Lesson From The Tax Court: The #1 Habit Of Highly Successful Taxpayers

In Michael K. Simpson and Cynthia R. Simpson v. Commissioner, T.C. Memo. 2020-100 (July 7, 2020) (Judge Buch) the hapless taxpayers — devotee’s of Stephen Covey’s 7 Habits of Highly Effective People — not only failed to separate personal from business expenses, they also confused entity returns and personal returns.  The case is an object lesson on the importance of taxpayers properly accounting for business expenses and personal expenses.  Careful accounting is probably the #1 Habit of Highly Successful Taxpayers.  Details below the fold.

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Lesson From The Tax Court: Being Too Smart Precludes Innocent Spouse Relief

Growing up, I was taught to value intelligence.  My dad even had a sign in his office like the one to the right: his read “life is hard, especially if you’re stupid.” 

Being smart surely brings many advantages in life, but we learn today why it serves as a disadvantage when seeking spousal relief under §6015.  Getting spousal relief is hard; it's harder if you are smart. 

In John E. Rogers and Frances L. Rogers v. Commissioner, T.C. Memo. 2020-91 (June 18, 2020) (Judge Goeke), the court denied spousal relief to Mrs. Rogers because it found her too smart to qualify.  It is a useful lesson as many of us prepare our own joint returns for 2019. 

Details below the fold.

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Lesson From The Tax Court: Cheshire Cat Jurisdiction Over Passport Revocation Petitions

Congress keeps expanding the Tax Court’s subject matter jurisdiction.  A recent expansion came in 2015 in the cutesy-cutesy named Fixing America’s Surface Transportation Act (FAST Act, get it?), 129 Stat. 1312.  There Congress created §7345 as a revenue offset.  That new section authorizes the IRS to periodically give lists of seriously delinquent taxpayers to the State Department, who is then supposed to deny their passport applications or even yank their passports.  Taxpayers upset at the IRS ratting them out to the State Department can seek judicial review either in the Tax Court or in a federal district court.

Section 7345 is simple in theory but complex in execution.  Last week’s case of Vivian Ruesch v. Commissioner, 154 T.C. No. 13 (June 25, 2020) (Judge Lauber) teaches that the Tax Court’s §7345 jurisdiction is like the Cheshire Cat: it can appear and disappear multiple times with respect to the same taxpayer and the same tax liabilities.  Details below the fold.

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Supreme Court Denies Certiorari In Altera

The U.S. Supreme Court today denied certiorari in Alterna Corp. & Subsidiaries v. Commissioner, No. 19-1009 (June 22, 2020), despite "the glut of high-powered amicus briefs in support of the taxpayer’s petition for certiorari and last week’s landmark APA decision on DACA."

• Bloomberg, Supreme Court Won’t Review Major Tax Case for Big Tech
• Bloomberg, Practical Implications of Denial of Review in Altera
• Law360, Justices Won't Hear Altera's Cost-Sharing Regs Challenge
• Wall Street Journal, Supreme Court Declines to Hear Tech Challenge to IRS Rules

Prior TaxProf Blog coverage:

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Lesson From The Tax Court: How Taxpayers Can Sometimes Benefit From IRS Errors

Last week my son got a job at Auto Zone, a company that sells auto parts to the entire U.S.  The IRS administers a wickedly complex set of tax laws to same population.  Guess which one employs more people?  Auto Zone.  It has over 87,000 workers to sell you windshield wipers.  The IRS does its job using about 74,000 workers.  Oh, and while both organizations employ computer support, can you guess whose computers are the mother of all outdated legacy systems?  I am sure you can.

Overworked IRS employees and outdated computer systems commit errors.  Last week, two Tax Court cases teach us when taxpayers might benefit from IRS errors.  In Askar Moukhitdinov and Sana Abeuova v. Commissioner, T.C. Memo. 2020-86 (June 16, 2020) (Judge Colvin), a computer error did not invalidate a Notice of Deficiency (NOD) and the taxpayer thus could not get preassessment review.  But in Carl William Cosio v. Commissioner, T.C. Memo. 2020-90 (June 18, 2020) (Judge Vasquez), a human error gave the taxpayer another chance for prepayment review of a disputed IRS assessment.  Details below the fold.

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Morse & Shay: In Altera Reply Brief, Taxpayer Doubles Down On Flawed Argument That The Government Changed Its Tune

Susan C. Morse (Texas) & Stephen E. Shay (Harvard), In Altera Reply Brief, Taxpayer Doubles Down on Flawed Argument that the Government Changed Its Tune:

The Altera reply brief doubles down on an argument that the government brief has already persuasively dispatched: that Treasury gave the impression during the rulemaking process that comparability analysis—i.e., the analysis of comparable transactions between unrelated parties—was relevant to the determination of an arm’s length result under the transfer pricing regulation at issue, and that then the government changed its tune. ...

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Lesson From The Tax Court: How To Pay A Deficiency And Still Get To Tax Court

A basic lesson I teach students is that clients often have choices in where to obtain judicial review of a Notice of Deficiency (NOD).  The usual choices are (1) file a petition in Tax Court and get pre-payment review or (2) pay the proposed deficiency in full and follow the procedures to, eventually, sue for a refund in either federal district court or the U.S. Court of Federal Claims.  The downside of Tax Court is that interest keeps accruing so, if you lose, you lose more than if you had paid and gone the refund route. 

We find a more sophisticated lesson in Robert J. Peacock and Bonita B. Peacock v. Commissioner, T.C. Memo. 2020-63 (May 19, 2020) (Judge Vasquez).  There, at the end of the audit the taxpayers sent the IRS a check for more than the deficiency proposed in the later-issued NOD.  They even wrote “payment” in the memo line.  Yet they were allowed to contest that later-issued NOD in Tax Court.  How can that be?  The answer is below the fold.    

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Lesson From The Tax Court: Do The Right Thing

The protests dominating events recently have reminded me of Spike Lee’s classic film “Do The Right Thing.”  It’s a movie that explores how individual decisions that seem “right” from viewpoints blindered by race and class create seemingly inescapable conflicts.  It makes you question your perspective about “the right thing.”

I offer two recent Tax Court as a cautionary lesson that I hope makes tax professionals question their perspective about the right thing to do in tax return preparation and advice.  It’s not about race or class.  It’s about being blindered by client needs and client relationships, both on the part of taxpayers and the IRS.  Both cases show taxpayers, tax professionals, and the IRS all not doing the right thing.  In Enrique Aguilar v. Commissioner, T.C. Summ. Op. 2020-16 (May 26, 2020) (Judge Gerber), the tax professional created a fictional Schedule C.  In Thomas M. McCarthy v. Commissioner, T.C. Memo. 2020-74 (June 3, 2020) (Judge Thornton), the tax professional improperly claimed mortgage deductions on Schedule A.  Details below the fold.

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Lesson From The Tax Court: Litigation Funding Agreements Were Not Loans

David A. Novoselsky and Charmain J. Novoselsky v. Commissioner, T.C. Memo. 2020-68 (May 28, 2020) (Judge Lauber), teaches us that a repayment contingency in a litigation funding agreement means the funds are not a loan for federal income tax purposes.  Mr. Novoselsky was a lawyer who received $1.4 million in advances to fund litigation. Repayment was contingent on litigation success.  He did not report it as income.  He should have.  Details below the fold.

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Lesson From The Tax Court: Appeals Can Change Its Mind

Last week’s case of Abigail Richlin v. Commissioner, T.C. Memo. 2020-60 (May 18, 2020) (Judge Halpern) is a textbook example of how one hand of the IRS bureaucracy might pat your back even as another hand slaps you upside the head.  There, the taxpayer had received a favorable decision from Appeals in a first proceeding, but then received an unfavorable decision on the exact same issue in a later proceeding.  Judge Halpern’s sturdy opinion gives us a terrific lesson on the difficulties taxpayers face in navigating a bureaucracy like the IRS.  Details below the fold.

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Lesson From Tax Court: Selling Home Not Always Required For Installment Agreement

For most taxpayers, losing their home to the tax collector is one of their biggest fears.  Last week’s decision in Martin D. Kirkley and Sheila G. Kirkley, T.C. Memo. 2020-57 (May 13, 2020) (Judge Colvin) teaches us that nothing in the law requires taxpayers to sell their home as a pre-condition to an installment agreement.  There, the Office of Appeals had rejected a proposed installment agreement because it thought the law required the taxpayers to first sell all their assets, including their home.  The Court remanded the case to the IRS so the Office of Appeals could apply the law correctly.  Details below the fold.

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Supreme Court Hears Trump's Tax Return Cases

• Bloomberg, I’ve Seen Trump’s Tax Returns and You Should, Too
• Noah Feldman (Harvard), Supreme Court Tax Return Case Isn't Actually About Trump
• FiveThirtyEight, Will The Supreme Court Finally Force Trump’s Tax Returns To Be Released?
• The Guardian, US Supreme Court Tackles Politics’ Most Tantalising Mystery: Trump’s Tax Returns
• Law & Crime, House Lawyer Was ‘Woefully Unprepared’ to Defend Subpoenas for Trump’s Tax Returns
• Law.com, In Rare Unity, Trump, DOJ and House All Urge Justices to Resolve Subpoena Fights
• Los Angeles Times, Supreme Court Appears Divided in Clash Over Trump’s Tax and Bank Records
• National Law Journal, 'We All Know It's About the President': Trump Finds Defenders at Supreme Court in Tax Returns Case
• New York Times, Momentous Choices for Supreme Court as It Hears Trump Financial Records Cases
• New York Times, Supreme Court Hears Arguments on Releasing Trump’s Financial Records
• New York Times, Trump’s Taxes and the Supreme Court: What You Need to Know

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Lesson From The Tax Court: Late Is Late! The Impact Of COVID-19 On Filing Petitions

A recurring issue in Tax Court litigation is the timeliness of petitions.  Currently the rules are strict.  While the Tax Court has used some very creative legal reasoning over the years to find some small stretch in the statutes, it steadfastly holds to the view that it is powerless to apply basic and well-settled equitable principles to stretch the statutes any further.  Thus Tax Court judges routinely, and reluctantly, kick taxpayers out of court.

Today’s case shows both the routine and the rigidity of the Tax Court’s approach to petition timing rules.  It’s a timely lesson because the COVID-19 pandemic has huge potential to create significant litigation on this issue.  I predict there will be many late-filed petitions that, in equity and good conscience, should be heard, but will have to be dismissed unless (1) the Court changes its mind and begins to apply well-settled equitable principles to alter statutory timing requirements or (2) Congress explicitly grants the Court authority to apply timing rules using equity. 

In Bryce Kent Smith & Natosha Ann Smith v. Commissioner, Docket No. 3463-20 (Order of Dismissal)(May 7, 2020) (Judge Foley), the taxpayers filed their petition timely but filed with the IRS.  By the time it got to the Court it was three days late.  And late is late!  The Court dismissed the petition.  Details below the fold.

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Lesson From The Tax Court: The Eye Of The CDP Needle

If Jesus had been a tax practitioner, he might have said “I tell you it is easier for a camel to go through the eye of a needle than for a taxpayer to contest a tax liability in a CDP hearing.”  That is the lesson we learn from two recent Tax Court decisions: (1) Jason E. Shepherd v. Commissioner, T.C. Memo. 2020-45 (Apr. 13, 2020) (Judge Guy); and Patrick’s Payroll Services, Inc. v. Commissioner, T.C. Memo. 2020-47 (Apr. 14, 2020) (Judge Urda).  Mr. Shepherd wanted the Tax Court to review the merits of a Trust Fund Recovery Penalty assessed against him.  Patrick’s Payroll Services wanted the Tax Court to review assessed employment tax liabilities.  In both cases the Tax Court refused, holding that both taxpayers had had a prior “opportunity to dispute such tax liability” within the meaning of §6330(c)(2)(B).  The Court’s idea of what constitutes a prior opportunity might surprise you at first, but makes sense once you think about it, particularly for these two types of tax liabilities.  Details below the fold.

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Lesson From The Tax Court: Using Legislative History To Clarify Ambiguous Text

Tax statutes are difficult to read.  Usually that is because they make precise use of complex terms of art.  But sometimes the text is hard to follow because of poor drafting.  Last week’s case of Dale W. Laue and Alicia Laue v. Commissioner, T.C. Sum. Op. 2020-14 (April 20, 2020) (Judge Panuthos) shows us the classic approach to resolving textual ambiguities: look to legislative history.  There Judge Panuthos examines a drafting ambiguity in §72(t), the statute governing qualified retirement plans and penalties for early withdrawals.  He relies on an explanation given in a committee report to resolve the ambiguity against the taxpayer.  Details below the fold.

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Lesson From The Tax Court: Distinguishing Child Support From Alimony

The recent case of Timothy Clinton Biddle v. Commissioner, T.C. Memo. 2020-39 (April 6, 2020) (Judge Vasquez) teaches that payments labeled as alimony may be treated as child support even when the divorce decree has other provisions explicitly labeled as child support.  Some may think that a lesson about the difference between alimony and child support is not worth learning because Congress eliminated the §215 deduction for alimony payments in December 2017.  See §11051(a) of P.L. 115-97, 131 Stat. 2054 at 2089.  Once Congress did that, both alimony and child support payments are treated the same for income and deduction purposes: not deductible by the payor spouse and not includable by the payee spouse.

I think the lesson is still important, however, for three reasons.  First, the repeal generally does not apply to divorce or separation instruments entered into before December 31, 2018.  Thus, there are lots of potential situations where this exact issue may yet arise.  Second, the lesson may be important for ongoing §152(d)(1)(C) issues, where taxpayers need to figure out who meets the support test to claim someone as a qualifying relative.  Third, this is a lesson about the limits of state court decrees to shape the federal tax consequences of divorce.  That is always a lesson worth remembering.  Details, as usual, below the fold.

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Lesson From The Tax Court: Penalty Approval Form Invalid When Penalty Not Properly Identified

To the uninitiated, §6662 seems to impose a single accuracy-related penalty that varies in amount depending on just how badly the taxpayer screwed up.  For example, here’s the Wikipedia description: “This penalty of 20% or 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, transfer pricing adjustments, or negligence or disregard of rules or regulations.”  Note the singular “this penalty.” 

Today’s post will initiate you.  In Roderick M. Campbell and C. Sandra Campbell v. Commissioner, T.C. Memo. 2020-41 (April 7, 2020) (Judge Ashford) an IRS Supervisor’s approval of a accuracy-related penalty was insufficient to comply with §6751 because the approval form did not specify whether the approval was for the 20% or 40% penalty amount.  Despite the technical win here, however, this may not be a strong case for taxpayers.  Details below the fold.

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Lesson From The Tax Court: The Long And Short Of CDP

I call it Collection Delay Process for a reason.  Two recent cases are bookend lessons on the speed of CDP.  These two cases suggest that the fastest CDP resolution one can reasonably expect is 2 years, but one can push that to 7-8 years depending on the complexity of the case and persistence of the taxpayer. 

First, Do S. Wong v. Commissioner, T.C. Memo 2020-32 (March 5, 2020) (Judge Lauber) is one of the shorter CDP timelines I’ve seen, with a correspondingly short opinion of 12 pages.  There, the taxpayer was able to stop active collection for about 2 years.

Second, Ronald M. Goldberg v. Commissioner, T.C. Memo 2020-38 (April 2, 2020) (Judge Morrison) is one of the longer CDP timelines I’ve seen, with a correspondingly long opinion of 163 pages.  There, the taxpayer was able to stop active collection for 7.5 years.

What each of these taxpayers gained in delay, however, is somewhat offset by the simultaneous extension of the collection limitations period.  As a result Mr. Wong's 2013 liability and Mr. Goldberg's much older 2004 liability are both now likely collectible through 2029.  The IRS may continue with enforced collection for both but one taxpayer will owe more in penalties and interest because of the longer delay.  Next week we will consider a lesson that Goldberg teaches on interest (unless a more interesting lesson comes up).  Today, however, I just present these cases to illustrate what practitioners might expect in the CDP process.

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Lesson From The Tax Court: One Plus One Equals One

Author’s Note: Like so many others I am now working from home and climbing various learning curves, some steeper than others.  So please accept my apologies if today’s post contains more errors than normal.  Hopefully they will just be errors of the fingers and not of the brain.  

The case of Sean McNamee v. Commissioner, T.C. Memo. 2020-37 (Mar. 18, 2020) (Judge Lauber) teaches us that taxpayers have only one opportunity to challenge a tax liability in a Collection Due Process (CDP) hearing, even though the Tax Code provides for up to two CDP hearings for any given tax liability.  In today's case the IRS erroneously refused to let Mr. McNamee challenge a tax liability in his first CDP hearing.  He did not obtain Tax Court review of that decision.  Instead, he re-challenged the liability in a second, later, CDP hearing involving the same underlying liability.  Mistake.  The Court held that even though the IRS screwed up the first time, the taxpayer’s failure to obtain judicial review of the first hearing precluded him from challenging the underlying liability in the second.  The lesson here centers on a tricky quirk in the CDP rules.  Details below the fold.   

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Lesson From The Tax Court: Last Known Address Rules And The Rule Of Law

Celebrities are often hard to contact.  “Call my agent” is their standard line.  When do that on their tax returns, they should know that the last known address rules apply to celebrities the same as to regular folk.  That is the lesson in Duane Lee Chapman and Alice E. Smith, Deceased v. Commissioner, T.C. Memo. 2019-110 (Aug. 29, 2019) (Judge Ashford).  There, the taxpayers—famous from the TV reality show Dog the Bounty Hunter—put their agents’ address on their tax returns.  It cost them the opportunity to contest tax liabilities in Tax Court.

The case also shows us another meaning of the term Rule of Law.  That is why I am presenting this case today, as a follow-up on last week’s lesson.  Details below the fold. 

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Lesson From The Tax Court: The Two Postmark Rule And The Rule Of Law

Taxpayer petitions must still be filed in hard copy.  So you still need to understand the §7502 mailbox rules and the case of Sara M. Thomas and David A. Thomas v. Commissioner, T.C. Memo. 2020-33 (Mar. 11, 2020) (Judge Vasquez) teaches us a useful lesson.  There, taxpayers mailed their petition on March 5, 2018, the last day of the 90 day period.  When received by the Tax Court the envelope had two postmarks, one from a private postage meter that read “March 5” and one from the USPS that read “March 6.”  Relying on the applicable regulation, the Court said it was the USPS postmark that counted and dismissed the case for being filed late.

At one level this case is a straightforward lesson about the mailbox rules.  But it also illustrates one meaning of the phrase “Rule of Law.”  You would not think Tax Court opinions would deal with legal philosophy.  But they sometimes so.  Details below the fold.

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Ohio Supreme Court: 2019 Law Grad's $900,000 Student Loan Debt Does Not Disqualify Her For Admission To The Bar

Following up on my previous post, Court Cites Student Loans As Reason To Deny Bar Admission To New Lawyer:  In re Application of Rodgers, Slip Op. No. 2020-Ohio-770 (Mar. 5, 2020):

Applicant, Cynthia Marie Rodgers, of Dresden, Ohio, is a 2019 graduate of Capital University Law School. Rodgers applied to register as a candidate for admission to the Ohio bar and to take the July 2019 bar exam. ...

[T]he board issued a report recommending that we disapprove Rodgers’s pending application on the ground that she has failed to establish that she currently possesses the requisite character, fitness, and moral qualifications to practice law in this state and that we permit her to reapply for the July 2024 bar exam. In support of that recommendation, the board cites Rodgers’s default on several consumer debts, the nearly $900,000 in student-loan debt that she and her husband have amassed in the pursuit of multiple degrees, and her personal involvement in nearly 60 civil proceedings—in some of which it appears that she engaged in the unauthorized practice of law. ...

Rodgers objects to the board’s findings that she neglected her financial responsibilities, abused the legal process, and demonstrated an ongoing lack of integrity on the grounds that (1) her default on several consumer debts occurred more than 15 years ago, (2) her student-loan debt, while significant, is not in default, and (3) her past litigation, most of which occurred before she attended law school, does not accurately reflect her current character, fitness, or moral qualifications to practice law. She contends that she has been honest about her debts, has abided by the terms of her student-loan repayment plan for nearly 20 years, and has become more circumspect about pursuing litigation since she enrolled in law school. She therefore urges this court to find that she has carried her burden of establishing that she currently possesses the requisite character, fitness, and moral qualifications for approval of her pending bar-exam application.

For the reasons that follow, we sustain Rodgers’s objections to the board’s report and find that she has established by clear and convincing evidence that she currently possesses the requisite character, fitness, and moral qualifications required for admission to the practice of law. We therefore approve Rodgers’s pending application and permit her to sit for the July 2020 bar exam. ...

The board ... expressed significant concerns regarding the nearly $900,000 of student-loan debt that Rodgers and her husband have incurred and her acknowledgment that they would never be able to repay the entire amount that they owed. [Fn. 1. According to Rodgers’s April 14, 2019 credit report, the original balance of the consolidated loans was $339,540, but under the income-contingent repayment plan, that amount had ballooned to $884,403 by March 31, 2019.]

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Lesson From The Tax Court: New Contract Turns Deductible Travel Into Non-Deductible Commute

The case of Deborah Louise Biegalski v. Commissioner, T.C. Summ. Op. 2019-35 (Dec. 3, 2019)(Judge Colvin) teaches a useful lesson in the difference between deductible business travel and non-deductible commuting for taxpayers who work as independent contractors.  The wrinkle in this case was that the taxpayer’s travel was done per two different contracts for different types of work and for two discrete periods, each less than one year.  She thought that made her travel deductible.  The Tax Court disagreed.  Details below the fold.

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Hickman: Justice Thomas, Brand X, and Baldwin

Following up on my previous post, Justice Thomas, In Lone Dissent, Thrashes Chevron and His Own Brand X Decision:  Kristin E. Hickman (Minnesota), Justice Thomas, Brand X, and Baldwin:

The Internet and academia are abuzz about Justice Thomas’s dissent from the Supreme Court’s denial of certiorari in Baldwin v. United States. Specifically, Justice Thomas called upon the Supreme Court to reconsider its 2005 decision in National Cable & Telecommunications Ass’n v. Brand X Internet Services. The Court in Brand X held that an administering agency acting with the force of law — e.g., through notice-and-comment rulemaking — may adopt an interpretation of a statute it administers that is contrary to a pre-existing circuit court decision advancing a different interpretation, and reviewing courts must in such circumstances extend Chevron deference to the agency’s reasonable, contrary interpretation, irrespective of stare decisis. The opinion for the Court in Brand X was written by none other than Justice Thomas. In his dissent from the denial of cert in Baldwin, he said, “Although I authored Brand X, it is never too late to surrender former views to a better considered position” (internal quotation marks and brackets omitted).

From what I have read in the past 36 or so hours, and the reporters with whom I have spoken, some of the reactions to Justice Thomas’s Baldwin dissent have been mixed. Much of the media coverage is behind paywalls (e.g., Bloomberg Tax), unfortunately, though not all of it is. (See, e.g., Taxprof blog.) Ultimately, your reaction to Justice Thomas’s dissent may depend upon whether or not you see Justice Thomas’s opinion as A BIG DEAL. Some people do, others do not. Please put me in the “not” camp. ...

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Lesson From The Tax Court: Taxpayer Cannot Cure Reporting Error During Audit

The IRS is understandably skeptical of taxpayers who claim charitable deductions for conservation easements.  Opportunities for fakery abound, including valuation fakery, as explained in this nice post by Peter J. Reilly.  To help combat that kind of fakery, Congress has authorized the Treasury to adopt strict reporting requirements.  Today’s case shows just how strict they are.

In Oakhill Woods v. Commissioner, T.C. Memo. 2020-24 (Feb. 13, 2020) (Judge Lauber), the taxpayers made a conservation easement but their return omitted information required by regulation.  That proved fatal.  The IRS disallowed the deduction because of that omission, even though taxpayers offered the information during audit.  Judge Lauber agreed with the IRS that the taxpayers could not cure the omission during audit.  The taxpayers then tried to argue that the regulation was invalid.  Judge Lauber said “don’t be stupid” (but more politely).  It’s a nice lesson on the power of the IRS to impose reporting obligations and a cautionary tale to taxpayers on the danger of trying to game the reporting requirements with a needle in a haystack approach.

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Lesson From The Tax Court: What Is 'New Matter' That Shifts Burden Of Proof To IRS?

Tax Court Rule 142 provides that “the burden of proof” in a Tax Court case is generally on the taxpayer.  Among the exceptions is the “new matter” exception.  When the IRS introduces a “new matter” it bears the burden of proof.  In Alvin E. Keels, Sr. v. Commissioner, T.C. Memo. 2020-25 (Feb. 19, 2020) (Judge Colvin) the NOD disallowed certain deductions for lack of substantiation.  After trial the IRS said that taxpayer's error was misapplication of §409A.  The Tax Court said that was a new theory and, hence, a new matter.  Because the IRS had not introduced any evidence to show how the taxpayer had misapplied §409A, the Court handed the taxpayer a sweet, sweet victory.  I read the case as a lesson in how broadly the Tax Court will construe the new matter exception.  The result was that while both the taxpayer and the IRS messed up, it was the IRS error that proved fatal thanks to the burden of proof shift in Rule 142.  I question the result here.  All of that comes below the fold. 

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WSJ: Facebook And IRS Prepare For $9 Billion Tax Court Fight

Following up on my previous post, Who’s Afraid Of The IRS? Not Facebook.:  Wall Street Journal, Facebook and IRS Prepare for $9 Billion U.S. Tax Court Fight:

Facebook and the Internal Revenue Service will square off in a U.S. Tax Court case that could cost the social-media giant more than $9 billion and shape the government’s ability to crack down on companies’ efforts to shift profits to low-tax countries.

The trial slated to start in the week ahead caps a nine-year dispute over how Facebook structured its international operations. The IRS argues that more of the company’s profits should have been taxed at higher rates in the U.S., rather than in the company’s Irish subsidiary. Facebook contends that it deserves a refund.

Facebook’s practice of routing overseas profits to low-tax countries is common among U.S. multinationals, which have faced criticism in the U.S. and in Europe for not paying enough in taxes. The case could set the rules of the road for others with similar disputes in the pipeline.

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Lesson From The Tax Court: IRS Automated Matching Program Not An 'Examination'

Taxpayers think there is an audit lottery.  Tax professionals know better.  True, there is an audit lottery in the sense that only a very, very small percentage of returns are subject to human scrutiny.  But what most taxpayers overlook is that the IRS relies heavily on machines to process returns and, in that process, uses myriad automated programs to review all returns.  The truth is that every single return filed is subject to some level of review by the IRS.   One well known program is the Automated Underreporting program (AUR).  It matches information returns against taxpayer returns to catch under-reporting of income.

Last week’s case of Richard Essner v. Commissioner, T.C. Memo. 2020-23 (Feb. 12, 2020) (Judge Marvel) teaches a lesson about what happens when machine and human review of the same tax return overlap.  There, the IRS issued an NOD based on an AUR review while the same tax year was, at the same time, under human review.  The taxpayer argued that this duplicative review violated the §7605(b) restrictions on unnecessary or duplicative examinations.  Judge Marvel sympathized but hewed to a long line of precedent holding that AUR review does not trigger the §7605(b) restrictions.  Details below the fold.

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Lesson From The Tax Court: Drafting Error Costs Client $16 Million Deduction

Tax statutes and tax regulations mostly use words to talk about numbers.  One of the basic lessons I must teach students is how to read numerical formulas that are expressed in words.  The importance of that lesson was recently reinforced by Railroad Holdings, LLC, Railroad Land Manager, LLC, Tax Matters Partner v. Commissioner, T.C. Memo. 2020-22 (Feb. 5, 2020) (Judge Gustafson).  There, the drafters of a conservation easement deed failed to properly incorporate the regulation’s proportionality requirement, a requirement that expresses a mathematical concept in words.  The resulting drafting error was so bad that not even tax litigators could twist the deed’s language to fit the requirement.  That cost the taxpayer a $16 million charitable deduction.  Details below the fold.

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Lesson From The Tax Court: The Common Law Mailbox Rule Lives!

The United States Postal Service (USPS) is a very large, complex organization, as detailed in this webpage.  It delivers some 146 billion pieces of mail a year.  It has a reputation for reliability.  The reputation is so strong that Congress actually made it the foundation of §7502’s statutory mailbox rule.  You know the rule: timely mailing is timely filing.

In Michael J. Seely and Nancy B. Seely v. Commissioner, T.C. Memo. 2020-6 (Jan.y 13, 2020) (Judge Vasquez) the Post Office apparently failed to put a postmark on an envelope containing the taxpayer's Tax Court petition.  The petition was received late but the Tax Court allowed the taxpayer the benefit of the timely-mailing rule, even though the statute requires a postmark and the regulations assume one.  This case shows us how the common law mailbox rule still lives and breathes in the statutory and regulatory gaps.  Details below the fold.

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Lesson From The Tax Court: §6672 Trust Fund Recovery Penalty Is Really A Penalty ... Sort Of

Sometimes we get so used to norms of practice that we forget the legal text governing that practice.  Last week the Tax Court taught that text is still important.  In David J. Chadwick v. Commissioner, 154 T.C. No 5. (Jan. 21, 2020) (Judge Lauber), the Court held that the IRS must comply with §6751(b)’s supervisory approval requirements before assessing the §6672 Trust Fund Recovery Penalty.  That is because the text of §6751(b) says those requirements apply to any “penalty” and the text of §6672 permits the IRS to assess a “penalty.”

Some may laugh!  Some may snort “It’s so simple!”  But, truly I tell you, nothing is simple when you combine the Tax Code and lawyers.  While the lesson may seem simple, it’s more nuanced than you may realize.  And even though this is a reviewed opinion, it may be of surprisingly limited reach.  Details below the fold.

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Lesson From The Tax Court: Employee Cannot Deduct Expense That Could Have Been Reimbursed

I teach my students this rule: “always take the reimbursement.”  Last week’s case of Daniel Alan Near and Denise Frances Mayhugh v. Commissioner, T.C. Memo. 2020-10 (Jan. 14, 2020) (Judge Kerrigan) reinforces the soundness of that rule.  There, the Tax Court held that Mr. Near’s travel expenses were not deductible because he did not take the reimbursement his employer offered for those expenses.  Details below the fold.

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Lesson From The Tax Court: A Practical Interpretation Of The Penalty Approval Statute § 6751

Section 6751 is a poorly written statute that has caused no end of headaches for taxpayers, the IRS and the Tax Court.  It requires supervisory approval of tax penalties at some point before those penalties are assessed.  But that statute does not say at what point.  Last week a surprisingly divided Tax Court created a relatively bright line for taxpayers and the IRS to know by when the IRS must conform to the supervisory approval requirements.  The Tax Court did so by giving the statute a practical rather than hyper-textual construction.  The cases are: (1) Belair Woods, LLC, et al v. Commissioner, 154 T.C. No. 1 (Jan. 6, 2020) (Judge Lauber writing for a majority of nine); (2) Tribune Media Company v. Commissioner, T.C. Memo 2020-2 (Jan. 6, 2020) (Judge Buch).  Details below the fold.

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Lesson From The Tax Court: Taxpayer Who Got $1.6m Assessment Reduced To $170k Not Entitled To Costs

Section 7430(a) permits a court to award “reasonable administrative costs” and “reasonable litigation costs” (the largest being attorneys fees) to a taxpayer who is a “prevailing party” in a dispute with the IRS.  In Mark C. Klopfenstein v. Commissioner, T.C. Memo 2019-156 (Dec. 9, 2019) (Judge Lauber), Exam assessed a $1.6 million §6707 penalty against the taxpayer.  Mr. Klopfenstein eventually secured a closing agreement from Appeals that reduced the penalty to just under $170,000.  The IRS abated the assessment to that amount.  Mr. Klopfenstein then asked for “reasonable administrative costs” under §7430.  The Tax Court said no, because Mr. Klopfenstein was not a “prevailing party.”  You will find out why below the fold.

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Lesson From The Tax Court: Taxpayers Behaving Badly (2019)

This will be my last post until January.  I will be spending my days (except for Christmas Day) grading exams.  Grades are due Friday January 3rd so I hope to have my next post done for January 6th. 

For the second year, my last blog of the year is a roundup of the cases I read during 2019 where something in the facts made me just shake my head (SMH in texting parlance).  I present them to you now, in chronological order, and I invite you to consider which of the following cases may be examples of just an empty head and which are examples of something worse. [Lesson From The Tax Court: Taxpayers Behaving Badly (2018)]

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WSJ: Presidential Campaign Raises Stakes In Bloomberg v. IRS Tax Court Battle Over Disputed Software Deduction

Wall Street Journal, Bloomberg’s Firm Fights IRS in Court During White House Bid:

Michael Bloomberg’s company is embroiled in a tax dispute with the government he wants to lead.

The case pits the Internal Revenue Service against Bloomberg LP over the financial-data company’s claim that it qualifies for a deduction for domestically produced software. The lawsuit in U.S. Tax Court centers on whether Bloomberg leases or licenses its flagship product as software to customers, which would allow it to get the deduction, or provides an online service, which wouldn’t.

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Hemel: Preview Of Today's Supreme Court Oral Argument In Rodriguez Tax Refund Case

Daniel Hemel (Chicago), Argument Preview: Whose Refund Is It Anyway?:

Where’s my refund? Millions of Americans ask that question each spring as they await checks from the Internal Revenue Service for tax overpayments. The question takes on added significance if your refund exceeds $4 million and you are teetering on the edge of insolvency. This was the circumstance facing United Western Bank, whose eight-year wait for a $4 million refund gave rise to Rodriguez v. Federal Deposit Insurance Corp. On December 3, the Supreme Court will decide whether—and when—to bring that wait to an end. ...

[W]hat will the justices do? One possibility is that they will dismiss the case as improvidently granted (or “DIG it,” in Supreme Court speak). The reason for a DIG would be that the 10th Circuit’s decision doesn’t turn on federal common law at all, and so the question presented isn’t actually implicated. DIGs are disfavored, though, and the 10th Circuit may have said enough about Bob Richards to satisfy the justices that the federal-common-law issue is fair game. (The 10th Circuit noted that “[f]ederal common law … provides a framework for resolving this issue,” though it then added that federal common law directs it to start with the parties’ agreement, and it went on to interpret that agreement in light of Colorado law.)

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Lesson From The Tax Court: How The Court Reviews Whistleblower Office Decisions

Everyone, myself included, tends to refer to “the” IRS as if it is a sentient being.  We all know, however, that there is no such being.  Rather, the IRS is composed of many employees grouped together in different offices that perform different functions with various degrees of elan or despair.  It is the connections and coordination between these offices that make up “the” IRS.

Normally that distinction in not important.  But proved critical in last week’s case of Richard E. Lacey v. Commissioner, 153 T.C. No. 8 (Nov. 25, 2019).  There the Tax Court was asked whether it had jurisdiction to review the refusal of the IRS Whistleblower Office (WBO) to send whistleblower information to the Exam function.  The majority said yes.  The language of §7623(b)(4) gives the Tax Court jurisdiction to review any work product produced by the WBO.  Four Judges disagreed.  In their view, the statute does not permit review of decisions on whether or not to open exams in the first place, and that is true regardless of whether such decision is made by the WBO or by the relevant Exam function.  To the dissent, Tax Court review power turns on the functional nature of the work product and not the formality of the issuing office.   To the dissent, the IRS is the IRS.  To the majority, the IRS is sometimes discrete offices.

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Lesson From The Tax Court: The Scope And Standard Of Review In CDP Cases

Many Tax Court cases teach lessons about Collection Due Process (CDP).  The case of Norman Hinerfeld v. Commissioner, T.C. Memo. 2019-47 (May 2, 2019) (Judge Halpern), teaches a nice lesson about how the Tax Court reviews IRS CDP decisions.  It illustrates the difference between the concepts of “scope” of review and “standard” of review.  And it introduces readers to the wacky world of tax administrative law which, must to the consternation of those academics who like their law neat and tidy, is anything but neat and tidy.  More below the fold.

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Harvard Law Prof Who Was Ousted From Deanship For Representing Harvey Weinstein Failed To File Tax Returns For Nearly A Decade

Following up on my previous posts:

• After Ouster From Deanship For Representing Harvey Weinstein, Law Prof Blasts Harvard's Capitulation To A 'Loud Minority Of Students' (June 17, 2019)
• Sullivan: Why Harvard Was Wrong To Make Me Step Down As Faculty Dean For Representing Harvey Weinstein (June 25, 2019)

Sullivan v. Commissioner, T.C. Memo. 2019-153 (Nov. 19, 2019):

Petitioner is a clinical professor of law at Harvard Law School and the faculty director of the Harvard Trial Advocacy Workshop and the Harvard Criminal Justice Institute. He did not file a Federal income tax return for 2012 or 2013; IRS records indicate that he likewise failed to file returns for 2005-2011. ...

[P]etitioner’s aggregate outstanding liability for 2012 and 2013 was $1,231,775. The bulk of this assessed liability, for 2013, appears to be attributable to petitioner’s sale during 2013, for $1,865,000, of his former residence at the Newton address.

Petitioner timely filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, listing his address as the Winthrop House address. He checked the box captioned “I cannot pay balance.” Referring to the 2013 liability in particular he stated: “I did not (nor have I ever made) enough money to justify a $1.2M tax.”

On July 3, 2017, the IRS sent petitioner a letter, addressed to his Winthrop House address, acknowledging receipt of his hearing request. The letter advised him that, to be eligible for a collection alternative, he would need to file Federal income tax returns for 2012-2015 and supply a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. He did not respond to this letter and did not supply any of the requested documents. ...

Finding no abuse of discretion in any respect, we will grant summary judgment for respondent and sustain the proposed collection action.

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Lesson From The Tax Court: Whistleblowers Don't Get To Work The Case

You can't bring a Qui Tam action against a tax cheat.  You can blow the whistle, but it's not the same.

Qui Tam actions are lawsuits brought by private parties on behalf of the federal government against those who have defrauded the government.  Congress has long allowed such actions.  The current rules are found in 31 U.S.C. §3730.  That statute permits private parties to enforce the provisions of the immediately preceding statute, 31 U.S.C. §3729, known as the False Claims Act.

The False Claims Act, however, explicitly excludes actions against tax cheats from its scope.  See §3729(d).  That means private parties cannot bring Qui Tam actions to enforce the tax laws.  Instead, to help the IRS enforce the tax laws, Congress has created a whistleblower program, codified in §7623.  It permits individuals who report wrong-doing to the IRS to “receive as an award at least 15 percent but not more than 30 percent of the proceeds collected...”  In FY18, the Whistleblower Office's Report To Congress said that the program resulted in collection of over $1.44 billion, at a cost (of awards) of $312 million (about a 21% award rate). 

The recent case of Vincent J. Aprunzzese v. Commissioner, T.C. Memo. 2019-141 (Oct. 21, 2019)(Judge Vasquez) teaches the difference between a Qui Tam action and whistleblowing.  There, the whistleblower argued that he was due a larger award because the IRS could have collected much more based on the information he gave.  The Tax Court rejected the argument.  The case also shows why allowing Qui Tam actions for tax would not be a good idea: you don’t want private parties working the audits.  Details below the fold.

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Lesson From The Tax Court: One Year At A Time

I do not teach much tax accounting in my basic tax class.  I do, however, teach the general rule in §441(a) that each tax year stands alone.  Last week’s case of Roger G. Maki and Lilane J. Gervais v. Commissioner, T.C. Summary Op. 2019-34 (Nov. 4, 2019) (Judge Gerber), illustrates that general rule.  In Maki, the taxpayers won a §162 deduction for Mr. Maki’s travel away from home.  What makes this case fun is that these are the same retired taxpayers I blogged about last year in “Where Is A Retiree’s Tax Home.”  In both cases they won the issue, albeit for a smaller amount than they had claimed.  The lesson here is that a win in the first case did not guarantee the win in the next.  Details below the fold.

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Carried Interest Warning From Court May Be Trouble For Treasury

Bloomberg Tax, Carried Interest Warning From Court May Be Trouble for Treasury:

A recent court case meant to clarify the definition of a corporation intensifies questions about the tax treatment of carried interest, a prized perk for private equity and hedge fund managers [Charleston Area Medical Ctr. v. United States (Fed. Cl. Oct. 17, 2019)].

The IRS argued for a broad definition of the term “corporation” in the case. But the legal issue that could come up in the future is whether it’s reasonable for Treasury regulations to interpret the term more narrowly in the carried interest context, affecting who can qualify for the treatment.

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Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD

Jurisdiction is just a fancy word for “power.”  In a speech later published as The Path of The Law, the sainted Justice Holmes said: “in societies like ours the command of the public force is entrusted to the judges in certain cases, and the whole power of the state will be put forth, if necessary, to carry out their judgments and decrees.”  To Holmes, and others, courts are an instrumentality of government power.  The Tax Court is one such court.

In the tax arena, §6214 gives the Tax Court the power “to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency...”  And the whole force of the state---via the IRS---will be put forth, if necessary, to carry out its judgment regarding the correct amount of a deficiency.

Last week’s decision in U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. No. 5 (Oct. 28, 2019), teaches a lesson in how the Tax Court takes a pragmatic approach to exercising its power to “redetermine...the deficiency.”  In that case, the IRS sent the taxpayer an erroneous NOD.  The error was in the taxpayer’s favor, to the tune of over $6 million.  The taxpayer filed a petition, ostensibly asking the Tax Court to wield it’s power to “redetermine...the deficiency.”  Un uh.  The IRS moved to dismiss the case for lack of jurisdiction because, it claimed, the erroneous NOD was also invalid.  Accordingly, there was no deficiency over which the Tax Court could exercise its power of review.

The Tax Court held that the NOD was invalid and so the Court could not exercise its power.  But the vote was 9-6, spread over five different written opinions.  My take-away is that what splits the majority and dissenting positions are different practical judgments about what parts of an NOD the Court should consider when deciding whether its jurisdiction has been properly invoked.  NOD's serve different purposes and different parts of an NOD package contribute to those different purposes. Details below the fold.

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Mason: Implications For Apple In The Lower Court Rulings In Starbucks And Fiat

Ruth Mason (Virginia), Implications for Apple in the Lower Court Rulings in Starbucks and Fiat, 165 Tax Notes 93 (Oct. 7, 2019):

Yesterday’s EU General Court decisions in Starbucks and Fiat represent major victories for the Commission and its theory of state aid, notwithstanding that it lost Starbucks. The cases have significant implications for the pending Apple case. This short article discusses five major themes emerging from the decisions:

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Lesson From The Tax Court: § 280E Does Not Violate The Eighth Amendment

My wife and I are considering putting in a solar tube.  It will cost about $1,000.  But if we add a $50 solar night-light, then we are told the entire installation qualifies for the §25D residential energy credit.  I dunno... 

If true, however, most of us probably see this as a tax benefit, reducing the taxes they would otherwise pay.  Congress is subsidizing those who choose to “go solar.”  But some might see it as punishment.  Congress is punishing those who choose not to go solar by denying them a tax credit and thus “increasing” their liability from what it would be with the tax credit.  Whether you view this as a benefit or punishment depends on your baseline.

This baseline issue is what I see going on in last week’s decision of Northern California Small Business Assistants Inc. v. Commissioner, 153 T.C. No. 4 (Oct. 23, 2019).  There, the IRS had audited the taxpayer’s marijuana business and said §280E disallowed deductions otherwise allowable by §162, et. seq.  The taxpayer argued the denial of deductions was a punishment.  Not only that, it was a punishment that violated the Eighth Amendment’s prohibition against “excessive fines.”   Most of the Tax Court rejected the argument and found that §280E does not impose a fine (or penalty) just because it disallows deductions to some taxpayers that Congress gives others.  But some of the Tax Court agreed with the taxpayer that §280E does impose a penalty within the meaning of the Eighth Amendment. 

This is a fun case.  It teaches a lesson on the difference between a tax and a penalty in the context of some cool constitutional law.  Details below the fold.

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100th Lesson From The Tax Court: The Role Of Innocence In § 6015 Spousal Relief

Author's Note:  This is my 10oth Lesson published on TaxProfBlog.  I continue to be very grateful to Paul for this opportunity.  I have learned loads from the cases and I enjoy sharing what I learn. 

Editor's Note:  I am very grateful to Bryan for the great work he has done on these weekly posts. Bryan has developed a huge following among tax academics and practitioners: his Lessons From The Tax Court are invariably among the most popular posts each week, and cumulatively have been viewed 2.6 million times (26,000 page views per post).

Section 6015 is not titled “Innocent Spouse Relief.”  It is titled “Relief From Joint and Several Liability on Joint Return.”  And you will not find the word “innocent” (or any cognate) in the statute’s text.  But we still call the relief granted by §6105 “innocent spouse relief.”  Two cases from last week teach why.  In Habibe Kruja (Petitioner), Ermir Kruja (Intervenor) v. Commissioner, T.C. Memo. 2019-136 (Oct. 15, 2019) (Judge Buch) the Tax Court granted partial relief under §6105(c).  In Lori D. Sleeth (Petitioner), David T. Sleet (Intervenor) v. Commissioner, T.C. Memo. 2019-138 (Oct. 15, 2019) (Judge Goeke), the Court denied relief under §6015(f).  Both cases show that the idea of innocence plays an important, if often implied, role in the application of §6015.  Details below the fold.

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Lesson From The Tax Court: No § 911 Exclusion For Taxpayers With U.S. Abode

In several Lessons From The Tax Court (here, here, and here) we have seen how the concept of a tax home is important for deciding when §162 allows a deduction for the expenses of travel away from home.  The lessons teach that a tax home is where one must live to earn a living.  One’s personal choice of abode may or may not be one’s tax home.  That is the law for §162 purposes.  For §911 purposes, however, Congress has made the taxpayer’s personal choice of abode part of the definition of tax home.  That definition is what tripped up the taxpayers in Joseph S. Bellwood And Jacqueline E. Bellwood v. Commissioner, T.C. Memo 2019-135 (October 7, 2019)(Judge Gustafson) and in James M. Cambria v. Commissioner, T. C. Summary Opinion 2019-28 (September 30, 2019)(Judge Nega).  Details below the fold.

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Lesson From The Tax Court: Payments v. Deposits

The only thing worse than overpaying ones tax liabilities is not realizing one has overpaid until it is too late to get the overpayment refunded.  Section 6511 requires taxpayers to ask the IRS for refunds of overpayments within the later of: (1) three years after the relevant return was filed; or (2) two years after the relevant payment was made.  If no return was filed, then the two year period applies.

Section 6511, however, only applies when there has been a payment in the first place.  Not every remittance to the IRS constitutes a payment.  Sometimes taxpayers send in money without intending it to be a payment.  For example, a taxpayer might send money to simply stop the running of interest while the taxpayer pursues a protest of the amount of tax owed.  The IRS and courts call those remittances “deposits.”  The good news is that returns of deposits are not subject to the limitation periods in 6511.  The better news is that if a taxpayer is entitled to their return, the government might have to pay interest. §6603.

Thus, it is useful to learn the difference between a payment and a deposit.  In Michael C. Worsham v. Commissioner, T.C. Memo. 2019-132 (Oct. 1, 2019) (Judge Colvin) the taxpayer thought that his remittances to the IRS were not payments because he made them long before the IRS assessed the relevant taxes.  Judge Colvin makes quick work of that argument.  Perhaps too quick.  There is more to the difference between payments and deposits than the timing of the remittance.  I still think the taxpayer’s remittances in this case still might have been deposits, depending on facts not contained in the opinion.  Details below the fold.

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Tax Court Can’t Order IRS To Not Jerk People Around

Forbes:  Tax Court Can’t Order IRS To Not Jerk People Around, by Peter J. Reilly:

Jeffrey Davis is my new hero. From the record in Judge Ruwe’s Tax Court opinion, it appears that he got the IRS to back down on their notice of deficiency, but he didn’t stop there. He went on to recover $154.98 in costs.

But that is not the heroic part. He also sought to have the Tax Court order the IRS to not jerk other people around in the way that he was jerked around. In that quixotic quest he failed, because as the mantra goes the Tax Court is a court of “limited jurisdiction. Here is the story. ...

Mr. Davis contacted Senator Cory Booker’s office. They got the Taxpayer Advocate Service involved. Since the ninety day clock was ticking, there was also a Tax Court petition filed.

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