proper use of expert witnesses.  In Skolnick, the Tax Court rejected the taxpayer’s expert witness valuation of of 153 horses at two points in time 7 years apart because the expert did not adequately disclose the facts and methodology used to value each horse.  Judge Lauber held that the taxpayer could not fix the value of the horses through expert’s ipse dixit.

The form of the lesson is also instructive.  Even though the parties went to trial this past April, Judge Lauber’s opinion does not decide the case...directly.  The opinion merely grants an interstitial motion, called a motion in limine, to exclude the expert’s report from the evidentiary record.  One might ask why the Court would take the time to issue an opinion on just one aspect of a case after the bother of a trial.  Why did not the Court just issue an opinion on the merits of the dispute?  After all, if the expert’s opinion is worthless enough to exclude from evidence, it is unlikely to really be helpful in deciding the merits of the case. 

I give my thoughts on both lessons below the fold, although I won’t blame you if you prefer to just watch this classic Monty Python sketch “The Argument Clinic.” Ipse Dixit is the form of argument that predominates in the sketch and is part of what makes it funny.  In real life, however, taxpayer representatives who do not heed today’s lesson will not be laughing. 

Continue reading

Unanimous Supreme Court: State Cannot Tax Out-Of-State Beneficiary On Undistributed Trust Income

North Carolina Dept. of Revenue v. Kimberley, No. 18–457 (June 21, 2019):

Joseph Lee Rice III formed a trust for the benefit of his children in his home State of New York and appointed a fellow New York resident as the trustee. The trust agreement granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee later divided Rice’s initial trust into three separate subtrusts, and North Carolina sought to tax the Kimberley Rice Kaestner 1992 Family Trust (Trust)—formed for the benefit of Kaestner and her three children—under a law authorizing the State to tax any trust income that “is for the benefit of” a state resident, N. C. Gen. Stat. Ann. §105–160.2. The State assessed a tax of more than $1.3 million for tax years 2005 through 2008. During that period, Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the State. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax as applied to the Trust violates the Fourteenth Amendment ’s Due Process Clause. The state courts agreed, holding that the Kaestners’ in-state residence was too tenuous a link between the State and the Trust to support the tax.

Held: The presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. Pp. 5–16.

Continue reading

Lesson From The Tax Court: Your Brand Is Your Business

Self-promotion is as American as P.T. Barnum.  So is wanting to avoid tax.  In K. Slaughter v. Commissioner, T.C. Memo. 2019-65 (June 4, 2019), Judge Wells teaches a lesson that all YouTube influencers and their return preparers need to learn: it is difficult to avoid self-employment tax on earnings from self-promotion.  Ms. Slaughter argued that her “brand” was an intangible asset separate from her business of writing crime novels, and so earnings attributed to her brand were not self-employment income.  The Court rejected her attempt to assign part of her earnings to what amounted to her investment in herself.  Her brand was itself her business.  Hey, at least she avoided penalties because her tax position was her accountants’ idea.  However, that leaves the accountants potentially vulnerable to penalties under §6694.  Details below the fold.   

Continue reading

D.C. Circuit: Black Law Professor Ostensibly Denied Tenure For Lack Of Scholarship May Sue D.C. Law School

Bloomberg Law, Fired Black Law Professor May Sue D.C. Law School:

University of the District of Columbia trustees must face race bias and breach-of-contract claims by a black law professor who was denied tenure and fired. A federal appeals court found that academic institutions shouldn’t receive special treatment under anti-discrimination laws.

The university said it denied Kemit Mawakana tenure because his scholarship was deficient, and a federal trial court granted judgment for the board of trustees.

But a jury could find race was a motivating factor in the university’s decision to deny him tenure, the U.S. Court of Appeals for the District of Columbia Circuit said June 14.

Mawakana v. Bd. of Trs. of Univ. of D.C., No. 18-7059 (D.C. Cir. June 14, 2019) (citations omitted):

Law professor Kemit Mawakana was denied tenure and terminated by his employer, the University of the District of Columbia. He sued the University’s Board of Trustees, claiming the University discriminated against him based on race and violated both the terms and spirit of its contract with him. The district court granted the University’s motion for summary judgment as to each count of Mawakana’s complaint. Mawakana appealed as to three counts. We now reverse as to those counts.

In 2006, Mawakana, a black male, was hired by the University of the District of Columbia (“University”) to serve as a law professor at the David A. Clarke School of Law (“Law School”). Pursuant to his initial employment contract, Mawakana was hired as an Assistant Professor for a three-year period. In 2009, Mawakana’s employment contract was renewed and in 2010 he was promoted to Associate Professor. In July 2011, Mawakana applied for tenure. There is no record evidence that Mawakana heard anything about his tenure application during the 2011-2012 academic year. In early fall 2012, he was invited to and attended a meeting of the faculty subcommittee assigned to review his application. At the meeting the subcommittee assured him that his application was in good shape. A short time later, however, Mawakana attended another subcommittee meeting at which the subcommittee informed him that it had some concerns about his scholarship. In November 2012, Mawakana was invited to and attended a meeting with Law School Dean Katherine “Shelley” Broderick (Broderick), and faculty subcommittee chairman, John Brittain. At the meeting they both suggested that he withdraw his tenure application. Mawakana refused. In February 2013, the subcommittee issued its assessment of Mawakana’s tenure application, concluding that his scholarship was not worthy of tenure and recommending that tenure be denied. The full faculty evaluation and tenure committee reviewed and adopted the subcommittee’s report. Broderick then reviewed and endorsed the recommendation of the full faculty evaluation and tenure committee. University Provost Ken Bain subsequently reviewed and adopted the recommendation of the full faculty evaluation and tenure committee and Broderick. Finally, University President James Earl Lyons upheld the recommendation of Provost Bain. On May 1, 2013, Mawakana received notice that he had been denied tenure and that his employment was to terminate effective August 15, 2013.

Continue reading

Lesson From The Tax Court: The Long Tail of OICs and IAs

Today’s lesson is about dogs and tails. Tax practitioners often work hard to get their clients into some kind of Offer In Compromise (OIC) or Installment Agreement (IA) with the IRS. Those are the dogs. But a successful IA or OIC involves more than just making timely payments on the deals. It involves an ongoing commitment to properly file returns and pay taxes for up to five years. That’s the long tail. And, to mix metaphors, that long tail can come back to bite a taxpayer who falls out of compliance. That’s the lesson we learn from two recent opinions: (1) Edward F. Sadjadi and Cynthia M. Sadjadi, T.C. Memo. 2019-58 (May 29, 2019) (Judge Cohen) (IRS can collect original liability against taxpayers who fully paid their OIC); (2) Kevin Scott Millen v. Commissioner, T.C. Memo. 2019-60 (May 30, 2019) (Judge Lauber) (taxpayer had his IA terminated even though he never missed a payment).

Continue reading

Avi-Yonah: Altera Redux

TaxProf Blog op-ed:  Altera Redux, by Reuven Avi-Yonah (Michigan):

On June 7, 2019, the Ninth Circuit Court of Appeals released its long awaited opinion in Altera.[1] Like its predecessor, the new panel chosen after Judge Reinhardt’s death reversed the Tax Court and held that the regulation requiring multinationals that enter into a qualified cost sharing agreement (QCSA) to share the cost of employee stock options is valid.[2]

The issue in Altera has been litigated repeatedly. In Xilinx, the Tax Court held that a previous regulation requiring that all costs be shared including the cost of stock options was invalid because it conflicted with the governing arm’s length standard (ALS).[3] On appeal, the Ninth Circuit first upheld the regulation, but then reversed itself over a strong dissent from Chief Judge Reinhardt.[4]

Continue reading

Tax Court Disallows Evangelist's Charitable Deduction For $40,000 Of Claimed Ministry Expenses

Don't Mess With Taxes, Evangelist's Almost $40,000 in Deductions Disallowed as Personal Expenses, Not Charitable Gifts:

Robert A. Oliveri, a self-described devout Catholic, spent almost $40,000 in 2012 traveling across the country conducting evangelical activities. The money went toward meals and gifts to strangers and acquaintances to further his religious outreach. ... Oliveri claimed myriad expenses totaling $39,979 as charitable contributions. ... [W]hen he tried to deduct those expenses from his federal income taxes, the IRS said no.

Last week, ... Tax Court Judge [Colvin] agreed with the tax agency, ruling that Oliveri's expenses didn't count as tax deductible charitable contributions and denied almost all those deductions [Oliveri v. Commissioner, T.C. Memo. 2019-57 (May 28, 2019)]. ...

Continue reading

Lesson From The Tax Court: Another Pyrrhic CDP Win

Last week, I discussed the case of Mr. Kearse, whose three lawyers secured him a CDP win some five years after filing a Tax Court petition.  They got the win because of an IRS screw-up.  They did not get the underlying assessment invalidated.  They did not get a merits determination of the underlying liability.  They did not kill future collection.  They got delay.  I questioned what value that whole process added for either Mr. Kearse or taxpayers in general.  

This week I discuss the case of Linda J. Romano-Murphy v. Commissioner, 152 T.C. No. 16 (May 21, 2019) (Judge Morrison).  Ms. Romano-Murphy, representing herself, secured a CDP win some 10 years after she first filed her Tax Court petition.  She got the win because of an IRS screw up.  Unlike Mr. Kearse's team she got the underlying assessment invalidated.   Once again, however, I question whether this win created value for either this taxpayer or taxpayers generally.

The case took 10 years because Ms. Romano-Murphy initially lost her Tax Court case on the merits of her liability.  She appealed to the 11th Circuit in 2013 on a procedural issue.  Three years later that court rendered its opinion that the IRS had screwed up by not following a new rule that the 11th Circuit discovered buried in an implication in the statutory language of §6672, a rule no one else had spotted during the 20 years the statute had been in operation.

The new rule is a procedural one: when the IRS proposes to assess a Trust Fund Recovery Penalty (TFRP) under Section 6672 and the taxpayer timely asks for a hearing with the Office of Appeals, then the IRS may not assess the liability until after Appeals performs its review and issues a document that reflects its final determination. 

The 11th Circuit sent the case back to the Tax Court to decide whether the IRS screw-up was harmless error.  In a 87-page opinion, the Tax Court said the IRS error was not harmless and held that the assessment was void.  It reversed the Appeals CDP determination since the IRS cannot collect a void assessment.

You may think this is great result for Ms. Romano-Murphy.  She got the assessment invalidated!  I wish I shared that happy outlook.  Alas!  I think the result is really just a win of delayed assessment and later collection.  And I cannot see how the 10-year delay benefits either the taxpayer or tax administration.  Details below the fold.

Continue reading

Lesson From The Tax Court: CDP Win Is Not Always A Victory

CDP officially stands for Collection Due Process.  I snark that it really stands for Collection Delay Process, because delay in administrative collection activities is really the main result taxpayers get from CDP.  But it’s not all snark.  At the administrative level, delaying the automated collection processes can be good for everyone.  Taxpayers can use that delay to work out collection alternatives and thus avoid the disruption of random ACS levies and NFTLs.  The IRS can bring more folks into ongoing compliance.  Win-win.

At the Tax Court level, however, delay generally helps neither taxpayers nor the IRS.  That is the lesson I see from two Tax Court cases decided last week:  (1) Jevon Kearse v. Commissioner, T.C. Memo. 2019-53 (May 20, 2019) (Judge Ashford); and (2) Linda J. Romano-Murphy v. Commissioner, 152 T.C. No. 16 (May 21, 2019) (Judge Morrison).  In both cases, the taxpayers “won” the case; the Tax Court entered a judgment for the taxpayers because of IRS screw-ups.  It is not clear, however, that the decisions did anything more than delay collection.  It appears the IRS can fix the procedural errors and then re-start collection.  If so, then the delay might actually hurt the taxpayers because of increased interest and penalties.  Or it might hurt the increasingly underwater federal fisc (and the rest of us) because delay increases the risk of taxpayers hiding or dissipating assets.

I will discuss Kearse this week and will discuss Romano-Murphy next week, when I’ve had more time to think on and condense that 87 page (!) opinion.

Continue reading

Taxes Slash $2 Billion Roundup Weedkiller Verdict To $27.5 Million

Forbes, Taxes Slash $2 Billion Roundup Weedkiller Verdict To $27.5 Million:

Another Roundup verdict is in, and once again, bizarre new tax rules make the IRS the biggest winner. This time, a Northern California jury found that Monsanto failed to warn users that Roundup was dangerous, awarding Alva and Alberta Pilliod $55 million in compensatory damages and a whopping $2billion in punitive damages. Alva and Alberta Pilliod used Roundup on their San Francisco Bay Area property for 35 years. They were both diagnosed with non-Hodgkin lymphoma, but are currently in remission. This is the largest jury award in the U.S. so far this year, and the eighth-largest ever in a product-defect claim, according to Bloomberg. Last year, jurors gave $289 million to a man they say got cancer from Monsanto's Roundup. That verdict was later reduced, and is on appeal. In early 2019, jurors awarded Edwin Hardeman $200,000 for economic losses, $5 million for past and future pain and suffering, and $75 million in punitive damages. Bayer has said it would appeal the jury award. Monsanto faces over 13,400 claims, and is fighting hard. But even if Monsanto pays up, new tax rules could swallow up many of the verdicts plaintiffs might be hoping to collect. 

Continue reading

Lesson From The Tax Court: Mostly Dead Corporation Cannot File Petition

As we learned from this scene in The Princess Bride, there’s dead...and then there’s mostly dead. 

In Timbron Holdings Corporation v. Commissioner, T.C. Memo. 2019-31 (April 8, 2019) (Judge Vasquez), the Tax Court decided that it could not hear the petition filed by a mostly dead corporation.  In reaching this conclusion, Judge Vasquez carefully followed existing Tax Court precedents to hold: (1) a corporation whose charter is suspended under California law (i.e. is mostly dead) has no capacity to file a Tax Court petition; (2) the corporation’s lack of capacity is not a defense that the government must raise but is instead an element of §6213’s jurisdictional requirements; and (3) “reliance on equity and policy considerations [cannot] overcome a jurisdictional defect.”

The idea that §6213 is a jurisdictional statute is an old idea.  Really old.  Decrepitly old.  If the right right case goes up on appeal, I think an appellate court will likely decide that old idea is dead.  Deceased.  Kaput.  Expired.  Gone.  Done in.  All-the-way dead.  Parrot dead.  To beat the dead horse, an appellate court is likely to find that §6213 is not a jurisdictional restriction on the Tax Court but is instead a “claims processing rule,” a term the Supreme Court uses to describe limitations that are important but not jurisdictional.  You can find the deathly dull details in my forthcoming article (Fall 2019 issue of The Tax Lawyer).

Timbron is not the right case to take on appeal.  I think the result would be the same even if §6213 were treated as a straight-forward non-jurisdictional limitations period.  But, either way, the result creates a curious contradiction in the Tax Court Rules.  Details below the fold.

Continue reading

Lesson From The Tax Court: Get It In Writing!

Last week’s case of Jason Aaron Cook v. Commissioner, T.C. Memo. 2019-48 (May 7, 2019) (Judge Colvin), teaches a straightforward lesson: if you are not the custodial parent of a child and want to claim the child as your “dependent” within the meaning of §152, you need to obtain a Form 8332, or an equivalent document, from the custodial parent.  You need to get it in writing.

The case also teaches a more fundamental lesson in some of the complexities of family taxation.  The lesson here shows how the tax law indirectly defines families through the concept of dependents.  When a taxpayer can claim someone as a dependent, that triggers a host of different tax rules for that taxpayer---mostly good.  The cumulative effect creates the rules of family taxation. 

The biggest group of dependents are children, at least until more Boomers hit their dotage.  When spouses stay together the idea of defining families through the concept of dependents works pretty well.  When spouses split up, however, it becomes much harder figuring out the appropriate family unit to tax.  Section 152(e) uses a concept of "custodial parent."  Last week’s case is a good illustration of the Tax Code’s basic approach, and its limitations.

Continue reading

Lesson From The Tax Court: It Takes More Than Winning To Get Attorneys Fees Under §7430

It’s always nice to beat the IRS in court.  It is even sweeter when you can also make the IRS pay your attorneys fees.  But that is not so easy, even when you win.  In last week’s Tax Court opinion in Jason Bontrager v. Commissioner, T.C. Memo. 2019-45 (May 1, 2019) (Bontrager II) Judge Lauber teaches a short lesson about the attorneys fees award provisions in §7430.  Section 7430 balances policies of paying taxpayers when the government loses with protecting the federal fisc when the government’s litigating position was reasonable.

Bontrager II was a proceeding where the taxpayer sought to recover reasonable litigation costs under §7430 after having won the most significant issue in the case.  Mr. Bontrager followed all the proper administrative steps to get attorneys fees.  Yet he failed to get fees because Judge Lauber found that the IRS’s losing position was substantially justified.  That idea of substantial justification often prevents attorneys fees.  But if you click the "continue reading" button you can learn the one weird trick taxpayers use to overcome it!  (Except it’s not really a trick.  And it’s not really weird.  It’s right in the statute.  I am just trying to get you to read on.)

Continue reading

Lesson From The Tax Court: The Role Of The Taxpayer Bill of Rights

Over the years Congress has enacted various pieces of legislation that it labels “Taxpayer Bill of Rights” (TBOR).  The original TBOR came in 1988 as part of the Technical and Miscellaneous Revenue Act of 1988.  It was followed by a free-standing TBOR II in 1996, and then TBOR III in 1998, enacted as part of The IRS Restructuring and Reform Act of 1998. 

All three of these TBORs created substantive changes in the tax laws, such as adding procedures for the IRS to follow, giving taxpayers greater access to the Tax Court, giving taxpayers the right to sue under certain circumstances, creating the Taxpayer Advocate Service, etc. 

In 2015, Congress did something different.  It enacted yet another TBOR but this time the substantive command was framed as an additional duty given to the Commissioner, not additional rights given to taxpayers.  The new duty is to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title.”  There follows a list of 10 nobly worded vagaries, such as “the right to quality service” and “the right to a fair and just tax system” and “the right to finality” which is somewhat in tension with “the right to challenge the position of the Internal Revenue Service” and “the right to appeal a decision of the Internal Revenue Service in an independent forum” (think Collection Delay Process).  You can find the complete high-minded list in §7803(a)(3). 

Taxpayers want TBOR IV to be more than pretty words.  They want §7803(a)(3) to give them substantive rights.  The recent case of Maria Ivon Moya v. Commissioner, 152 T.C. No. 11 (Judge Halpern) (April 17, 2019), teaches a lesson about that.  The case did not directly involve §7803(b).  It instead involved the administrative adoption of taxpayer rights in 2014, the year before the statute’s enactment.  Still, the Tax Court’s decision here is an important lesson that presages what is likely to happen when a taxpayer tries to allege violations of the statutory TBOR IV: do not waste Tax Court opportunities to argue the merits of an NOD by complaining about procedural errors. 

Continue reading

D.C. Circuit Upholds IRS's Voluntary Regulation Of Tax Preparers

Frank G. Colella (Pace), D.C. Circuit Upholds IRS's Voluntary Regulation of Tax Preparers — Majority Holds APA's Statutory Notice and Comment Not Required: AICPA v. IRS, 15 N.Y.U. J. L. & Bus.229 (2019):

In American Institute of Certified Public Accountants (“AICPA”) v. Internal Revenue Service (“IRS”), the D.C. Circuit for the District of Columbia Circuit (“D.C. Circuit”) reversed the District Court for the District of Columbia’s (“District Court”) dismissal and held, for a second time, that the AICPA had standing to challenge the IRS’s promulgation of the Annual Filing Season Program (“AFSP” or “the Program”). The D.C. Circuit then went a step further and ruled on the merits of the AICPA’s challenge to the IRS’s rulemaking. It held that the IRS had the statutory authority to promulgate the voluntary program to enhance the skills of licensed tax return preparers. However, while the D.C. Circuit was unanimous on standing and the merits, it split two-to-one on whether the IRS had followed proper procedure when it adopted the AFSP without first providing the requisite “notice and comment” period required by the Administrative Procedures Act (“APA”).

Continue reading

Lesson From The Tax Court: Distinguishing Investment From Business Activity

The U.S. economy rests in no small part on capital allocation decisions made by a panoply of private participants.  Adam Smith explained in The Wealth of Nations why such a system “handily” beats all the others.  These individualized decisions find their practical expression in the buying and selling of “stock” of corporations on the “stock” market. 

Since 1921 Congress has supported this mode of capital formation by taxing income derived from capital at a lower rate than income from labor.  I blogged about this huge tax subsidy in “The Tax Lawyer’s Wedding Toast” last year.  Curiously, however, Congress did not permit deductions for the expenses of managing stock market investments until it enacted what is now §212(1) in the Revenue Act of 1942.  Until then, while taxpayers could deduct the ordinary and necessary expenses associated with trade or business activity (§162), they could not take parallel deductions for expenses associated with the investment of capital. 

Section 212(1) is the fix: it permits the same deductions as §162 for activities that are not a trade or business but are still for “the production or collection of income.”  

Investment expenses are still, however, disfavored by the deduction hierarchy created by §62.  If a taxpayer can hook expenses to a trade or business (or a §212(2) rental real estate), then §62 permits the deductions above the line.  But if the expenses relate only to an investment activity, then while §212(1) allows the same deductions, they must be taken below the line.  Bad: that means they fight against the standard deduction.  Worse: since they are not mentioned in §67(b), they are subject to a 2% floor.  Worst: starting in 2018 such deductions get sucked into the black hole of the recently enacted §67(g).  That section completely disallows miscellaneous itemized deductions.  You can think of it as 100% floor.  Yuck. 

The deduction hierarchy makes it important to know when an activity is a trade or business or mere investment.  In Ames D. Ray v. Commissioner, T.C. Memo. 2019-36 (Apr. 15, 2019), Judge Nega teaches a nice lesson about the difference.  Mr. Ray argued that he was entitled to deduct certain legal expenses, relating to three lawsuits, under §162.  He was not successful.  Judge Nega, however, allowed Mr. Ray the deduction under §212.  To see why, dive below the fold.

Continue reading

Lesson From The Tax Court: Hoist By His Own Petard

In 17th Century warfare, armies used a primitive explosive device called a petard to help breach castles and walled cities.  It was basically a bell filled with gunpowder that would be shoved in a tunnel or hole facing the wall or gate to be breached.  The operator, called an enginer (pronounced “engine-ur” with emphasis on first syllable) would light the fuse and scramble back.  If all did not go well, however, the enginer might be blown up (hoisted) in the resulting explosion.  Thus the expression.  It’s an extremely common trope in fiction starting at least as far back as Hamlet, and continuing in modern times, as this lovely time-wasting website extensively details.

In tax law taxpayers build both primitive and sophisticated devices to avoid taxation.  Last week’s decision in Allen R. Davison III v. Commissioner, T.C. Memo. 2019-26 (April 3, 2019)(Judge Ashford) involves a taxpayer whose tax reduction device consisted of layering partnerships.  How ironic, then, that it blew up his chances for pre-payment litigation over the merits of a tax assessment.  He did not learn that unhappy lesson until both the IRS and then the Tax Court refused to let him litigate the merits of his tax liability in the CDP process.  Details below the fold.

Continue reading

Lesson From The Tax Court: Telling Stories

I teach my tax students that representing a taxpayer is about being the taxpayer’s voice.  They must tell the taxpayer’s story as best they can fit the facts to the law.  Thus, for example, in order to deduct expenses taxpayers must tell a convincing story that the expenses relate to an activity engaged in for profit.  Last week's Lesson concerned taxpayers who said they had converted their former personal residence into income producing property.  The story their representative told was simply too inconsistent with the facts to convince the Court.  Thus they were denied a §165 deduction when they sold the home for a loss.

This week’s lesson is similar.  In Edward G. Kurdziel, Jr. v. Commissioner, T.C. Memo 2019-20 (Judge Holmes), the taxpayer bought a plane, restored it, and flew it around the country. That's him flying his plane in the picture.  Here's a video!  What fun!

Oh, and he also took deductions for depreciation and ongoing expenses that far, far, far exceeded income from the plane.  He offset those losses against his hefty airline pilot salary.  The IRS eventually audited and disallowed the losses under the hobby loss rules.  So the taxpayer tried to sell the Tax Court on a story of profit-making activity.  In his usual airy, pun-filled, style, Judge Holmes explained why the taxpayer’s story didn’t fly.  Peter Reilly calls this the coolest hobby loss case ever.  He has a nice summary of the case on his Forbes blog.  What I see in the case is a lesson about storytelling.  One big reason the taxpayer lost here is because he told conflicting stories to different tax authorities.  Telling one story to your local tax authorities and another story to the IRS is, ultimately, not a successful tax reduction strategy.   You are trying to fool one of them.  I thought this was a particularly apropos lesson for today, April 1.  You will find the interesting details, with pictures of the crash (Mr. K was unhurt), below the fold.  If that's not click-bait, I don't know what is.  Who can resist seeing pictures of a crash? 

Continue reading

Lesson From The Tax Court: Nothing Personal

The Tax Code is built on a dichotomy between business and personal.  That is one of the ideas that runs throughout each semester of my basic tax class.  Whether a taxpayer is entitled to deduct an item of expense depends on whether the Code classifies the expense as business or personal.  In one box go expenditures needed to carry on an activity engaged in for profit.  Section 162 allows taxpayers to deduct the money it takes to make money.  In another box go expenditures made for personal consumption.  Section 262 disallows a deduction for such expenses.  One finds the same dichotomy in §165, which permits taxpayers to deduct business losses, but not non-business losses.

Sometimes it is difficult to distinguish business from personal.  In life, the difference is not a dichotomy but a continuum with expenditures often made for mixed purposes.  Still, taxpayer activity falls into either the deductible box or the non-deductible box.  There is no in-between.  The expense (or loss) is deductible or it’s not.  Congress helps taxpayers figure out into which box they fall with various statues.  Treasury helps them with various regulations.  And courts help with decisions like two Tax Court decisions from last week. 

Last week the Tax Court issued two opinions that teach lessons about distinguishing business activity from personal activity.  First, Carlos Langston and Pamela Langston v. Commissioner, T.C. Memo 2019-19 (Judge Nega) presents a really nice twist on the classic problem of how to tell when a taxpayer has converted a personal residence into an income-producing property.  There, the taxpayer's actual rental was not sufficient to convert a property formerly used as a personal residence into a property held for the production of income.  That surprised me.  Second, Edward G. Kurdzeil, Jr. v. Commissioner, T.C. Memo 2019-20 (Judge Holmes) concerns whether a taxpayer’s very expensive plane restoration activity was a business or a hobby.   I will blog Langston this week and Kurdziel next week. 

Continue reading

Chodorow: Opponents Of Clergy Housing Allowance Should Turn To Congress And The IRS After 7th Circuit's Rejection Of Establishment Clause Challenge

TaxProf Blog op-ed:  Opponents Of Clergy Housing Allowance Should Turn To Congress And The IRS After 7th Circuit's Rejection Of Establishment Clause Challenge, by Adam Chorodow (Arizona State): 

 The Seventh Circuit recently issued its long-awaited decision in Gaylor v. Mnuchin, holding section 107(2) constitutional.  Unless the plaintiffs appeal or decide to try again in another circuit, this decision ends a legal dispute dating back to 2002, when the Ninth Circuit, sua sponte, questioned the provision’s constitutionality.  Having written an article arguing that the provisions is unconstitutional (The Parsonage Exemption, 51 U.C. Davis L. Rev. 849 (2018)), drafted an amicus brief supporting the plaintiffs, and argued the case, I can’t say that I’m pleased with the result.  That said, this case had it all, and it was truly an honor to be involved in the fray.

The case raised a host of procedural issues, including standing to challenge tax provisions and the appropriate remedy for alleged constitutional violations.  It also raised factual questions related to Section 107’s legislative history and how allegedly similar provisions operate and were interconnected.  The case raised substantive constitutional question regarding the appropriate test to use to evaluate whether state actions violate the First Amendment and how to apply it to the facts of this case.  However, for my money, the best part was that this was one of those rare cases where tax theory could make a significant contribution to the understanding of how these provisions functioned.  In particular, it could help distinguish between normative provisions in the housing context and those designed to serve as subsidies.

For those considering another run at this, the court’s decision reached a number of conclusions that are, in my opinion, suspect 

Continue reading

Lesson From The Tax Court: Form 2848 Does Not Change Your Address

Generally, it’s nice to be noticed.  Tomorrow is my 24th wedding anniversary and I remain truly grateful that my wife noticed me one day long ago at a contra dance at Glen Echo.  That notice continues to this day, fully reciprocated. 

But sometimes it’s not so nice, such as when the notice comes from the IRS.  And when Congress wants the IRS to “notice” taxpayers (pun intended), it generally requires the IRS to send that notice to their last known address. 

The last known address rule is critical to learn.  Congress puts that rule in about 20 different statutes, helpfully listed in Rev. Proc. 2010-16.  The governing regulation generally allows the IRS to comply with the rule by using the address in its Master File database.  There are some exceptions.  In a blog last November, I discussed one exception: certain events can trigger an IRS duty of due diligence to go beyond the address in its database. 

Last week the Tax Court taught us about another exception in Damian K. Gregory and Shayla A. Gregory v. Commissioner, 152 T.C. No. 7 (Mar. 13, 2019) (Judge Buch).  There, Tax Court let us know, in a fully reviewed opinion, that a Power of Attorney (Form 2848) does not have the legal effect of telling the IRS that a taxpayer has changed their official address of record.  This is important because, as long-time practitioners know, Form 2848 used to work for that purpose (albeit as a backstop).  Time to unlearn that old lesson!  Details below the fold.

Continue reading

Lesson From The Tax Court: Murphy’s Law Of Mailing

When something goes right most of the time, we generally are not prepared for when it goes wrong.  Last week’s opinion in Teri Jordan v. Commissioner, T.C. Memo. 2019-15 (Mar. 4, 2019) (Judge Buch) teaches that lesson as applied to the §7502 statutory mailbox rule.  It also teaches us what we need to know to avoid the unhappy outcome for Ms. Jordan.

Most folks know something about the statutory mailbox rule in §7502.  Or at least think they do.  Almost everyone has a general idea if they mail their tax returns or, as here, their Tax Court petition on the last day of the deadline for filing, all will be well.  That generally works out for them because the U.S. mail is reliable.  That reliability leads many folks to think they can print off a stamp or postage label from an internet provider and drop the petition off at their nearest U.S. Post Office (USPS).  Or taking it to the counter of a Fed Ex or UPS “store” is the same as taking it to a USPS counter.  Again, those actions usually result in a timely petition. 

More savvy (or cautious) taxpayers, however, not only know the mailbox rule, they also know Murphy’s law.  They know the best way to beat Murphy’s law of mailing is to use Registered Mail or Certified Mail.  Ms. Jordan was not one of the savvy.  She  used a private postage label printed out from Endicia.com to mail her Tax Court petition.  That proved to be a mistake.  To see how her case is a lesson for all of us, read on.

Continue reading

Herzig: Supreme Court To Consider Proper State To Tax Trusts

David Herzig (Ernst & Young), U.S. Supreme Court Considers Proper State To Tax Trusts:

I love tax nexus cases! When the U.S. Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, No. 18-457 (Kaestner Trust) in January, I expected a flood of commentary. But, to date, very little attention has been paid to what is perhaps the most important state tax taxation and trust case in decades.

The problem in Kaestner Trust seems simple: In which state is a trust subject to taxation?

Of course, the question presented is more difficult, e.g., does the Due Process clause of the U.S. Constitution prohibit North Carolina from taxing the undistributed income of a New York trust based on a beneficiary’s residency in North Carolina? But the basic question is important and certain to force trustees to focus on state tax consequences. ...

Continue reading

Lesson From The Tax Court: No Human Review Needed For Automated Penalties?

Section 6751(b)(1) prohibits the IRS from assessing any penalty against a taxpayer “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination...”  The Tax Court will not sustain a penalty unless the IRS produces evidence that the required personal approval has taken place before the IRS first notifies the taxpayer (typically in either a 30-day letter or the NOD) about the penalty.  Section 6751(b)(2) provides an exception to the personal approval requirement for “any...penalty automatically calculated through electronic means.” 

Craig S. Walquist and Maria L. Walquist v. Commissioner, 152 T.C. No. 3 (Feb. 25, 2019) (Judge Lauber) was one of two reviewed opinions issued last week that gave the IRS important wins on the scope of §6751.  In Walquist the Automated Correspondence Exam (ACE) system hit the taxpayers with a §6662 substantial understatement penalty.  No IRS employee even knew about it until after the taxpayers petitioned Tax Court in response to the automated NOD.  Thus, there was no supervisory approval as required by §6751(b)(1).  The Court decided, however, that the IRS was entitled to the §6751(b)(2) automatic computation exception to the supervisory approval requirement. 

At one level, this was an easy case against two unsympathetic taxpayer hobbyists.  At another level, however, the decision may create problems down the road because the facts of the case are more modest than the scope of the Court’s language.  That tension between facts and language may end up harming other taxpayers ensnared by the IRS automated processes.  As usual, you will find the more complete story below the fold.

Continue reading

Lesson From The Tax Court: Drawing The Line

Tax law often involves line drawing.  Doyle v. Commissioner, T.C. Memo. 2019-8 (Feb. 6, 2019) (Judge Holmes) teaches two line-drawing lessons, one about the §104(a)(2) exclusion for payments received on account of physical injury and the other about “above-the-line” vs. “below-the-line” deductions. 

Mr. Doyle was a whistle-blower who sued his former employer after it fired him.  The parties settled the case without trial.  The former employer agreed to pay Mr. Doyle a total of $350,000 for lost wages and another $250,000 for emotional distress.  The payments were each split evenly between 2010 and 2011.  For each year the employer sent Mr. Doyle a W-2 for $175,000 and a 1099-MISC for $125,000.  In addition, Mr. Doyle paid some amount in attorneys fees.

The issue litigated in Tax Court was about the $125,000 emotional distress payments in each year.  It appears Mr. Doyle’s tax return preparer, one Herbert Hunter, took what can only be described as a bizarre reporting position.  No.  Wait.  It can also be described more kindly as “weird.”  That’s how Judge Holmes puts it.  A Judge with a less generous disposition might use the word “fraudulent.”

You be the judge.  To deal with the $125,000 payments for emotional distress, Mr. Hunter created a fake Schedule C, with a “999999” NAICS code (“unclassified establishment”).  On the 2010 Schedule C he reported the $125,000 payment, and then zeroed it out by two offsetting deductions: one for $23,584 for “legal and professional services,” and one for $101,416 for “personal injury.”  Mr. Hunter prepared the 2011 in much the same way, only then the deduction for legal fees was $33,000.  ”Weird”?  “Bizarre”?  “Fraudulent”?  Take your pick.  

By the time Mr. Doyle got to Tax Court, he at least had an attorney who understood the difference between an exclusion and a deduction.  One issue was whether the emotional distress payments were excludable under §104(a)(2).  The resolution of that issue is one of the line-drawing lessons today. 

But there was a second issue in the case, one that teaches a second line-drawing lesson. Mr. Doyle’s attorney, one Steven G. Early, seems to have totally missed the second issue, involving the proper place to deduct attorneys fees.  Judge Holmes missed that as well.  Sadly, I must confess I also missed it.  But Professor Gregg Polsky caught it (and I thank him for bringing it to my attention).  So I will pass that lesson on to you.  Keep reading. 

Continue reading

Lesson From The Tax Court: Jurisdiction To Determine Jurisdiction

Last week’s case of Steven Samaniego v. Commissioner, T.C. Memo. 2019-7 (Feb. 6, 2019) (Judge Lauber) teaches a great (and short) lesson about the Tax Court’s subject matter jurisdiction.  Mr. Samaniego had asked for a CDP hearing but the Office of Appeals thought his request was untimely.  So it gave him an Equivalent Hearing and issued a Determination Letter to reflect its decision.  Mr. Samaniego petitioned the Tax Court.  Problem: the Tax Court does not have jurisdiction to review an Equivalent Hearing.  Solution: Judge Lauber treated the hearing as a CDP hearing because he found that the Office of Appeals had miscounted the applicable time period.  Hey Presto! Jurisdiction.  But getting Tax Court review turned out to be a Pyrrhic victory for the taxpayer, because Judge Lauber found no error. 

As we gear up for post-shutdown litigation over late-filed petitions this case is a useful lesson about how the Tax Court will take seriously its obligation to determine the scope of its own jurisdiction.  The case also shows the Court's willingness to look through form to substance when doing so.  I see the case as a direct descendant of Marbury v. Madison, 5 U.S. 138 (1803).  Details below the fold.

Continue reading

Lesson From The Tax Court: Taxpayer’s Shell Game Defeats IRS

Those who perform shell games often view them as games of skill.  Those who lose money view them as blue collar swindles.  I personally lost money at one on the streets of New York in the early 1980’s, a tuition payment to the School of Hard Knocks. 

Sophisticated taxpayers use shells—layers of entities—to protect assets in a white collar version of the shell game.  In last week’s Campbell v. Commissioner, T.C. Memo. 2019-4 (Feb. 4, 2019) (Judge Kerrigan), it looks like the IRS lost money to one.  There, in a CDP proceeding, the Court found that the IRS abused its discretion in refusing an OIC of $12,600 to satisfy a $1.1 million tax liability.  The interesting part of the decision for me was trying to figure out how the taxpayer’s various shells affected the ability of the federal tax lien to attach to property or rights to property of the taxpayer.  Just based on what the Court wrote in its opinion, I think it possible that the IRS Chief Counsel attorney did not do enough to educate the Court on how to properly analyze the extent of IRS collection powers.

Of course, I am always trepidatious when critiquing an opinion, especially when the opinion is missing information that might well fix some of the problems I see.  Here, in particular, it may be me who is confused by the taxpayer’s shell game.  As usual, I welcome anyone who spots holes in my thinking to comment.

Continue reading

Lesson From The Tax Court: The Pain of Disappointment

There are two pains in life. There is the pain of discipline and the pain of disappointment. If you can handle the pain of discipline, then you’ll never have to deal with the pain of disappointment.
Nick Saban

Nick Saban may be a great coach, but that aphorism is unhelpful in its opaqueness. Perhaps he means that if you are disciplined enough, or prepared enough, no type of disappointment can hurt you because you will have done your best. If that’s his idea, litigators likely disagree. The pain of disappointment permeates any litigator’s professional life. Even the most disciplined litigators have to deal with the disappointment of adverse fact finding by a judge or jury. 

Last week it was government litigators’ turn to feel the pain of disappointment, in the case of 2590 Associates v. Commissioner, T.C. Memo. 2019-3 (Jan. 31, 2019). The case teaches a substantive lesson about the §166 bad debt deduction and a procedural lesson about the power of fact-finders, here Judge Goeke. It's a fun case to follow a Super Bowl Sunday because it tangentially involves Nick Saben. The mainstream press erroneously types it as Nick Saban's win over the IRS. That is wrong.  Saban was neither a party to the litigation nor did its outcome affect his taxes. He had already taken his winnings long before the litigation even commenced. Details and lessons below the fold.

Continue reading

Nick Saban Beats The IRS In Tax Court

Following up on my previous post, Will Nick Saban Sack The IRS In Tax Court?:  Wall Street Journal, Nick Saban Wins Again in Baton Rouge—Over the IRS:

Alabama football coach Nick Saban racked up a win this month after all, prevailing over the Internal Revenue Service in court.

Mr. Saban, whose Crimson Tide lost the national championship game Jan. 7, will get to claim a bad-debt deduction that the government tried to deny, the U.S. Tax Court ruled on Thursday [2590 Associates v. Commissioner, T.C. Memo. 2019-3 (Jan. 31, 2019)].

The deduction stems from a real-estate investment Mr. Saban made in Baton Rouge, La., through a property developer he met when he was head coach at Louisiana State University.

Continue reading

U.S. Supreme Court To Hear Key Income Tax Issue For $120 Billion Trust Industry

Forbes, U.S. Supreme Court To Hear Key Income Tax Issue For $120 Billion Trust Industry:

The U.S. Supreme Court has announced it will hear a trust tax case that has significant implications for states and trust beneficiaries: Hundreds of millions of dollars of annual tax revenue hang in the balance. “It’s a big development,” says Carol Harrington, an estate lawyer with McDermott Will & Emery.

The question posed in North Carolina Department of Revenue v. the Kimberley Rice Kaestner 1992 Family Trust is: Does the due process clause prohibit states from taxing trusts based on trust beneficiaries’ in-state residency?

partner Ronald Aucutt, editor of the recent developments materials for the Heckerling Institute of Estate Planning, called out the ongoing controversy regarding limits on the state income taxation of trusts as the No. 1 Estate Planning Development of 2018. Speaking at the Heckerling conference this week, estate lawyer Steve Akers of Bessemer Trust posed the vexing question this way: “Can a state tax a trust located in another state? What are minimum contacts?”

Continue reading

Lesson From The District Court: OIC Rejection Is No Basis For Wrongful Collection Suit Under §7433

Alas!  A closed Tax Court issued no opinions last week.  Curse that federal shutdown!  But the federal district courts did issue opinions.  The Administrative Office of the U.S. Courts website says they have enough money (from fees) to run through January 18th.  And their opinions teach lessons as well.

Today’s lesson comes from a lawsuit filed against the United States by Mr. Nicholas Morales, Jr. in 2017.  He sued under §7433, a statute that gives taxpayers a cause of action against the government when any IRS employee negligently, recklessly, or willfully "disregards" any statute or associated regulation in title 26 “in connection with any collection of Federal tax.”  His Complaint alleged that IRS employees had disregarded §7122 in refusing his Offer In Compromise.     

The Federal District Court for the District of New Jersey has issued two opinions in the case: Morales v. United States (Morales I) on March 26, 2018 and Morales v. United States (Morales II) on January 2, 2019.  Both opinions are marked “Not for Publication.”  They are not, however, marked “Not for Blogging”!  That’s a good thing because they actually make for a good basic lesson about the scope and limits of §7433.  You will find the lesson below the fold.

Continue reading

Lesson From The Tax Court: The Cheeky' Way To Avoid The Fraud Penalty

Courts and commentators often tout the voluntary nature of the United States tax system.  In one sense, the claim is true.  The tax determination process ultimately rests on taxpayers disclosing their financial affairs and paying what they owe---through withholding or otherwise---without overt government compulsion.  It is voluntary just like stopping one's car at a red light---at midnight with no traffic---is voluntary.  It takes each citizen's disciplined self-enforcement of the legal duty to keep both the tax and transportation systems running smoothly.

But saying the system is voluntary is also misleading.  The discipline of self-reporting and payment cannot be divorced from the constant coercive threat of discovery and the resulting civil or criminal sanctions.  It's Bentham’s Panopticon.  Congress weaves together civil and criminal penalties to enforce the legal duties to report and pay taxes.  It leaves the ever unpopular IRS to swing the net.  By my count, Chapter 68 of the Tax Code contains 48 separate civil penalty provisions to catch out taxpayers.

Today’s lesson concerns the §6663 fraud penalty.  On December 26, 2018, the Tax Court issued its opinion in Richard C. Mathews v. Commissioner, T.C. Memo 2018-212.  The decision was a holiday gift to a pro se taxpayer who was contesting deficiencies (and fraud penalties) assessed well after the normal three year limitation period had expired.  The IRS relied on the fraud exception in §6501(c)(1) but was unable to convince Judge Vasquez that the taxpayer had the necessary fraudulent intent.  This was likely a surprising result to the IRS because the taxpayer had: (1) lied to IRS agents; (2) massively unreported gross receipts for the two years at issue and many years before that; and (3) been convicted of the §7206 crime of subscribing to false tax returns for the years at issue.  To find out how the taxpayer dodged the fraud penalty bullet, read on.

Continue reading

Lesson From The Tax Court: Taxpayers Behaving Badly

This will be my last Lesson From The Tax Court for 2018.  Exam-grading season has started and I need every hour to give student exams the time and attention they deserve.  I will emerge from the flood of exams by January 4th and so my next Lesson will likely appear on Monday, January 7th.  Writing these blog posts is loads of fun and I appreciate the opportunity Paul has given me for sharing my thoughts with you.

For my last Lesson this year, I have saved some cases that I think will make your head shake in disbelief (SMH in text parlance).  Sometimes such cases teach a useful lesson, such as the one where the taxpayer took over $100,000 in charitable deductions over several years by using the original prices of clothing she bought on clearance.  That taught a useful lesson about valuation and about substantiation, so I blogged it here.

The cases today are simply object lessons.  Practitioners probably don’t need this lesson.  But still, it may be useful to be reminded that there are perfectly ordinary people out there---folks you might well enjoy spending the holidays with or who might make a marvelous mincemeat pie---who are either so overconfident or greedy when it comes to taxes that they end up being an object lesson for the rest of us.  So as you read about the following cases, I invite you to consider whether these taxpayers (and sometimes their attorneys) were unlucky, overconfident, greedy or something else, and whether, but for the grace of God, it could have been you or one of your clients?

Continue reading

Lesson From The Tax Court: NOD Reprints Are Not Copies, But May Still Trigger Presumption Of Correctness

One of the challenges of administering the tax laws to hundreds of millions of taxpayers is recordkeeping.  Since the 1960’s the IRS has increasingly met this challenge by computerizing its systems of records. As a consequence, it often no longer keeps paper copies of important documents but instead relies on accurate recordation of those documents in its computerized system of accounts.  For example, when the IRS sends out a Notice of Deficiency (NOD), an IRS employee inputs data to reflect the content of the NOD and inputs to reflect the issuance of the NOD.  If a taxpayer (or representative) later wants to see what was in that particular NOD, the IRS can re-print the content of that NOD but does so on a new form.  That’s not a copy.  It’s a reprint.

The difference between a copy and a reprint was an important to last week’s case of Jeffrey D. Gregory v. Commissioner, T.C. Memo 2018-192 (Nov. 20, 2018).  There, Mr. Gregory contested the Office of Appeals’ CDP determination that the IRS had taken the proper administrative steps to assess his 2009 tax liability.  In particular, Mr. Gregory argued that because the IRS was unable to produce an actual copy of the actual NOD it actually sent him, the Office of Appeals could not credibly verify that the IRS had properly sent the NOD.  The IRS argued that its computer records created all the evidence necessary for the Court to apply a strong presumption of correctness that the NOD existed and had been properly mailed.

Judge Halpern’s careful and thorough opinion is well worth your time, but in case you have too much holiday shopping yet to do, today’s blog will give you the short of it.  The takeaway lesson  here is that the IRS does not have to have an actual copy of an NOD to show it complied with administrative requirements, so long as it has sufficient other evidence to trigger a strong  presumption of correctness the courts give to IRS records.

Continue reading

Lesson From The Tax Court: Counting The Days

As a young child I counted the days to Christmas starting December 1st, using advent calendars.  As I grew older, advertisements taught me that not all days were equal; one counted “shopping days” differently than calendar days.  As I now grow old, the Christmas season starts the day after Halloween, briefly tolled by days around Thanksgiving. 

Counting days is important in tax law, both for substance (e.g. figuring holding periods, allocating expenses between business days and personal days) and procedure (e.g. applying limitation periods).  Fortunately, how one counts days in tax has not changed much since I was a child.  So the lesson we find in last week’s case of Randy Richardson and Melisa Richardson v. Commissioner, T.C. Memo. 2018-189 (Nov. 13, 2018), should stick with us for a while. 

Richardson involves a married couple who filed a CDP petition contesting NFTLs filed against them.  Shortly after filing their CDP petition they filed a bankruptcy petition and received a discharge.  When the IRS denied CDP relief, the Richardsons sought Tax Court review, arguing that the IRS did not correctly account for the discharge they got in bankruptcy.  They ended up before Judge Lauber.  The resulting lesson is how counting days can be important to resolving the question of what taxes the IRS can later collect.  Even more important, it’s a lesson on when NOT to use CDP, but to instead request an “Equivalent Hearing.”  Details below the fold.  You can count on it.

Continue reading

Lesson From The Tax Court: The Hotel California Rule

I love classic rock from the 70’s. Not just for all the great music, but for the way that the bands help me teach tax. For example, Fleetwood Mac teaches a lesson about §162 deductions for uniforms. I know, I know, you would think that lesson would come from the Village People, but it was Stevie Nicks who filed a petition in Tax Court after the IRS disallowed her deduction for stage clothing.

The Eagles’ classic “Hotel California” provides an excellent way to think about Tax Court procedure, as we can learn from the recent case of Daniel Sadek v. Commissioner, T.C. Memo. 2018-174 (Oct. 16, 2018).  In that case, the Tax Court dismissed as untimely Mr. Sadek’s 2017 petition contesting a 2011 NOD that the IRS had sent Mr. Sadek. The NOD was for $25 million and Mr. Sadek has not yet had a day in court to contest that amount. Oh, sure, he can sue for a refund but only if he fully pays the deficiency.  Flora v. United States, 362 U.S. 145 (1960). He could also file bankruptcy and ask the bankruptcy court to determine his tax liability under its powers in 11 U.S.C. §505. But Mr. Sadek’s best hope might come in a CDP hearing. That is what I want to explore in this post.

I think this case teaches a lesson about the relationship between the Tax Court’s deficiency jurisdiction and its CDP jurisdiction. The question is whether Mr. Sadek, who has now lost in Tax Court, will be able to contest the merits of the $25 million in a CDP hearing.  To answer that question, we need to understand the Hotel California rule and how it affects a taxpayer’s ability to turn what is ostensibly a hearing about collection into a hearing about tax liability.

Continue reading

Lesson From The Tax Court: Last Known Address Rules Apply To The Rich And Famous Too

The rich really are different, and not just because they don't cut coupons.  It often seems that they escape the rules that apply to the rest of us.  Thus, there is understandable fascination when rich bad actors get a comeuppance.  That is probably why so many folks blogged last week's decision about Wesley Snipes, where the Tax Court found that the Office of Appeals did not abuse its discretion in rejecting Snipes' OIC that would pay less than 4% of his $23.5 million tax liability.  "Tax Girl" Kelly Erb put up this terrific post if you want the salacious details.

Today I want to look at a different bad actor, one just as rich as Snipes, albeit a bit less famous.  The recent case of Daniel Sadek v. Commissioner, T.C. Memo. 2018-174 (Oct. 16, 2018), raises the question of whether the IRS is entitled to rely upon its records when sending an NOD to a rich and famous taxpayer who “everyone knew” had fled to Lebanon to ride out an FBI investigation.

In 2011 the IRS sent Mr. Sadek an NOD for over $25 million in tax deficiencies for the year 2005 and 2006.  Mr. Sadek did not file his Tax Court petition until 2017.  The IRS moved to dismiss because, it said, the petition was filed way after the expiration of the §6212 period to petition the Tax Court.  Mr. Sadek also moved to dismiss because, he said, the NOD was not sent to his last known address.  The IRS had sent the NOD to an address Mr. Sadek had left long before 2011.

The Tax Court indeed dismissed the case for lack of jurisdiction.  But since the Tax Court might lack jurisdiction either because of an IRS screw-up (not properly sending the NOD) or because of a taxpayer screw-up (not timely filing a petition) it is important to understand which party messed up and why.

The case teaches a useful lesson about when and how the IRS can rely on its own records in order to meet the last known address requirement.  I think Judge Goeke here got the right result, but I do question how he got there and so I offer what I (oh so modestly) believe is a better path.

Continue reading

Lesson From The Tax Court: When Payments To A Pastor Are Not Gifts

I don’t think Jesus ever charged for his services.  Jesus instead lived off of gifts.  Sure, some gifts got him in trouble, such as when Mary gave him expensive perfume and his followers complained he should have sold it to raise money for the poor. See John 12:1-8 (dramatized in this clip from Jesus Christ, Superstar).  But mostly Jesus worked off a sandal-strap budget.  He trusted in the generosity of those he encountered on the way. 

Modern preachers usually take a salary for their services.  Churches systematically solicit money from their congregation, both during each worship service and by encouraging yearly pledges.  And the main component of at least most Protestant church budgets (at least based on my experience) is personnel costs, the largest one being compensation for the pastor or minister. 

But modern preachers can receive gifts as well.  And while salary is taxable, gifts are not, thanks to §102.  The question becomes when are payments salary and when are they gifts?  In the recent case of Wayne R. Felton and Deondra J. Felton v. Commissioner, T.C. Memo. 2018-168 (Oct. 10, 2018), Judge Holmes teaches a great lesson how to answer that question. 

Continue reading

Preacher Taxed On Gifts From Congregation

Forbes: Preacher Taxed On Regular Gifts From Congregation Members, by Peter J. Reilly:

Archbishop Wayne Felton and Deondra Felton are the Senior Pastor and Overseer of Women Affairs, respectively, of The Holy Christian Church of St. Paul Minnesota (HCC). As a bishop, Felton serves as Apostolic Overseer of the Communion of Holy Christian Churches which consists of over 150 churches and ministries in the United States, Riwanda, Kenya and Liberia.The couple got behind in their income tax filing and caught up with joint returns for 2008 and 2009.

They were able to work out most of the issues on the returns with IRS, but there was one issue left for the Tax Court.  Was the cash and checks that congregants put in blue envelopes on Sundays taxable income or could it be excluded as gifts? Judge Mark Holmes, who is noted for his distinctive writing style,  concluded that the blue envelope money is taxable income in his opinion last week. It amounted to $258,001 in 2008 and $234,826 and 2009. ...

Continue reading

Lesson From The Tax Court: The TFRP Trap For Accommodating Payroll Service Providers

In last week's blog post about Loveland v. Commissioner, we learned that declining the opportunity to go to Appeals for a post-assessment hearing did not bar the taxpayer from raising the non-appealed issue in a later CDP hearing.  This was good for the taxpayer because the declined hearing was non-reviewable whereas the CDP hearing was reviewable (albeit lightly) by the Tax Court.  And we all clapped when the Tax Court remanded the case to Appeals to properly consider the OIC issue and gave Appeals some guidance on how to do that. The Tax Court thought that lesson so important that it made Loveland a reviewed opinion.

This week gives a contrasting lesson.  The contrast will not have you clapping.  This week's case involves the more common lesson that that a pre-assessment opportunity for a hearing with Appeals does indeed preclude the taxpayer from raising the issue in a later CDP hearing.  So it is not a reviewed opinion.  But I also see a second lesson here, about exposure to the Trust Fund Recovery Penalty (TFRP).  I see this case as one about a Payroll Service Provider who went too far in accommodating her client's needs and thereby exposed herself to the TFRP, perhaps needlessly.   This lesson may make you put you hands together, but more likely in prayer for your clients who are in the business of providing payroll services. 

The case is Joanna Kane v. Commissioner, T.C. Memo. 2018-122 (Aug. 6, 2018), and the details, as usual, lie below the fold.  

Continue reading

Lesson From The Tax Court: Using CDP To Stop The Collection Train

I am not a fan of the Collection Due Process (CDP) provisions Congress stuffed into the Code in 1998.  I call them “Collection Delay Process.”  It’s not that I favor taxpayer abuse!  But I think the source of abuse is rarely bad-acting IRS employees.  Bulk processing is generally the culprit.  The combination of computer-processing and over-whelmed employees creates an assessment process that runs over taxpayers who do not understand how to stop it or slow it down and who cannot afford to hire lawyers to do that for them.  And then, the end of that assessment process starts the engine of the collection train.  CDP is designed to keep the train from going down the wrong collection track before it leaves the station.  But CDP is a badly designed mechanism.  That was my conclusion in 2009, after I studied almost 1,000 CDP cases.  I have seen nothing in the past 10 years to change my mind.  

Those who disagree with me point to cases like the one I’m blogging about today: James Loveland Jr., and Tina C. Loveland v. Commissioner, 151 T.C. No. 7 (Sept. 25, 2018), a reviewed decision written by Judge Buch.  This is one of the rare cases where the Tax Court found that the IRS had abused its discretion in deciding to proceed with collection.  Here it looks like CDP prevented the collection train from running over the Lovelands.  The case provides a good lesson for what works, and what does not work, about CDP.  Keith Fogg also has a good post on this case over at Procedurally Taxing, explaining why it is a reviewed opinion.

The case is also an interesting lesson about Tax Court Procedure.  While the case is ostensibly a ruling on an IRS motion for Summary Judgment, Judge Buch effectively grants Summary Judgment to the taxpayers...who never asked for it.  This disposition—while sensible enough---is apparently an unwritten rule of Tax Court procedure.  At least I did not see a rule.  Nothing in 121.  Maybe I missed it.  But I think the Court is silently borrowing from Federal Rules of Civil Procedure 56.

Continue reading

Lesson From The Tax Court: What Is A 'Liability' For §108 Purposes?

To qualify for the insolvency exclusion in §108(a) one has to be insolvent.  Section 108(d)(3) defines insolvency as "the excess of liabilities over the fair market value of assets."  But nothing in the Code or Regulations defines the term "liabilities."  The recent case of Richard Bryan Jackson and Nora Irene Jackson v. Commissioner, T.C. Summ. Op. 2018-43 (Sept. 17, 2018), teaches a lesson about the meaning of that word. 

In February, I wrote about Discharge of Indebtedness (DOI) Income.  I called it “The Phantom of The Tax Code.”  Readers will recall that when a taxpayer obtains a loan, the loan proceeds are not reportable as gross income, but it is not entirely clear why.  The most common reason given is that the borrowed funds do not represent a increase in wealth because they are offset by the obligation to repay.  I call this the balance sheet theory.  The logic of this theory means that when the obligation to repay is discharged or relieved by the creditor, that discharge increases the taxpayer’s wealth to the extent that it frees the taxpayer from the obligation.  I go into more detail in my February post.

Section 108(a) reflects this balance sheet theory by allowing taxpayers to exclude DOI from gross income when they are insolvent but limiting the exclusion to the amount of the insolvency at the time of the discharge. For example, if a taxpayer is discharged from $10,000 of debt at a time when the taxpayer is insolvent by $6,000, then the taxpayer can exclude $6,000 of the DOI from income but must report the remaining $4,000 as gross income. 

Today’s lesson is about what types of obligations count as liabilities for purposes of determining insolvency. It turns out that not every obligation to pay someone is a liability.  To see why, read on!

Continue reading

Tax Prof Amicus Brief In State Corporate Income Tax Case

Hayes Holderness (Richmond), Darien Shanske (UC-Davis) & David Gamage (Indiana), Brief of Tax Law Professors as Amici Curiae in Support of the Department of Revenue of the State of Colorado in Department of Revenue of the State of Colorado v. Agilent Technologies, Inc.:

Amici write to address specific matters of tax policy and history raised by this case. In particular, amici address 1) the history and justification for water’s edge combined reporting (the “water’s edge method”) and 2) the history and justification for the remedial provisions that are uniformly part of state corporate income taxes.

Continue reading

Lesson From The Tax Court: When Non-Receipt Of An IRS Notice Matters

In 2015, Congress added what is commonly called the “Taxpayer Bill of Rights” to the Tax Code.  Currently codified in §7803(a)(3), it lays upon the IRS Commissioner the duty to ensure that IRS employees “are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title.”  Section 7803(a)(3) then lists 10 (natch!) rights including “the right to be informed” and “the right to appeal a decision of the Internal Revenue Service in an independent forum.”  I wonder whether the person who drafted that last quoted language, or any of the folks who reviewed it, discussed whether it makes any grammatical sense for one to “appeal...in” a forum?  

Putting aside the grammatical question, readers might well question the impact of these rights on IRS operations.  The recent case of Paul T. Venable, II v. Commissioner, T. C. Memo. 2018-144 (Sept. 10, 2018), suggests an answer for the two rights I quoted above: the right to be informed and the right to appeal an IRS decision to an independent forum.  It teaches a lesson about the rare situation where the lack of actual receipt of an IRS notice can be important to a taxpayer’s ability to get judicial review of an IRS decision.  But the lesson does not come from the language in §7803(a)(3).  Nope, the lesson comes from language in “other provisions” in the Code, notably the CDP provisions in §6330(c).

Continue reading

Lesson From The Tax Court: The Substantial Substantiation Rules In §170

The great philosopher George Carlin understands the problem of stuff.  My wife and I have too much stuff.  My wife, however, hates yard sales.  And we cannot afford a bigger house.  So we give a lot of stuff away. 

When Congress ratcheted up the substantiation requirements for deducting non-cash charitable contributions in 1993, we stopped giving to Goodwill.  That is because Goodwill did not change their pre-printed receipt form to say the now-required magic language “no goods or services were given in exchange for this donation.”  While some of our donations were below the $250 threshold, the aggregate value of our donations of similar items regularly exceeded that amount.  I remember one year I had to go up several layers of management to even get a letter with that language sent to me before I could file my taxes.  So we now favor other charities.

I was not just being picky in wanting a proper contemporaneous receipt, as the recent case of Estelle C. Grainger v. Commissioner, T.C. Memo. 2018-117 (July 30, 2018) demonstrates.  The taxpayer there was massively confused about the basic valuation rules for donations of property.  That’s one lesson here.  But I think another important lesson in this case is just how difficult the substantiation rules in §170 can be for substantial amounts of non-cash charitable contributions.  It was certainly an eye-opener for me, particularly the lesson about Form 8283.

Continue reading

Lesson From The Tax Court: Distinguishing Property Settlement From (Indirect) Alimony

Congress eliminated the deduction for alimony in the December 2017 Reconciliation Act (informally called the Tax Cuts and Jobs Act).  But the legislation grandfathered in alimony payments made pursuant to divorce or separation instruments executed on or before December 31, 2018. The question of whether a payment qualifies as alimony will thus still be important for many taxpayers for years to come.  The short lesson from the recent decision in Jeremy Adam Vanderhal v. Commissioner, T.C. Sum. Op. 2018-41 (Sept. 5, 2018) is thus worth blogging about.  Plus, it's nice to blog about one of those very rare wins for a pro se taxpayer.

This is mainly a drafting lesson: the tax effect of language in a divorce or separation instrument turns on what the language does more than what the language says it does. Here, Judge Carluzzo gives a very nice lesson on how not to be distracted by what the language says it is doing.

Continue reading