Lesson From The Tax Court: The Employer/Employee Gift Rule

Relationships can be messy.  That is true whether they are work relationships or romantic relationships.  But it is especially true for romantic relationships with co-workers.  Throw in a power disparity (in either direction) and the relationship becomes even trickier.  That is why I suspect most readers subscribe to the standard advice to avoid romantic relationships with co-workers—even if they honor that advice in the breach.  After all, the standard advice is often easier said than done. Humans are not little neat boxes where you can separate relationships into “work” and “personal.”  It’s messy.

That messiness invades tax law.  The Supreme Court has said as much in how it tells us to apply the §102(a) exclusion from income for gifts.  Congress has tried to lessen the §102(a) mess with a bright line rule in §102(c) that prohibits the exclusion when a gift is from employer to employee.  Call that the employer/employee gift rule.  In Jennifer Joy Fields and Walter T. Fields v. Commissioner, T.C. Sum. Op. 2022-22 (Nov. 10, 2022) (Judge Panuthos), we see the employer/employee gift rule applied to a CEO’s decision to help an employee buy a home with company money.  Despite their personal relationship, the employer/employee relationship meant there was no exclusion.

Today’s lesson seems especially timely in light of the approaching holiday season with all its messy relationship and gift-giving complexities.  Details below the fold. 

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Lesson From The Tax Court: An Object Lesson For Tax Professionals

It is not always easy to follow the advice you give others. A common question I get is "how long should I keep my tax records?" My somewhat snarky reply is “as long as you need to.” The response is not entirely snarky because even though each tax year stands alone, events that occur in one year might have tax repercussions many, many years later.

In Betty Amos v. Commissioner, T.C. Memo. 2022-109 (Nov. 10, 2022) (Judge Urda), the taxpayer failed to keep records as long as she needed to is.  It is an object lesson for all of us. Ms. Amos was a highly successful tax practitioner, a CPA, who had decades of high-level business experience.  On her 2014 and 2015 returns she reported about $100,000 of IRA income against which she claimed over $4 million of net operating losses (NOLs) that dated back to 1999. While she could produce her 1999 tax returns showing the NOLs, she could not produce the underlying records substantiating what she had then reported, causing Judge Urda to write “It beggars belief that she would be unaware...[of] her responsibility to demonstrate her entitlement to the deductions she claimed.” Op. at 11.  Details below the fold. 

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Lesson From The Tax Court: The Impact Of De Novo Review In Spousal Relief Cases

I don't just inflict misery on tax students.  I also teach a class in Civil Procedure to first year law students.  One recurring lesson there concerns the different standards courts of appeals use when reviewing trial court decisions.  I want my students to learn to that the applicable standard of review matters.  It not only makes a huge difference in the outcome of the current case, but it also can make a huge difference in the precedential effect of that case on later cases.

We learn today how the different standards of review affect both outcomes and precedential value of old spousal relief cases.  We also learn how the Tax Court might be induced to finesse the bastardized administrative record rule in §6015(e)(7).  In Pia O. Bacigalupi v. Commissioner, Docket No. 20480-21 (Order of Oct. 27, 2022) (Judge Holmes), the IRS Office of Appeals decided Ms. Baciglupi should be held to the joint liability she had agreed to bear when she signed the joint returns.  They were unmoved by her present circumstances and denied her request for §6015(f) equitable relief.  Despite the record review rule, Judge Holmes allowed her to testify, and on the basis of that testimony disagreed with the IRS about two crucial factors for spousal relief.  Under an abuse of discretion review, that disagreement would not have mattered but under the de novo review, it made all the difference.  The de novo review standard also allowed Judge Holmes to ignore certain precedents unfavorable to Ms. Baciglupi.  Notice, however, this is just an unpublished bench opinion, so don’t get too excited.  For more about that, I recommend Keith Fogg’s excellent post from last week on bench opinions in general and this case in particular.  Meanwhile, you will find today's lesson in more detail below the fold. 

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Lesson From The Tax Court: Fake It Till You Make It

Today’s lesson is how to win a valuation dispute with the IRS.  I don’t teach much about valuation in my basic tax course. When we work problems involving property, the problems generally tell students to assume a certain fair market value (FMV) for the property.  For example, when I teach the deductions allowed by §170 for contributions of property to a charity, what I want students to learn is the reduce-to-basis rule.  To work that particular rule, those problems just assert an FMV because I’m trying to get them to focus on what kind of property is being donated and to what kind of charity.  See e.g. last week’s lesson “The Reduce-To-Basis Rule For §170 Deductions,” TaxProf Blog (Oct. 17, 2022).

I tell students that in real life, valuation is often open to dispute.  That is because facts matter.  And facts may often be disputed.  Moreover, assumptions matter as well.  And assumptions may often be questioned.

This week, we learn a great lesson from the Tax Court on how to win a valuation dispute against the IRS: have a better expert.  While that is easy to say, the 43-page opinion in Champions Retreat Golf Founders LLC et al. v. Commissioner, T.C. Memo. 2022-106 (Oct. 17, 2022) (Judge Pugh), teaches how it is not always easy to do. Today’s case involves the valuation of a conservation easement.  The taxpayer’s expert was not the best, but the IRS’s expert was worse.  So the taxpayer won.  The lesson is kind of like the old joke that you don’t have to outrun the bear: a taxpayer’s valuation does not have to be the best possible; it just has to be better than the IRS’ valuation.  Details below the fold.

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Lesson From The Tax Court: The Reduce-To-Basis Rule For §170 Deductions

Basis is probably the most important concept I teach in my intro income tax course.  I like thinking of basis as the tax history of a piece of property.  It tracks what ought not to be taxed upon eventual sale or exchange of that property under the calculations required by §1001.  But a proper understanding and tracking of basis can also be important for other reasons, such as determining the amount of a §165 loss ... or calculating the amount of a §170 deduction for  charitable donations.

Donald Furrer and Rita Furrer  v. Commissioner, T.C. Memo. 2022-100 (Sept. 28, 2022) (Judge Lauber), teaches a lesson on the importance of basis in determining the amount of a §170 deduction for the donation of property to charity.  We also learn a cautionary lesson on the use and mis-use of Charitable Remainder Annuity Trusts (CRATs).  The taxpayers here were farmers who donated crops to a CRAT and then attempted to claim a §170 deduction based on the fair market value of the donated crops.  That ran afoul of the reduce-to-basis rule.  Details below the fold.

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Lesson From The Tax Court: Know Your TMP

In my now 22 years of teaching tax, I have assiduously avoided teaching partnership taxation.  With any luck, I’ll never have to.  Inside and outside basis still confuse the heck outta me.  But I do teach tax procedure, so I’ve been forced over the years to learn something about the rules governing audits of partnerships.

If there is one stand-out lesson I’ve learned, it’s the one Judge Buch teaches us in Trevor R. Pettennude v. Commissioner, T.C. Memo. 2022-79 (July 18, 2022): individual partners are often at the mercy of their Tax Matter Partner (TMP) when it comes to participating in partnership-level determinations.  The burden is on each partner to know their TMP, and to ensure they are in the loop on important partnership matters.  That may even more true post-TEFRA.  In today’s case, Mr. Pettennude was a tiny partner in a large coal tax credit shelter partnership.  The IRS caught on and audited the partnership.  No one told Mr. Pettennude about either the audit or its results (not happy ones) until the IRS told him he owed about $850,000 in additional taxes.  He tried to contest that in a CDP hearing.  It did not go well.  Details below the fold.

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Lesson From The Tax Court: Don’t Confuse Dummy Returns With Substitutes For Returns

The act of filing a return is central to tax administration. Section 6011 sets out the general requirement: “any person made liable for any tax imposed by this title” must file a return “according to the forms and regulations prescribed by the Secretary.”  Section 6012 gets more granular and gives more specific requirements and exemptions from filing.

When a taxpayer fails to file a return, even after being reminded to do so, the IRS can simply send the taxpayer a Notice of Deficiency (NOD), and let the taxpayer either agree to the proposed tax liability or petition Tax Court.  Or the IRS can follow the §6020 Substitute For Return (SFR) process whereby it creates a return for the taxpayer either with or without the taxpayer’s cooperation.

Regardless of how the IRS deals with the non-filer, an IRS employee first needs to create an account in the computer system for the relevant tax period.  They do that by inputting the proper Transaction Code and preparing what is called a “dummy return” to support it.  But there is one important difference between dummy returns used to set up the NOD process and dummy returns used to set up the SFR process: the §6651(a)(2) failure to pay penalties only apply to the failure to pay taxes shown on a “return.”  Thus, the penalties do not apply to bare NODs.  They do apply to SFRs.  That’s why today’s lesson is useful.

In William T. Ashford v. Commissioner, T.C. Memo. 2022-101 (Sept. 29, 2022) (Judge Vasquez), we learn what to look for in the IRS files to see whether a dummy return used by the IRS leads to a proper SFR or not.  We also learn why you cannot always trust the advice you see on the IRS website.  Details below the fold.

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Lesson From The Tax Court: Honor The Corporate Fiction

A corporation has no soul to be damned and no body to be kicked.  So supposedly said Baron Thurlow long, long ago.  It is but a  legal fiction.  It’s not the Borg (which is science fiction, not legal fiction).

The fictional nature of corporations creates all kinds of gnarly problems in criminal law, in constitutional law and, as we learn today, in tax law.  When I was in practice my clients often confused their personal selves with the closely held corporate doppelganger I created for them.  They repeatedly ignored the corporate fiction.  They were the kings of their empires and, like Louis XIV, they felt they were the corporation and the corporation was them.  I am sure many readers can relate to that!

In John E. Vorreyer and Melissa D. Vorreyer, et al. v. Commissioner, T.C. Memo. 2022-97 (Sept. 21, 2022) (Judge Greaves) two of the “et al” taxpayers ignored the corporate fiction to their detriment: they paid debts of their S Corporation from their personal funds and attempted to deduct those payments on their personal income tax returns as a §162 deduction. While the payments were in fact ordinary and necessary expenses for the carrying on a farm business, the corporate fiction prevented the taxpayers from taking the deduction on their individual returns.  It was not their farm business.  It was their corporation's.  Details below the fold. 

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Lesson From The Tax Court: Checks ... Still Matter

Who uses paper checks anymore?  Not my kids.  My daughter even prefers to incur a surcharge for using her debit card to pay her rent rather than walking a paper check to the rental office.  The practical reason, she says, is that when she uses her debit card she can immediately see the impact on her checking account balance by looking at her “available balance” number in her banking app.  If she wrote a check, she’d have to wait until the check cleared and she fears over-drawing her account.

That delay—between the time a person writes and check and the time it gets reflected in their checking account—is what gives us our lesson in Estate of William E. Demuth Jr. et al. v. Commissioner, T.C. Memo. 2022-72 (July 12, 2022 )(Judge Jones).  In that case the issue was the value of an investment account on the date of the decedent’s death.  On that date there were 10 checks totaling $436,000 that had been written on the account but had not cleared.  The Executor did not include that amount on the Form 706 because the recipients of the checks had deposited them before the decedent died.  Their accounts had been credited.  They had been paid.  Or so thought the Executor.  The IRS, however, thought that the checks had not been paid because they had not cleared the decedent’s bank.  So the money still belonged to the taxpayer and should have been included in the valuation of his Estate.

In (mostly) agreeing with the IRS, Judge Jones gives us a useful lesson on basic commercial law principles.  Maybe my kids won't care, but enough folks still use checks that it's a lesson worth remembering.  Details below the fold. 

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Lesson From The Tax Court: The Finality Of Closing Agreements

Section 7121 authorizes the IRS to enter into “an agreement in writing” with taxpayers “in respect of any internal revenue tax for any taxable period.”  Such agreements are called “Closing Agreements.”  As implied by that name, the big idea here is that such agreements are meant to “close” a particular tax issue or a particular tax year or years.  Accordingly, the general rule is that such agreements are final: they “close” the ability of either the IRS or the taxpayer to later assert a different position with respect to the matters covered in the Closing Agreement.

In Cory H. Smith v. Commissioner, 159 T.C. No. 3 (Aug. 25, 2022) (Judge Toro), the Tax Court teaches a lesson on that finality rule.  There, the taxpayer had signed a Closing Agreement for multiple years promising not to claim the §911 exclusion for foreign earned income.  He then reneged by filing amended returns (for some years) and original returns (for other years), breaking that promise.  Even though the opinion is a 43-page precedential opinion, the lesson is relatively simple: Closing Agreements are final; one must be very careful when signing one because final means final.

What is also interesting (at least to me) is why the Tax Court may have taken extra effort to hammer on the finality rule and issue this opinion as a T.C. opinion.  It seems Mr. Smith did not act alone.  He appears to have received some dubious advice from his tax return preparer, an Enrolled Agent (EA) who awkwardly styles himself as “Dr.” Castro.  Op. at 16, note 20.  That EA seems to have also given the same bum advice to a bunch of other taxpayers.  The Court notes that “at least 19 other cases pending in our Court involve the same issue as the one presented here.”  Op. at 11, note 14.  So making this first-out opinion a precedential opinion should help to efficiently dispose of all the rest.  The Court makes the effort to note that all 19 of the other cases involve this same EA.  This leads to some thoughts about potential §6694 penalties.

Details below the fold.

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Tax Court Seeks Amicus Briefs On Innocent Spouse Jurisdictional Issue

A recent Tax Court order seeks amicus briefs on an interesting jurisdictional issue in innocent spouse cases under § 6015(e). Frutiger v. Commissioner, Nos. 25835-21 & 31153-21 (Sept. 7, 2022) (Judge Buch):

Under section 6015(e)(1), if the Commissioner denies innocent spouse relief, the taxpayer who sought relief may file a petition with the Tax Court to challenge the Commissioner’s final determination. The petition must be filed within 90 days of the date the Commissioner mails the final determination letter to the taxpayer. I.R.C. § 6015(e)(1)(A). The Court has previously held that this deadline is jurisdictional. Pollock v. Commissioner, 132 T.C. 21 (2009) but see Boechler v. Commissioner, 142 S. Ct. 1493 (2022).

If the Commissioner mailed his final determination to Mr. Frutiger on June 16, 2021, the 90-day period for timely filing a petition with this Court ended September 14, 2021. Mr. Frutiger’s petition was mailed to the Court on September 16, 2021, and received by the Court on September 20, 2021.

Without additional information, it appears that Mr. Frutiger’s petition was untimely. For the Court to determine whether the petition was untimely, the Commissioner must provide proof of when he mailed the notice of determination to Mr. Frutiger. If proof of mailing is not available, the Commissioner must address whether the presumption of administrative regularity would apply in determining when the notice of determination was sent. Lastly, if the petition was untimely, the Commissioner must address whether the Court lacks jurisdiction over an untimely petition in an innocent spouse case filed under section 6015(e)(1)(A). Accordingly, it is ...

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Lesson From The Tax Court: Substantiation Means More Than Receipts

It's the day after Labor Day.  So it's fitting for a post about a taxpayer who labored for a good cause only to learn that the Tax Code does not allow deductions for the cost of providing such labor unless linked to a trade or business.  Yes, this is a §162 travel-away-from home case.  Deductions claimed under §162 for business travel away from home most often get cut down by the buzz saw of the substantiation requirements in §274.  Today’s short lesson reminds us that substantiation means more than meeting §274’s demand for adequate receipts.  It requires meeting §162’s requirement for an adequate connection between those expenses and an identifiable trade or business.

While §162 is a pretty low bar, the taxpayer in George C. Luna v. Commissioner, T.C. Summ. Op. 2022-18 (Sept. 1, 2022) (Judge Carluzzo), was unable to meet it.  Sure, he had adequate receipts for his travel to Brazil.  But he could not connect them to the labor he did for a living, in Los Angeles.  He could connect them to his separate labor of studying the impact of social media on Brazilian children to help them deal with those impacts.  While laudable, however, that activity was not a trade or business.  Details below the fold.

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Lesson From The Tax Court: The Law Of Unintended Consequences

To say the Internal Revenue Code is complex is like saying a virus is hard to see.  It understates the obvious. NSS.  Today the Tax Court teaches us one consequence of that complexity: the meaning and scope of one statute (§6103) can be altered by the later addition of another statute (§7623(b)).  The former is the statute that requires the IRS to keep taxpayer information confidential.  The latter is the statute that allows whistleblowers to obtain Tax Court review of a denial of a whistleblower award.

In Whistleblower 972-17W v. Commissioner, 159 T.C. No. 1 (July 13, 2022) (Judge Toro), the Court said the IRS had to give a whistleblower the unredacted returns and return information of three taxpayers that the whistleblower informed on.  Folks, this is a reviewed opinion and all 15 of the reviewing judges agreed with Judge Toro’s decision (one judge did not participate).  While the decision is rational, its conclusion is certainly not a slam dunk.  IMHO it misses the forest for the trees, resting on a curious presumption about the statutory text in 6103.  Whether or not readers agree with that, we can all agree this case illustrates how a later statute may give new meaning to the words in an older statute.  That is an inherent difficulty in interpreting statutory language that is part of such a wickedly complex Code.

Trigger warning: today’s post runs a bit longer than normal.  So the refresh rate will likely bother those who click through.  I am so sorry for that!  But this lesson is really just so cool that I hope you will persevere.

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Lesson From The Tax Court: State Law Label Did Not Control Federal Tax Consequences

Some things never change:  people get married, people get divorced.  Sure, the divorce rate has fallen somewhat, as this thoughtful 2018 Time Magazine analysis explains.  But people continue to marry, and some non-trivial percentage of those marriages will end in divorce.  Plenty of work for family lawyers.

Other things constantly change:  tax law, for example!  While divorce is primarily a matter of state law, good family lawyers need to keep an eye out for the tax consequences of divorce.  They need the tax lesson we learn today.  Despite recent changes in taxation of certain divorce payments, it's a lesson that never gets old: state law cannot trump federal tax law.

In Alejandro J. Rojas and Elena G. Rojas v. Commissioner, T.C. Memo. 2022-77 (July 18, 2022) (Judge Thornton), the taxpayer was obligated to pay his ex-wife what the divorce decree labeled “family support” under California law.  Under state law, none of those payments were for child support.  Alejandro decided that the state law label entitled him to deduct those payments in 2016 as alimony under former §215.  The Tax Court decided otherwise, finding that all the payments were child support for federal tax purposes, despite the state law label.  State law did not control federal tax consequences.  Details below the fold.

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Lesson From The Tax Court: Taxpayer Could Not Prove His Way Out Of §162(f)

The basic rule is simple: the taxpayer bears the burden of proof.  That is, all income is gross income unless the taxpayer proves a statutory entitlement to an exclusion; and no expenditure is deductible unless the taxpayer proves a statutory entitlement to a deduction.

Complexity comes in the statutes that allow exclusions and deductions.  But the basic burden does not change: it is ultimately the taxpayer who must persuade either the IRS or the Tax Court of their entitlement to the exclusion or deduction claimed.

Clement Ziroli and Dawn M. Ziroli v. Commissioner, T.C. Memo. 2022-75 (July 14, 2022) (Judge Nega), shows us how the burden of persuasion applies in the complexity of a deduction statute.  There, the taxpayer sought to deduct an expenditure that was allowed by §162(a) but might or might not be disallowed by the §162(f) prohibition of deductions for penalties.  The taxpayer was unable to persuade the Tax Court that the expenditure was not a penalty.  He could not prove the negative.  Hence, no deduction.

The lesson relates back to the idea we looked at last week: the ambiguity of penalties.  Here, that ambiguity worked against the taxpayer because of the burden of persuasion.  Details below the fold. 

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Lesson From The Tax Court: Non-Receipt of 1099 Does Not Get You Out of Penalties

When we think of penalties we naturally think of punishment.  I mean, to channel Steven Wright, if a penalty is not punishment when why does the word start with “penal”?  Both this week and next week’s lesson teach us how penalties serve other purposes as well.  Today, in Lionel E. Larochelle and Molly B. Larochelle v. Commissioner, T.C. Summ. Op. 2022-12 (July 12) (Judge Leyden), we learn why non-receipt of a Form 1099 does not constitute reasonable cause to escape the §6662(a) penalty for making a substantial understatement of tax.  Next week we will look at whether a court-ordered disgorgement of illegal gains is a penalty for purposes of a §162(f) prohibition on  deductions for governmental fines or penalties.  Today’s short lesson awaits below the fold. 

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Lesson From The Tax Court: Excise Tax On Messed Up IRA Rollover Different From Income Tax

The tax laws are conflicted.  They encourage retirement savings by permitting taxpayers to deduct contributions to their Individual Retirement Accounts (IRA’s).  But that encouragement is hedged by various restrictions and caps as well as a special excise tax imposed on contributions that exceed the applicable caps.  And Congress crosses its fingers if taxpayers take early distributions.  Those can result in penalties as well as inclusion in gross income.  However, Congress uncrosses those fingers if the early distributions are properly rolled into another IRA.

Given these various statutory hedges and crossed-fingers, it’s no wonder that navigating the tax rules for retirement accounts is tricky!  Particularly tricky are managing rollovers from one type of retirement plan to another.  Mistakes there can have both income tax consequences and excise tax consequences.  Thus, we must always keep straight the difference between different types of taxes, just like we saw in last week’s lesson.

This week, we learn how excise tax consequences are different than income tax consequences of a messed up IRA rollover.  In Clair R. Couturier, Jr. v. Commissioner, T.C. Memo. 2022-69 (July 6, 2022) (Judge Lauber), the taxpayer escaped a huge income tax liability for messing up some of the rollover rules because the limitation period for assessment had run, but got snagged for a $8.5 million excise tax for excess IRA contributions.  Yeah, we’re talking a lot of money here, putting enough at risk for the taxpayer to hire one of the best tax lawyers in the country to represent him.  Alas, even Lavar Taylor could not pull him out of the $8.5 million hole.  He tried to argue that the IRS was bound by the income tax characterization of the transaction.  The Court rejected that argument because...an excise tax is not an income tax.  Details below the fold. 

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WSJ: The Fine Print Cost A Widow A $464,000 Charitable Tax Deduction

Wall Street Journal Tax Report, The Fine Print Cost a Widow a $464,000 Tax Deduction:

Charitable donors, beware: A widow has lost a $464,000 tax deduction for a gift to a museum because her tax paperwork lacked a few key words.

The recent Tax Court decision in Albrecht v. Commissioner [T.C. Memo. 2022-53 (May 25, 2022)] is a fresh reminder of how rigid the standards for charitable deductions often are.

Here are the facts in the case. Over the years Martha Albrecht and her husband amassed a large collection of Native American jewelry and artifacts. In late 2014 Ms. Albrecht, by then a widow, donated about 120 items to the Wheelwright Museum of the American Indian in Santa Fe, N.M., a well-known institution.

On her 2014 tax return, Ms. Albrecht claimed a charitable-donation deduction of $463,676 for her gift. Although her income wasn’t large enough to take the entire deduction for 2014, the law allowed her to carry over and use the remainder for five more years. Attached to her return was a five-page Deed of Gift detailing the donation.

Among other things, the deed said the gift was irrevocable and unconditional. However, Ms. Albrecht didn’t have what the law calls a “contemporaneous written acknowledgment” from the museum explicitly saying whether or not she received goods or services in return for her donation.

Bryan Camp, a professor at Texas Tech University’s law school and a noted tax blogger, calls this “the magic language requirement,” although the wording can vary. Even if no goods or services were provided to Ms. Albrecht by the Wheelwright, she needed this statement in hand before filing her tax return to be eligible for a deduction. This requirement has been in the law since 1994, after Congress enacted it to crack down on padded and dubious deductions.

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Lesson From The Tax Court: No §6015 Equitable Relief For §6672 Penalties

The Internal Revenue Code is full of taxes and penalties.  Oh my, so many taxes and penalties!  You must always stay aware of which kinds of taxes or penalties are at issue in order to know what rules of law apply.  This week and next week will give us two lessons on the importance in keeping straight the different kinds of taxes and penalties.

In Angela M. Chavis, 158 T.C. No. 8 (June 15, 2022) (Judge Lauber), the taxpayer was seeking spousal relief under §6015(f) from Trust Fund Recovery Penalties assessed per §6672 against her and her then-husband.  The liability for §6672 penalties is joint and several.  And, if you squint, the text of §6015(f) appears to allow relief from any joint and several liability.  Today we learn not to squint. Section 6015(f) provides relief only from joint liability for income taxes.  Trust Fund Recovery Penalties are not income taxes.  So no spousal relief for §6672 penalties.  You will find a bit more (but not much) below the fold.  It’s a short lesson for a hot summer day.

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Lesson From The Tax Court: The Difference Between Rejecting An OIC And Reviewing A Rejection

Tax collection is a process, not an event.  The process can last ten years or more.  During that time many different events may occur.  Different events may bring with them different decision-makers within the IRS.  The secret sauce of representing clients is that when you hit an unfavorable decision-maker, try to find a new one.  An example of that is getting a CDP hearing.  CDP hearings allow taxpayers to pause collection while they ask for alternatives to full collection, such as Offers In Compromise (OICs).  The CDP hearing is conducted by a Settlement Officer (SO) in the IRS Independent Office of Appeals (Appeals).

Thus, the SO represents a new layer of decision-making.  But what do you get with this new decision-maker?  Today’s lesson teaches that you may not get what you think.

Michael D. Brown v. Commissioner, 158 T.C. No. 9 (June 23, 2022) (Judge Lauber), address what I think is a common misconception about CDP hearings: that Appeals makes decisions about collection alternatives.  It does not.  It reviews decisions made by the relevant IRS function.  At issue in Brown was whether the IRS waited more than two years to reject his OIC, which was proposed as part of a CDP hearing.  If so, then his low-ball OIC would be deemed accepted under §7122(f).  Although the IRS unit that evaluated his OIC rejected it after a few months, the formal Appeals decision in the CDP hearing came more than two years later.  Mr. Brown went to Tax Court, claiming the benefit of §7122(f).  The Tax Court said no.  Appeals did not reject the OIC; all it was doing was reviewing the rejection decision made by the IRS.

This was not a slam dunk win for the IRS.  I think it’s worth your time to see why.  Details below the fold.

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Lesson From The Tax Court: TP Did Not File Return By Giving Copy To IRS Employee

Figuring out when or whether a taxpayer has filed a return is important for many reasons.  On the one hand, proper filing limits the time for the IRS to assess.  Thus taxpayers generally want the courts to find they have filed.  On the other hand, filing a frivolous or fraudulent return can lead to penalties.  In those situations, taxpayers want the courts to find they have not filed! 

Sometimes a taxpayer will give an IRS employee a copy of a return they claim was previously filed.  Does that constitute the filing of a return?  Well, it depends. Just like last week, I think it useful to compare the Tax Court and Circuit Court cases.

In a logic-challenged opinion, the Ninth Circuit recently decided giving a copy did constitute filing a return ... for for statute of limitations purposes.  See Seaview Trading, LLC v. Commissioner, 447 F.3d 706 (9th Cir. 2022), rev’g T.C. Memo. 2019-122. While I agree with the dissenting judge that “the majority's analysis and conclusions are logically absurd and should not be the holding of this court,” there is no denying the decision was good news for taxpayers.

Now comes the Tax Court and in Chule Rain Walker v. Commissioner, T.C. Memo. 2022-63 (June 15, 2022), Judge Nega decides that giving an IRS employee a copy of a frivolous return does not constitute filing a return ... for frivolous penalty purposes!

Win-win for taxpayers?  As usual, the devil is in the details, which you can find below the fold. 

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Lesson From The Tax Court: No §163 Deduction From Foreclosure Proceeds

It’s not just Death and Taxes that are certainties in life.  Having lived through the economic downturns in 1973, 1981, 2001, and 2008, I now believe we can add Recessions to the list.  And another one seems to be coming.  So this may be a good time to pay attention to Ronald W. Howland, Jr. and Marilee R. Howland v. Commissioner, T.C. Memo. 2022-60 (June 13, 2022) (Judge Weiler), where we learn some of the obstacles taxpayers face in taking a §163 interest deduction when foreclosure proceeds only partially pay off a loan balance that includes principal and accrued interest.

In Howland, the Court did not permit any §163 deduction.  This week and next I'm going to try something new and compare the Tax Court case with a recent Circuit Court case.  I think the comparison is instructive.  This week, we compare Howland to the recent 9th Circuit opinion in Milkovich v. U.S. 24 F.4th 1 (9th Cir. 2022), where the 9th Circuit did permit a §163 deduction from foreclosure proceeds.  Both Howland and Milkovich arose from the Great Recession.  Looking at the similarities and difference of the two cases gives us the lesson, which is in part a cautionary tale on how at least some of the obstacles to deduction may be self-created.

Details below the fold

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Lesson From The Tax Court: A Reasonable Basis For Deducting Scrubs?

My students—especially those with accounting backgrounds—come to class expecting that tax law is all about bright line rules and lots of calculations.  They are either disappointed, frustrated, or relieved to find that tax law is like other law: it’s words, words that are generally complex, often opaque, and frequently mysterious.  That’s why taxpayers need competent tax practitioners to advise them!

Some tax practitioners are more aggressive and some are more cautious.  Today’s lesson is for the more aggressive ones.  In Raul Romana and Maria Corazon Romana v. Commissioner, T.C. Sum. Op. 2022-9 (June 16, 2022), Judge Carluzzo generously allowed a taxpayer to deduct the cost of a her “scrublike clothing.”

Those of us who are more cautious will disregard this decision.  It’s an outlier and, no, I certainly would not advise my client to start deducting the cost of this type of clothing!  At the same time, however, the opinion may well provide aggressive taxpayers and their advisors protections from penalties if and when they try this trick at home.  The substantive tax lesson is short and sweet.  The penalty lesson is more complex, opaque, and mysterious.

Details below the fold.

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Lesson From The Tax Court: How To Tell When Land Is Held As A Capital Asset

When a taxpayer buys land and later sells it, the character of the resulting gain or loss will depend on whether taxpayer held the land as an investment or instead held it like inventory, to be sold to customers as part of a trade or business.  It is not always easy to tell how the land is being held and courts look at a variety of factors.

The lesson I take from William E. Musselwhite Jr. and Melissa Musselwhite v. Commissioner, T.C. Memo. 2022-57 (June 8, 2022) (Judge Ashford), is that how the taxpayer self-reports the activity in years prior to the year of disposition is one important factor in determining when land is held as investment.  There, Mr. Musselwhite acquired four lots in what was to become a residential development.  No development happened.  For years he consistently reported holding the lots for investment.  But when he eventually sold them for a big loss he and his wife reported the loss as ordinary, claiming on that return that he held the land for development.  In an informative opinion, Judge Ashford held Mr. Musselwhite to his prior reporting position.  Details below the fold.

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Lesson From The Tax Court: Ask The Right Court

It’s sweet to beat the tax man.  It’s even sweeter when you can make the government pay your litigation costs and attorneys fees under §7430.  But the bitter lesson for today is that you must be careful to ask the right court.  Law is hierarchical.  You can appeal a lower court’s adverse decision to a higher court.  But you cannot appeal a higher court’s adverse decision to a lower court!

In Celia Mazzei v. Commissioner, T.C. Memo. 2022-43 (May 2, 2022) (Judge Thornton), the taxpayer asked the wrong court for attorneys fees and because of that had nowhere to go when the court denied fees.  Ms. Mazzei had fought the IRS for over 10 years, losing in Tax Court in a reviewed opinion in 2018.  Undaunted, she appealed to the Ninth Circuit.  She won!  Yay!  Her attorneys then filed a “protective” motion with the Ninth Circuit for both her appellate litigation costs (about $70,000) and her trial court litigation costs (some $330,000).  The government argued that its litigating position was substantially justified.

The Ninth Circuit’s response was disappointingly succinct: “denied.”  Undaunted, Ms. Mazzei’s attorneys then asked the Tax Court for the $330,000 in trial court litigation costs.  The government opposed the motion for the same reason it gave the Ninth Circuit.  Judge Thornton, however, rejected the §7430 request for a different reason.  He ruled that the  Ninth Circuit’s single word left the Tax Court powerless to act on the request.  Appeals go up the hierarchy, not down.  The taxpayer had asked the wrong court.  Details below the fold.

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Lesson From The Tax Court: Taxpayer Held To His Word(s) Regarding Alimony

Congress eliminated the deduction for alimony in the December 2017 Reconciliation Act (informally called the Tax Cuts and Jobs Act, or TCJA).  The concept is still important, however.  First, the legislation grandfathered in alimony payments made pursuant to divorce or separation instruments executed on or before December 31, 2018.  So the question of whether a payment qualifies as alimony will thus still be important for many taxpayers for years to come.  Second, the definition continues to play an important role in analyzing the support requirements for dependents.  See §152(d)(5).

Determining whether payments constitute alimony is not always easy and errors can lead to §6662 penalties for careless taxpayers and their advisors.  Jihad Y. Ibrahim v. Commissioner, T.C. Summ. Op. 2022-7 (May 16, 2022) (Judge Weiler), teaches us the importance of the words used in divorce instruments. There, Dr. Ibrahim sought to deduct $50,000 in payments to his ex-wife.  He called them as alimony on his return.  But the marital separation agreement and the divorce decree did not call them that.  The IRS disallowed the deduction as contrary to the plain language in the divorce decree.  Despite Dr. Ibrahim’s ingenious arguments, the Tax Court agreed with the IRS and held the taxpayer to his word(s).  Details below the fold.

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Lesson From The Tax Court: The Sharp Corners Of The §170 Substantiation Requirements

The sainted Justice Holmes once wrote:  “Men must turn square corners when they deal with the Government.”  It is no accident that Justice Holmes wrote that in a tax case.  Rock Island R.R. v. United States, 254 U.S. 141, 143 (1920).  Of all the corners in all the laws governing citizen interaction with government, tax laws contain some of the squarest.  This is a lesson we’ve seen before.  See Lesson From The Tax Court: The Structure Of Substantiation Requirements of §170, TaxProf Blog (Sept. 24, 2018).  But I think it’s a lesson worth repeating: the substantiation rules in §170 contain some very sharp corners.  The lesson is important for high-end donations such as the one in today’s case.  And it is not just a lesson for taxpayers, but also for charities.

In Martha L. Albrecht v. Commissioner, T.C. Memo. 2022-53 (May 25, 2022) (Judge Greaves), the taxpayer made a very large donation to a museum and claimed a §170 charitable donation deduction on her return.  The IRS said that the 5-page document memorializing the gift did not meet the statutory substantiation requirements for such a gift.  The Tax Court agreed.  Thus, no §170 deduction.  Details below the fold.

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Lesson From The Tax Court: Counting The Days

Most people know that the IRS generally has three years to audit a return. Calculating the proper three-year period, however, requires close attention to both the start date and the end date.  You need to count those days properly.  I tried to drill into my students the practice of always consulting a calendar when attempting to calculate the proper dates.  Christian Renee Evert v. Commissioner, T.C. Memo. 2022-48 (May 9, 2022) (Judge Marshall), reinforces that teaching: to calculate the period in which the IRS can assess a tax, you need to properly count the days in the three year period.

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Tax Experts Say Section 107 Housing Allowance For Clergy Remains Safe Despite Recent Cases And Greedy Abuses

Christianity Today, Churches Still Depend on Clergy Housing Allowance:

Despite recent legal cases and reports of greedy abuses, experts say the longstanding benefit remains safe.

Wth the federal tax filing deadline looming, a Virginia court case may have some ministers wondering whether their ministerial housing allowance is secure.

The case isn’t about the housing allowance. But to some, including Supreme Court Justice Neil Gorsuch, it suggests courts may be willing to meddle increasingly in clergy affairs, including housing.

At issue was denial of a property tax exemption for a church parsonage in Fredericksburg, Virginia. New Life in Christ Church sought the tax exemption for a church-owned home inhabited by two youth ministers, married couple Josh and Anacari Storms. The city denied the exemption because it claimed the church’s denomination, the Presbyterian Church in America (PCA), does not allow women to be considered ministers.

New Life in Christ said the city misunderstood its doctrine. Ordination and certain duties, like preaching, are limited to men in the PCA, according to the church, but the denomination’s governing documents permit congregations latitude in hiring nonordained persons like the Stormses for various ministry jobs. Yet a trial court sided with Fredericksburg, as did the Virginia Supreme Court.

The US Supreme Court declined to hear the church’s appeal in January. Now the church must continue paying the annual property tax bill of $4,589.15. The Supreme Court’s action provoked a dissent from Gorsuch.

“The City continues to insist that a church’s religious rules are ‘subject to verification’ by government officials,” Gorsuch wrote. “I would grant the [church’s] petition and summarily reverse. The First Amendment does not permit bureaucrats or judges to ‘subject’ religious beliefs ‘to verification.’”

Is the case a harbinger of increased willingness to scrutinize ministerial housing in court? Pastors across America hope not. While fewer churches own traditional parsonages, the majority take advantage of the federal clergy housing allowance and say it benefits both their families and their churches. ...

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Lesson From The Tax Court: Only One Exclusion For Military Retiree Disability Payments

My dad served as a doctor in the military for 30 years, 23 days. Starting this week, he will have been retired for longer than he served. When he first retired, he received a monthly pension check from the Defense Finance and Accounting Service (DFAS) and that was all.  A few years later he learned that his hearing loss, likely from his time in Vietnam, qualified him for disability payments from the Department of Veterans Affairs (VA).  He applied for, and received, a 30% disability rating.  He then started receiving two checks each month, one from DFAS and one from the VA.

My dad’s DFAS check is included in gross income but his VA check is not, thanks to §104(a)(4).  If he had never applied for the disability rating, however, §104 would still permit him to exclude part of his DFAS check to the extent he would have be entitled to a disability check from the VA.  Confused?  Today’s lesson will help! 

In Tracy Renee Valentine v. Commissioner, T.C. Memo. 2022-42 (Apr. 28, 2022) (Judge Gustafson), the taxpayer was a veteran and received two checks per month, one from DFAS and one from VA for disability compensation.  She wanted to exclude not only the VA disability check, but she also wanted to exclude part of her DFAS check.  But she mis-read §104(a)(4)’s interplay with §104(b).  Judge Gustafson teaches us the proper way to read the rules.  Basically, veterans get only one exclusion for their disability payments.  Details below the fold.

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Lesson From The Tax Court: Avoiding The 2-Year Lookback Period In Bankruptcy

Today’s lesson is about how to maximize the discharge of tax liabilities through bankruptcy.  It's a lesson on timing.  Last year I blogged two cases showing how a bankruptcy tolls both the collection and assessment limitation periods in the Tax Code.  See Lesson From The Tax Court: For Whom The Bankruptcy Tolls, TaxProf Blog (July 19, 2021).  Today’s lesson is the flip side: we learn how taxpayers who want to discharge old tax liabilities through bankruptcy need to be careful about how the two-year lookback exception to discharge may be tolled by provisions in the Tax Code.

I offer today’s lesson in honor of Bob Pope, who died on April 29th.  Bob was one of those remarkable attorneys who could navigate the complex interplay of bankruptcy and tax law.  He was one of the founders of the Tax Collections, Bankruptcy and Workouts Committee in the ABA Section of Taxation, along with Paul Asofsky, Fran Sheehy, Ken Weil, and Mark Wallace.  He will be missed.

Bob would appreciate today’s lesson.  In Robert J. Norberg and Debra L. Norberg v. Commissioner, T. C. Memo 2022-30 (Apr. 5, 2022) (Judge Lauber), the taxpayers filed their 2016 return in February 2019 without paying the tax they reported due.  When the IRS started collection, the Norbergs asked for a CDP hearing.  When they got to Tax Court in September 2020 they filed a bankruptcy petition, hoping to wipe out the liability.  They failed because they mis-timed their bankruptcy petition.  An irony is that these taxpayers could have likely gotten their desired discharge if they had ignored the siren song of CDP.  Bob could have taught them that.  And, if you click below the fold, you too can learn this lesson on how to maximize the discharge of tax liabilities in bankruptcy.

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Lesson From The Tax Court: Distinguishing Employees From Independent Contractors

Pro Publica has proudly proclaimed that “If You’re Getting a W-2, You’re a Sucker.”  I know lots of workers who would strongly disagree.  For them, being a W-2 worker (a/k/a “employee”) is far more beneficial than their realistic alternative, which is being a 1099 worker (a/k/a “independent contractor”).  The Pro-Publica story was channeling this Brookings Institution study which noted how business owners can often hide their income but workers cannot because their employers rat them out with W-2s.

But most workers have no realistic choice.  Just ask your next Uber or Lyft driver.  For them, as for many others in various industries—from child-care to health-care to landscaping and construction—the choice is not whether or not to hide income.  Their choice is only whether their income gets reported to the IRS on a Form W-2 or a Form 1099.  The upside of being an employee is lower employment taxes and eligibility for unemployment benefits.  The potential downside is no §199A and no ability to deduct unreimbursed job expenses, given the current nastiness codified in §67(g).

And the choice of status is often on the employer.  Employers must decide whether and when to treat their workers as employees or as independent contractors.  Today’s lesson shows how they might be on the hook if they make the wrong classification.  Pediatric Impressions Home Health, Inc. v. Commissioner, T.C. Memo. 2022-35 (Apr. 12, 2022) (Judge Greaves), teaches us how Tax Court distinguishes employees from independent contracts.  It also shows us a potential safe harbor that employers can use to escape the unpaid obligations if it turns out they erroneously classified employees as independent contractors.  Details below the fold.

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Lesson From The Tax Court: The Unforeseen Circumstances Rule For §121 Home Sale Exclusions

The Tax Code gives homeowners many tax breaks.  Chief among them is the ability to exclude up to $500k of gain from the sale of a principal residence (for married taxpayers filing jointly).  Taxpayers seeking this exclusion must meet some basic requirements, set out in §121.  Taxpayers who fail the requirements, however, may still qualify for an exclusion under the unforeseen circumstances rule in §121(c).

Steven W. Webert and Catherine S. Webert v. Commissioner, T.C. Memo. 2022-32 (Apr. 7, 2022) (Judge Gustafson), teaches a lesson on the operation of the unforeseen circumstances rule.  There, unforeseen circumstances arguably forced the taxpayers to move out of their home during a real estate bust in 2009.  Apparently unwilling to sell short, they rented out the home until the market recovered and eventually sold it for a gain of about $195k in 2015.  They attempted to exclude the gain under §121, claiming they were entitled to do so because of the unforeseen circumstances rule in §121(c).  The IRS thought the claim had no merit.  Curiously, the Tax Court did not (yet) agree.  Beats me on why.  I explore the rule, and the mystery of why the IRS lost its Summary Judgment motion, below the fold.

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Solo Practitioner, Backed By Latham & Watkins, Wins SCOTUS Tax Ruling

National Law Journal, Solo Practitioner, Backed by Latham & Watkins, Wins SCOTUS Tax Ruling:

A Fargo, North Dakota, solo practitioner, with help from Latham & Watkins, scored a unanimous victory in the U.S. Supreme Court on Thursday for herself, and low-income taxpayers and small businesses.

The court, in an opinion by Justice Amy Coney Barrett, ruled in Boechler v. IRS that the 30-day time limit for filing a petition in the U.S. Tax Court to challenge the IRS’s decision to seize property to collect tax debts is not a jurisdictional limit and can be equitably tolled.

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Lesson From The Tax Court: What’s Excluded From The §132 Exclusion?

Tax Day is here! And what better way to observe the day than a lesson on §132, a lesson that evokes the ghost of Dan Rostenkowski, whose curmudgeonly visage appears to the right.  For those who don’t know, Rostenkowski was the chairman of the House Ways and Means Committee from 1981 until 1994 when, in the great tradition of Illinois politicians, he was indicted on various counts of fraud, eventually pleading guilty to mail fraud.  Yes, political corruption in Illinois actually has its own Wikipedia entry.

During his time as head of the House tax writing committee, Rostenkowski oversaw multiple major legislative changes. Perhaps his crowning glory was his role in the 1986 Tax Reform Act, which has long been viewed as a triumph (however short-lived) of sound tax reform.

Today’s lesson has its genesis in the earlier Deficit Reduction Act of 1984, PL 98-369, 98 Stat. 494.  There, Congress wrote a new §132 to exclude from gross income a long list of traditional employee fringe benefits.  In Douglas Mihalik and Wendy J. Mihalik v. Commissioner, T.C. Memo. 2022-36 (Apr. 13, 2022) (Judge Gustafson), Mr. Mihalik received free airline tickets for himself and members of his family. He sought the exclusionary shelter of §132.  While §132 is very broadly written to cover various family members of an employee, Judge Gustafson teaches us how some family members are excluded from the exclusion.  Details below the fold.

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Lesson From The Tax Court: 50 Ways To Lose Your Interest Abatement Request

Obtaining an abatement of interest reminds me of Paul Simon’s song 50 Ways to Leave Your Lover.  Sure, the “50 ways” in the song title is misleading.  By my count, Simon gives us only four.  And some are singularly unhelpful for real life advice.  I mean, “make a new plan, Stan”?  Really?  But the hyperbole does it’s job: it draws attention to idea there are the multiple ways to break off a relationship.

My Lesson title is also hyperbolic, but serves the same purpose.  When a taxpayer wants the IRS to abate interest charges, there are lots of ways to lose.  Jeremy Edwin Porter v. Commissioner, T.C. Memo 2022-23 (March 28, 2022)(Judge Greaves) gives us a nice review of some of them.  There, the hapless taxpayer was trying to get interest abated for, among other periods, a 34 month period where the Tax Court did not rule on pending discovery motions.  The Court sustained the IRS rejection of the abatement request because, even if the delay was unreasonable, and even if it was not attributable to Mr. Porter, it was caused by the Tax Court, not the IRS.  Ouch.

This gives us a good excuse to review the many ways the IRS can reject an interest abatement request.  And perhaps learn how to be a diligent litigant so as to keep your client’s case moving along during Tax Court litigation.  I hope today’s lesson is more helpful than Simon’s song.  At least it won't be an earworm.  Details below the fold. 

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Lesson From The Tax Court: Penalty Approval In Conservation Easement Cases

The §6751(b) supervisory approval requirement for penalties has been a thorn in the side of both the IRS and the Tax Court.  Today’s lesson shows us how the IRS penalty approval process in conservation easement audits has forced taxpayers to reach for wilder and less credible attacks in their attempts to avoid penalties by finding IRS procedural foot-faults.

First, in Pickens Decorative Stone LLC v. Commissioner, T.C. Memo. 2022-22 (Mar. 17) (Judge Lauber), the taxpayer argued that when the IRS had publicly committed in a general Notice to seeking penalties against the types of syndicated conservation easement scheme it had engaged in, the IRS was disabled from complying with §6751(b) because the supervisor in the audit had not signed off on that public Notice.  Yeah, pull your eyebrows down; the argument lost.

Second, in Oxbow Bend, LLC v. Commissioner, T.C. Memo. 2022-23 (Mar. 21, 2022) (also Judge Lauber), the taxpayer similarly argued the IRS failed to comply with §6751(b) when the Revenue Agent (RA) had failed to secure supervisory approval before telling the taxpayer during a status conference that penalties were “under consideration” when in fact the RA was completing an internal document recommending penalties that very day.  That was a loser as well.  Details below the fold.

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Lesson From The Tax Court: Take The Administrative Appeal

Taxpayers famously focus on trying to get their “day in court” against the evil IRS.  The Independent Office of Appeals (Appeals) is no court.  It is not surprising, then, that taxpayers’ myopia often leads them down the dangerously wrong path of ignoring their opportunity to go to Appeals.  Today’s lesson teaches us one reason that is a mistake.

In Mahammad A. Kazmi v. Commissioner, T.C. Memo. 2022-13 (Mar. 1, 2022) (Judge Paris), the IRS was seeking to collect a §6672 Trust Fund Recovery Penalty (TFRP) assessed against the taxpayer.  In a Collection Due Process (CDP) hearing, Mr. Kazmi attempted to explain why the assessment was improper against him.  He relied on the rule that a taxpayer can challenge a liability in a CDP hearing if the taxpayer had not had a prior opportunity to do so.  While Mr. Kazmi had been given the opportunity to take an administrative appeal during the prior §6672 assessment process, he said that should not count because it did not give him a day in court.  While that argument might have traction in other situations, it failed in this one.  Details below the fold.

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Lesson From The Tax Court: What Constitutes A CDP 'Hearing'?

Before the IRS can start collecting unpaid tax liabilities by levy, §6330(b)(1) requires it to give taxpayers an opportunity for a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals.

Many taxpayers do not fully understand how CDP hearings work. First, they erroneously expect that a CDP hearing is a discrete and physical event where they (finally!) confront the evil IRS.  Second, they erroneously expect that the point of the hearing is for the evil IRS to justify collection, including proving the correctness of the assessment.  Finally, they expect that they can go to Tax Court and get a do-over if they don't like the result they get from the CDP hearing.  Taxpayer with those expectations are doomed to disappointment.

Today’s lesson is for them. In Brian K. Bunton and Karen A. Bunton v. Commissioner, T.C. Memo. 2022-20 (Mar. 10, 2022), Judge Morrison gives a nice short lesson on what constitutes a CDP hearings.  The taxpayers complained that their CDP hearing was defective because (1) the Settlement Officer (SO) had not given them an in-person hearing, and (2) the IRS did not show the assessment was correct.  The Court rejected those complaints and in so doing, shows us what constitutes a CDP hearing. Details below the fold.

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Lesson From The Tax Court: Generally Is Not Always—Or—That’s The Way The Ball Bounces

We law professors are often accused of hiding the ball of legal analysis.  Teaching the basic tax law course presents a particular challenge because of the multiplicity of statutory rules that the ball bounces against.  We try to teach students the general rules of what constitutes income, what gets allowed as deductions, when both must be reported and who must report them.  That’s the stuff of the basic course.   We try to spare them from having to learn all the various exceptions and special cases that hit the ball on its journey.

Methods of tax accounting are a case in point.  Generally, taxpayers choose their method of accounting.  That's good enough for the basic tax course.  But generally is not always.  Practitioners need to be able to follow the ball as it bounces around the various timing statutes.  They not only need to know the general accounting rules, they must always be sensitive to the exceptions and the exceptions to the exceptions, and the gaps between all the exceptions!

In Hoops LP v. Commissioner, T.C. Memo. 2022-9 (Feb. 23, 2022) (Judge Nega), the taxpayer was an accrual-method taxpayer.  It sold a basketball team.  It then attempted to deduct $10 million in accrued but unpaid deferred compensation obligations, relying on a general rule for accrual-method taxpayers, albeit one buried in the regulations.  The Tax Court found, however, that the ball landed on a different statute, one forcing accrual-method taxpayers into the cash-method of accounting for deferred compensation deductions. It thus sustained the IRS’s disallowance of the deduction.   That’s just the way the ball bounces.

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Lesson From The Tax Court: A New Twist On Travel Away From Home Deductions?

When I teach the §162 travel away from home deductions I tell my students to distinguish between transportation costs (on the one hand) and meals/lodging costs (on the other hand).  Transportation costs are covered by Rev. Rul. 99-7.  Their deductibility turns on job site location.  To deduct meals and lodging expenses, however, the taxpayer must meet an overnight rule as well.  United States v. Correll, 389 U.S. 299 (1967).  I have never taught that the overnight rule applies to transportation costs.

After reading today’s case, I may have to change how I teach this issue.  In James P. Harwood and Connie J. Harwood v. Commissioner, T.C. Memo. 2022-8 (Feb. 15, 2022) (Judge Urda), Mr. Harwood worked at various temporary job sites located in cities away from his tax home in Yakima, Washington.  Sometimes he stayed overnight at the job sites, coming home on weekends.  Sometimes he drove there and back in the same day.  If I’m reading the opinion correctly, Judge Urda applied an overnight rule to hold that when Mr. Harwood chose to drive to and from his job site in the same day, he could not deduct the transportation costs.  That’s a new twist on the law from what I can tell.  So we should pay attention.  Details below the fold.

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Lesson From The Tax Court: The Tax Liabilities You Leave Behind

We all know you can’t take it with you.  But what happens to the “it” after you die?  Ideally, you will have paid all your debts, and your Estate will distribute your “it” to the objects of your affection. The IRS will probably not be one of the objects of your affection.

However, few of us do everything ideally.  If you leave behind unpaid tax obligations, Congress has ensured that the federal government gets priority over the objects of your affection.  And tax claims also take priority over most other creditors.  But most is not all.  Some creditors get paid before the Tax Dude.  Thus, if your unpaid tax obligations exceed the assets in your Estate, then the objects of your affection will take bupkis ... unless they also happen to be one of the few types of creditors that get priority over the unpaid taxes.

That is what we learn from Estate of Anthony K. Washington v. Commissioner, T.C. Memo. 2022-4 (Feb. 2, 2022) (Judge Toro).  There, the decedent died with unpaid federal tax liabilities that exceeded the assets in his Estate.  The decedent’s ex-wife tried to convince the Tax Court that her claim against the Estate took priority over the tax claim.  Alternatively, she argued that the IRS erred when it did not account for her claim in evaluating the Estate’s Offer In Compromise (OIC), because ignoring her claim simply was not fair because paying the tax claim would leave the Estate with nothing.

Both arguments failed.  The case teaches us a lesson about the federal tax lien and about the difficulty Estates face in obtaining OICs.  Details in the usual space, below the fold.

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Lesson From The Tax Court: The Proper Baseline For Offers In Compromise

Paying taxes can be painful.  When money is tight and other needs are pressing, sending money to the federal government understandably sinks on the taxpayer’s priority list.  But not the government’s!  Congress wants to make sure that paying taxes remains at the top of every taxpayer’s priority list.  That is why it gives the IRS really awesome collection powers.  If that duty to pay taxes is not uniformly enforced, the thinking goes, then voluntary compliance goes out the window and soon that window will be smashed by rocks thrown by rioting mobs.  Don’t want that.

At the same time, Congress recognizes that, sometimes, circumstances  should permit payment of less than the full amount.  The Offer In Compromise (OIC) process is designed to address those situations. The ability to secure an OIC, however, must always be evaluated against a default of full payment, not against a default of no payment.  That is what we learn from Edmund Gerald Flynn v. Commissioner, T.C. Memo. 2022-5 (Feb. 3, 2022) (Judge Urda).  There, the Court held that the taxpayer was not entitled to an OIC just because the full-pay obligation would be financially painful.  Details below the fold.

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Lesson From The Tax Court: The Innocence Requirement In § 6015(c) Proportional Relief

Section 6015 allows taxpayers to obtain relief from an otherwise joint and several liability.  The statute contains three related provisions allowing relief.  Siblings.  First is the eldest child, traditional innocent spouse relief.  It was formerly in §6013(e) and is now found in §6055(b).  Second is the quite middle child, a proportionate relief provision that basically permits unwinding the jointly filed return.  That’s in §6015(c).  Third is the wild child, an equitable relief provision that permits relief when it would be unfair to impose joint liability.  That’s in §6015(f).

Of these three spousal relief provisions, the wild child §6015(f) gets most of the attention, at least in court, because it is a very facts-and-circumstances determination and so leads to the most disputes between a requesting spouse and the IRS.  There is also robust case law on the bossy oldest child §6015(b) because it has been around the longest, since 1971.

Today’s lesson is about §6015(c), the oft overlooked middle child.  While, arguably, all three provisions involve some concept of innocence, we learn today a crucial difference between how that concept works for (c) relief and (b) relief.  In Tara K. Tobin (Petitioner) and Jeffrey Tobin (Intervenor) v. Commissioner, T.C. Summ. Op. 2021-36 (Nov. 16, 2021) (Judge Guy), an IRS audit disclosed multiple items of unreported income.  Ms. Tobin asked for §6015(c) relief, agreeing to take responsibility for her unreported income items and leaving Mr. Tobin responsible for his.  Mr. Tobin objected, claiming that Ms. Tobin was not innocent enough to qualify for proportional relief.  In a short but useful lesson, we learn why the Tax Court decided for Ms. Tobin.  Details below the fold.

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IRS Offers To Settle Cryptocurrency Case, But Taxpayer Wants Precedent That Mining/Staking Is Not A Realization Event

Press Release, Taxpayer Lawsuit Demands Confirmation of Tax Treatment of Staking Rewards:

Today, the Proof of Stake Alliance (POSA), a leading blockchain industry association, celebrated important news: as part of ongoing federal litigation (Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn.)), the government has offered to refund plaintiff Joshua Jarrett for the taxes he paid when he created new property through staking, a sign that the IRS may no longer attempt to tax tokens created through staking moving forward. Despite this initial victory, Jarrett is refusing the refund and continuing with his case, as without such a ruling there will be nothing to prevent the IRS from challenging him again on this issue.

Jarrett paid income tax for 2019 on new tokens he created through staking. Contending that property that is created—like bread baked by a baker or a novel written by an author—is only taxed when it is sold, Jarrett filed for a refund in August 2020. The IRS ignored Jarrett's refund claim, forcing him to pursue the matter in federal court. Today, court filings reveal that the government has offered to grant this refund, an early sign suggesting that the IRS will not tax property created through staking until it is sold.

POSA, and the broad coalition it represents, applauds Jarrett's decision to continue his lawsuit. He has rejected the IRS's offer of a refund, opening up the possibility of a court ruling that will give him, and millions of other taxpayers in the same position, the ability to confidently plan for the future. The importance of this issue has been raised by many, including Coin Center, the Blockchain Association, and several Members of Congress. ...

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COVID-19 Tuition Refund Fights Heat Up In Appeals Courts

National Law Journal, 'Watching the Outcome Like a Hawk': COVID-19 Tuition Refund Fights Heat Up in Appeals Courts:

After failures in district courts, a handful of students have taken their COVID-19 tuition refund fights to appellate courts in cases that are being closely watched by the higher education community.

Many of the lawsuits, alleging universities breached contracts by shifting to virtual courses while charging in-person prices, were dismissed by district court judges, though results have been mixed. Claims that survived tended to be those seeking compensation for specific fees, such as student activities promised but not delivered during campus closures, observers say.

No circuit courts have issued decisions on the matters yet, but recent oral arguments hint that the idea schools overcharged for remote learning has weight with some judges, said Stetson University Law School professor Peter Lake.

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Lesson From The Tax Court: The Presumption Of Regularity

No, today’s lesson has nothing to do with your gastrointestinal system.  But it does relate to what comes out of the bureaucratic process.  The presumption of regularity affects a broad range of IRS work product, such as Notices of Deficiencies, Certificates of Assessments and, in today’s case, Penalty Approval forms.

In Long Branch Land LLC v. Commissioner, T.C. Memo. 2022-2 (Jan. 13, 2022) (Judge Lauber), the taxpayer attempted to take a very large charitable deduction for donation of a conservation easement.  In its Notice of Deficiency, the IRS not only disallowed the deductions but also proposed to assess penalties under §6662 and §6662A.  In Tax Court the IRS moved for partial summary judgment on the issue of whether it complied with the supervisory approval requirements of §6751(b)(1).

The taxpayer argued that the IRS failed to comply with the penalty approval requirements because the IRS employee who approved the penalty was not the “immediate supervisor” of the IRS employee who proposed the penalty.  Judge Lauber rejected the argument, invoking the presumption of regularity.  His use of the doctrine, however, demonstrates it chameleon-like quality: it is both a rule of law and a rule of evidence.  Details below the fold.

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Lesson From The Tax Court: The Qualifying Child Misnomer

Like last week’s lesson, this week deals with how the Tax Code treats families as economic units and the difficulty in determining the scope of the proper family group.

Section 151 permits taxpayers a deduction for dependents.  Section 152 defines that term.  It divides the general concept of dependent into two buckets: one is labeled “Qualifying Child” (QC) and the other is labeled “Qualifying Relative” (QR).  The QC bucket is then used—more or less—to determine eligibility for the various child-rearing-related tax benefits in the Tax Code, such as the child credit, the earned income tax credit, etc.

Both labels are misnomers, but today’s lesson is about two common issues that arise with determining who is a QC.  In Carol Denise Griffin v. Commissioner, T.C. Sum. Op. 2021-26 (Aug. 16, 2021) (Judge Vasquez), we learn that a taxpayer can claim a deduction for a Qualifying Child who is not, actually, the taxpayer’s literal child.  However, in Nowran Gopi v. Commissioner, T.C. Sum. Op. 2021-41 (Dec. 2, 2021) (Judge Panuthos), we learn that a taxpayer may not do that when the Qualifying Child’s actual parent also files a tax return claiming the same QC.  Details below the fold.

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Lesson From The Tax Court: The Tacit Consent Rule

Every marriage requires trust.  In my own marriage my DW trusts me to handle our finances.  I’m sort of the CFO of our marriage.  As part of my duties I prepare our taxes.  I try to explain them to my DW before I file, but more often than not she just waves me away with a smile, saying “I trust you.”  Back in the day when we filed paper returns I at least was able to ensure she signed the returns.  But now that we file electronically, I just make a few clicks and, boom!, it’s filed.

I have sometimes questioned whether we are really filing a joint return when it’s only me doing all the clicking for the electronic submission.  When one files electronically there is nothing analogous to an actual signature to show that both spouses have even seen, much less approved, of what is submitted.  You just need to create two 5-digit numbers, one for each spouse. Tax return preparers at least get to secure a wet signature on Form 8879 to show both spouses consented to the return preparer submitting the electronic return.  I got nothing like that.  Just a smile and a “I trust you.”

Today’s lesson answers my question.  In Om P. Soni and Anjali Soni v. Commissioner, T.C. Memo. 2021-137 (Dec. 1, 2021) (Judge Copeland), we learn that a spouse can tacitly consent to a joint return even when the spouse does not actually sign the return and even when someone else forges the spouse’s signature!  Whether there is tacit consent depends on the facts and circumstances of the filing.  And perhaps the most important factor is a history of one spouse’s trust in the other.  Details below the fold.

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Morse: A Tax Deadline Missed By One Day Leads To A Supreme Court Showdown Over Equity, Jurisdiction – And Grammar

SCOTUSblog:  A Tax Deadline Missed By One Day Leads to a Showdown Over Equity, Jurisdiction – and Grammar, by Susan C. Morse (Texas; Google Scholar):

The argument on Wednesday in Boechler v. Commissioner of Internal Revenue will consider whether “equitable tolling” — which allows courts to excuse missed deadlines in some circumstances — is available for a statutory federal income tax deadline. The issue has split circuits, with the U.S. Courts of Appeals for the 8th and 9th Circuits concluding that tolling is not available, and the U.S. Court of Appeals for the District of Columbia Circuit concluding that tolling is available for a similarly worded tax provision. The court’s consideration of this question will address an issue of particular interest for low-income taxpayers and their advocates. It will also add to the court’s precedent on the interaction between the law of equity and the technicalities of federal statutes. Partly because of the circuit split and partly because of the statute’s lack of clarity, this could be a close case.

The dispute arose after the Internal Revenue Service assessed a $19,250 penalty and issued a notice of intent to levy to a small North Dakota law firm for failing to file employee tax withholding forms. After a hearing, the IRS issued a notice of determination sustaining the proposed levy. Under the Internal Revenue Code, the firm had a 30-day window following the issuance of the notice of determination to file a petition in the U.S. Tax Court to challenge the notice. The deadline was Aug. 28, 2017. The firm mailed its petition on Aug. 29, 2017. The question for the justices is whether the Tax Court may consider equitable tolling for this deadline; or whether the deadline is jurisdictional, which, under applicable precedent, would bar consideration of equitable tolling.

Both sides center their arguments on a test set forth in the 2015 case United States v. Kwai Fun Wong, decided 5-4, which elaborated a framework established in the 1990 case Irwin v. Department of Veterans Affairs. Under the Kwai Fun Wong test, there is a rebuttable presumption of equitable tolling for suits against the government. How can the presumption be rebutted? If the statute shows that Congress “plainly” gave the time limits “jurisdictional consequences.” Time limits are then jurisdictional and not subject to equitable tolling.

In Boechler, the court has the task of categorizing a limitation period that relates to a “collection due process” procedure. ...

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