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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Lesson From The Tax Court: Taxpayers Behaving Badly (2021)

This will be my last new post until January.  I will be spending my days (except for Christmas Day) grading exams.  Grades are due Monday, January 3th and then I resume teaching on January 11th, so you will likely see my next Lesson From The Tax Court on January 18th (the day after MLK holiday).

For the fourth year, my last new blog of the year presents cases where something in the facts made me just shake my head (SMH in texting parlance).  You can find the previous lists here (for 2018), here (for 2019) and here (for 2020).  This year I have six to share with you.  I present them in chronological order.  I invite you to consider which of theme may be examples of just an empty head and which are examples of something worse.

This year I also continue giving the Norm Peterson Award.  You will find more explanation below the fold.

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WSJ: A Couple Stored IRA Gold At Home. They Owe The IRS $300,000.

Following up on Bryan Camp (Texas Tech), Lesson From The Tax Court: How To Mess Up Your Checkbook IRA:  Wall Street Journal Tax Report, A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000.:

It’s official: Owners of individual retirement accounts with assets invested in gold and silver coins can’t store them in a safe at their home.

So ruled the judge in a recent Tax Court case, Andrew McNulty et al. v. Commissioner [157 T.C. No. 10 (Nov. 18, 2021)]. The decision will cost Mr. McNulty and his wife Donna dearly—taxes of nearly $270,000 on about $730,000 of IRA assets, plus penalties likely to exceed $50,000.

The ruling disallows a scheme that was heavily promoted several years ago, when radio and internet ads touted the benefits of using IRA assets to buy gold and silver coins and then store them at home or in a safe-deposit box. Promoters based pitches on a perceived ambiguity in the law, despite warnings from the Internal Revenue Service and legal specialists.

These pitches are less common now, but they’re still around. Savers who have bought into them or are considering such a move should reconsider right away.

The McNulty case has a broader lesson as well: It’s a cautionary tale showing how dangerous it can be to invest retirement-plan funds in alternative assets without proper guidance.

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Lesson From The Tax Court: Taxpayer 'Filed' Return Even Though IRS Could Not Process It

Case law gets made when things go wrong.  When things go right, a taxpayer will file a return, the IRS will process the return, and the taxpayer will receive any claimed overpayment as a refund.  Today's lesson arises from a breakdown between filing and processing.  It teaches us the difference between those concepts.

In James Forrest Willetts v. Commissioner, T.C. Sum. Op. 2021-39 (Nov. 22, 2021) (Judge Kerrigan), the taxpayer sought refund of an overpayment on the basis of a Form 1040 the IRS had refused to accept for processing because of concerns about identify theft.  The IRS was not sure whether the return was genuine.  By the time the taxpayer demonstrated the genuineness of the Form 1040, it was too late to get the refund unless the taxpayer’s submission of the rejected Form 1040 constituted the “filing” of a “return.”  The Tax Court framed the question as follows: “whether the Form 1040 petitioner mailed...constitutes a properly filed return.”  Op. at 5.  But do you see there are two questions presented in this framing?  First, did the rejected Form 1040 qualify as a “return.”  The Court said yes.  Second, was the rejected Form 1040 “filed” when the IRS could not process the Form? Again, the Court said yes.

The holdings in this non-precedential opinion are consistent with the recent Tax Court precedential opinion Fowler v. Commissioner, 155 T.C. No. 7 (2020), curiously uncited by Judge Kerrigan.  Fowler held a taxpayer had validly filed electronically even though the taxpayer had not supplied his Identify Protector Taxpayer Identification Number (IP-TIN) and thus the IRS could not process the return because, as in today’s case, it did not know who had submitted the return.

In this age of computer processing, especially as taxpayers and the IRS wrestle with such issues as identify theft and the complications created by COVID regarding return filing requirements, discerning whether and when a taxpayer “files” a document that qualifies as a “return” becomes all the more critical.  This Lesson helps us understand the issues at play.  Details below the fold.

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Lesson From The Tax Court: Who Is An IRS Employee's Immediate Supervisor For §6751 Penalty Approval?

Today’s lesson involves yet more litigation over IRS compliance with the penalty approval process required by the formerly toothless §6751(b)(1).  In Sand Investment Co., LLC, et al. v. Commissioner, 157 T.C. No. 11 (Nov. 23, 2021) (Judge Lauber), the Tax Court continues teaching us the scope and operation §6751(b), a series of lessons it started back in 2017 when its decision in Graev v. Commissioner, 149 T.C. 485 (2017), gave the statute sharp teeth.  Among other requirements, the statute says approval must come from an IRS employee's “immediate supervisor.”  In today’s case, the IRS employee who proposed a bunch of penalties had two supervisors but only one definitely signed timely.  Judge Lauber finds that function trumps form in identifying which of the two supervisors was the right one to approve the proposed penalties.  This is a short lesson, and also one that will may be rendered moot.  Legislation passed by the House and now before the Senate de-fangs §6751(b).  Details below the fold.

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Lesson From The Tax Court: How To Mess Up Your Checkbook IRA

The idea that freedom means control over your own destiny s arguably the most defining characteristic of American culture.  It is most certainly the basis on which various companies promote “checkbook IRAs.”  If you Google that term you will find a gaggle of companies urging people to take full control of their retirement funds, to free themselves from restrictive IRA custodians. The companies promote structures that purport to allow taxpayers maximum freedom over their investment decisions.  Freedom equals control. 

In Andrew McNulty and Donna McNulty v. Commissioner, 157 T.C. No. 10 (Nov. 18, 2021)(Judge Goeke) we learn that too much control messes up a checkbook IRA.  There, Mr. and Ms. McNulty created a checkbook IRA, funded it with transfers from their other retirement accounts, and then used the money to buy gold coins which they stored in their home.  The Tax Court said that last bit—storing the physical coins in their home—was too much control and thus the receipt of the coins was a taxable distribution to them.  While the taxpayers crossed the line in this case, it may not be altogether clear where that line is.  How far can a taxpayer go before they mess up their checkbook IRA?  Let’s see what we can learn.  Details below the fold.

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Lesson From The Tax Court: Not Every Decision Comes With An Opinion

Once a taxpayer petitions the Tax Court to contest a Notice of Deficiency (NOD), the Tax Court will issue a decision in the case.  The taxpayer has no option to nonsuit the case like plaintiffs can do in state courts or in federal district courts.  It’s what I call the Hotel California rule: the taxpayer might check out (e.g. by abandoning the case), but can never leave (the Court's decision will issue).  For details, see Lesson From The Tax Court: The Hotel California Rule, TaxProf Blog (Nov. 12, 2018).

Today we learn that even though the Tax Court will issue a decision, it may not issue an opinion.  More, we learn why that is so.  In Paul Puglisi & Ann Marie Puglisi, et. al., v. Commissioner (4796-20, 4799-20, 4826-20, 13487-20, 13488-20, 13489-20) (Nov. 5, 2021) (Judge Gustafson), the IRS conceded all of a proposed deficiency (except for a small part that the taxpayers had conceded).  It asked the Court to enter decisions in favor of the taxpayers.  The taxpayers objected!  They wanted more than a victory.  They wanted fries with that: an opinion to go with the decision.  Judge Gustafson decided to accept the IRS concession and enter a decision for the taxpayers without an accompanying opinion on the merits.  In a 17-page Order he teaches us that while the Tax Court has the discretion to issue an opinion even when the IRS concedes a case, it will do so only under extraordinary circumstances.  Details below the fold.

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Lesson From The Tax Court: A Hard Choice Is Still A Choice

I have a strict attendance policy in that a student is either either there or not.  I don't do excused absences.  Students get six absences with no penalty and with no questions asked.  Their seventh absence, however, results in a one-increment reduction of their final grade (B+ to B, e.g.), again with no questions asked.  Further absences lead to more severe consequences.

One year, a student who had missed six classes came to me and asked if I would excuse him for a seventh absence.  He was a key member of his University’s Cheer Squad and he would have to miss class in order to participate in their State finals competition.

I explained to him the concept of a hard choice: a situation where any decision carries some significant downside.  But the difficulty of the choice would not excuse the penalty.  I suggested that he consider what would be more important to him in 10 years: getting a lower grade in one law school course, or missing the chance to help his team win a State championship.  He decided to take the grade hit.  Good choice, IMHO.

In Pamela Cashaw v. Commissioner, T.C. Memo. 2021-123 (Oct. 27, 2021) (Judge Greaves), we learn that taxpayers cannot be excused from the §6672 Trust Fund Recovery Penalty just because they face hard choices on how to use their company’s limited cash, no matter how sympathetic we may be to their difficulties.  If they have funds to pay the taxes withheld from their employees’ paycheck, their choice to instead pay off more immediately threatening creditors opens them to personal liability for the unpaid trust fund taxes.  Details below the fold.

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Blue J Predicts With 74% Confidence That 8th Circuit Will Find Customary/Usual Management Fees Are Deductible Under § 162

Benjamin Alarie & Christopher Yan (Blue J Legal), Would Management Fees by Any Other Name Still Be Deductible?, 173 Tax Notes Fed. 499 (Oct. 25, 2021):

In this article, Alarie and Yan examine Aspro [T.C. Memo. 2021-8 (Jan. 21, 2021)] and use machine-learning models to evaluate the strength of the appellant’s arguments in its appeal to the Eighth Circuit concerning the deductibility of management fees the business paid to its shareholders. ...

Conclusion
Blue J predicts with 74 percent confidence that the expenses in connection with the set of services provided to Aspro that are customary or usual will be found to be ordinary and necessary expenses. Blue J also predicts with 56 percent confidence that expenses in connection with the set of services that Aspro has failed to establish are customary or usual will be found not to be ordinary and necessary expenses.

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Lesson From The Tax Court: Whistleblower Died, But His Claim Survived

The IRS has long been authorized to award informants a fee for information.  Informants unhappy with their awards, however, have not always had easy access to judicial review.  That changed in 2006 when Congress modified §7623 to permit taxpayers to ask the Tax Court to review “any determination regarding an award.” §7623(b)(4).  Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959.  For a description of how the program works, see Lesson From The Tax Court: The Slippery Slope Of Tax Court Review, TaxProf Blog (Oct. 12, 2020).

Getting that Tax Court determination can take a long, long time.  That is because awards are first determined by the IRS Whistleblower Office (WBO) as a percentage of the proceeds collected from the taxpayer and collection can take a long, long time (hello CDP!).  At the end of all that time, if the whistleblower is not happy with the award, they can petition the Tax Court.  And obtaining a final decision from Tax Court can take a long, long, time as well.  Put those two long processes together and you are easily looking at 20 years from the first blow of the whistle to the final strike of the judicial gavel.

So what happens to the whistleblower’s claim if the whistleblower dies during that long, long time?  In Joseph A. Insinga v. Commissioner, 157 T.C. No. 8 (Oct. 27, 2021) (Judge Gustafson), we learn that a whistleblower’s Estate can continue to assert a claim for an award even after the whistleblower dies.  It's a seemingly simple lesson, but one that not as straightforward as you might expect, requiring the Tax Court to discern and apply common law doctrines.  Details below the fold. 

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Lesson From The Tax Court: Of Distributive Shares And The CDP Mashup

Sometimes our biggest problems are self-created. In Taryn L. Dodd v. Commissioner, T.C. Memo. 2021-118 (Oct. 5, 2021) (Judge Lauber), the taxpayer was attempting to repudiate a tax liability she had self-reported but had not paid.  Her multi-year slog through Collection Due Process (CDP) involved three trips to the Tax Court.  Only in the third trip do we learn this basic lesson about passthrough entities: a partner must report as income her distributive share of partnership income, whether or not that share is actually received.  So now Ms. Dodd not only has her 2013 liability to pay off, she also has all the additions to tax and interest that continues to accrue.

We also learn a second lesson, a lesson about the structure of CDP.  The difference between Appeals Officers (AOs) and Settlement Officers (SOs) is more than just the title.  Each has different subject matter competencies but only SO's conduct CDP hearings, which are generally all about collection issues.  Sometimes, however, taxpayers can raise substantive tax issues, creating a CDP mashup.  When a taxpayer uses CDP to contest the merits of a liability, the lesson here is to be sure to ask the SO to confer with an AO.  Otherwise you get stuck like Ms. Dodd.  Details below the fold.   

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Lesson From The Tax Court #200: The Great Divide

Today's Lesson is an appropriate one for my 200th post.  While the line separating my 199th from my 201st post is not big—not a great divide—the line does make visible a degree of effort and consistency that might otherwise be obscure.  So, yeah, I'm kinda proud about crossing this line.

The concept of Adjusted Gross Income (AGI) also creates a line, one that confuses my students enormously.  They have trouble understanding that the ability to take a deduction is affected not simply by the statute that authorizes the deduction but also by the statutes that tell you where to take the deduction in the process of calculating taxable income.  And not only does the concept of AGI create a line—dividing deductions taken above the line from those taken below the line—it sometimes creates a great divide.

In Carl L. Gregory and Leila Gregory v. Commissioner, T.C. Memo. 2021-115 (Sept. 29, 2021)(Judge Jones), the taxpayer’s lawyers had the same trouble my students have.  The case teaches a graphic lesson on the great divide that can exist between treatment of deductions taken above the line and those taken below, not to mention the great divide between the really rich and the rest of us.  There, the taxpayers were unable to deduct a penny their yacht hobby expenses.  While §183 allowed over $340,000 of deductions, this amount did not exceed 2% of the Gregorys' AGI.  Wow.  That fact at least explains why they may have thought it a good idea to pay attorneys to argue that the expenses went above the line.  It does not explain why the attorneys did not advise that such an argument was groundless, bordering on frivolous.  Details below the fold.    

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2d Circuit Rejects States' Challenge To $10,000 Cap On State & Local Tax Deduction

New York v. Yellen, No. 19-3962 (2d Cir. Oct. 5, 2021):

New York, Connecticut, Maryland, and New Jersey (the “Plaintiff States”) appeal from a judgment of the United States District Court for the Southern District of New York (Oetken, J.) granting the defendants’ motion to dismiss for  failure to state a claim and denying the States’ cross-motion for summary  judgment. The States allege that the $10,000 cap on the federal income tax  deduction for money paid in state and local taxes, enacted as part of the 2017 Tax  Cuts and Jobs Act, violates the United States Constitution. They argue that the state and local tax deduction is constitutionally mandated, or alternatively that the cap violates the Tenth Amendment because it coerces them to abandon their preferred fiscal policies. The District Court held that the States had standing and that their claims were not barred by the Anti-Injunction Act (“AIA”), 26 U.S.C. 10 § 7421(a), but it concluded that the claims lacked merit. We agree with the District Court, and we therefore AFFIRM the judgment. ...

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Lesson From The Tax Court: The Many Rooms Of Tax Court Power

All federal courts (except the Supreme Court) are created by Congress.  Congress defines the extent to which each federal court can invoke the power of the federal government to coerce the parties before them.  The fancy legal term for that power is “jurisdiction.”  Like all other federal courts, the Tax Court is a court of limited jurisdiction, limited to the powers that Congress permits it to exercise.

The Tax Court sometimes claims its power is more limited than other federal courts but that idea has been rightly called “fatuous.” Flight Attendants v. Commissioner, 165 F.3d 572, 578 (7th Cir. 1999) (Posner, J.) (“The argument that the Tax Court cannot apply the doctrines of equitable tolling and equitable estoppel because it is a court of limited jurisdiction is fatuous. All federal courts are courts of limited jurisdiction.”).

What is true, however, is that Congress gives the Tax Court much specific grants of powers than other federal courts.  I think of the varied jurisdictional grants as different rooms of power.  When you go to Tax Court, the extent of its powers depends on which door you enter and what room of power you find yourself in.  What the Court can do for you in some cases, it cannot do for you in others because of the way that Congress has written the statute.  It depends on which room of power you are in.  That’s the lesson we learn in Michael D. Brown v. Commissioner, T.C. Memo. 2021-112 (Sept. 23, 2021), where Judge Kerrigan explains that what the Tax Court can do when exercising its CDP jurisdiction is more limited than what it can do when exercising its deficiency jurisdiction.  The taxpayer was in the CDP room and wanted relief that could only be granted in the Deficiency room.  Those different rooms of power are different in scope and do not overlap.   Details below the fold.

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Supreme Court To Decide Whether 30-Day Time Limit For Tax Court Appeal Of IRS Determination Is A Jurisdictional Requirement

The Supreme Court yesterday granted certiorari to resolve a circuit split over whether I.R.C. § 6330(d)(1)'s requirement that a petition for Tax Court review of an IRS notice of determination must be filed within 30 days is a jurisdictional requirement or a claim processing rule subject to equitable tolling. Boechler, P.C. v. Commissioner, No-18578 (Order of Dismissal Feb. 15, 2019), aff'd, 967 F.3d 760 (8th Cir. 2020).

• Amicus Brief of the Center For Taxpayer Rights (Keith Fogg, Director, Harvard Law School Tax Clinic)
• Amicus Brief of the Villanova Law School Federal Tax Clinic and Seton Hall Center for Social Justice Impact Litigation Clinic 

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Lesson From The Tax Court: Emotional Distress Is Not Physical Illness

My dad practiced medicine for some 40 years as both a surgeon and family practitioner.  He raised us to believe that someone who did not have objectively detectable causes for their physical symptoms was not really ill: it was “all in their head.”  The medical term for that idea is “psychosomatic disorder.” 

The Tax Code makes the same distinction.  Section 104(a)(2) permits taxpayers to exclude damages recovered for objectively detectible physical injuries or physical sickness.   But they may not exclude damages received for a sickness that is simply “all in their head.”  The legal term for that idea is “emotional distress.” 

Rebecca A. Tressler v. Commissioner, T.C. Summ. Op. 2021-33 (Sept. 13, 2021) (Judge Greaves), teaches us that damages even for severe emotional distress are not excludable unless properly linked to a physical injury.  Ms. Tressler had sued her former employer, alleging a variety of wrongs.  One allegation was that the employer failed to prevent a physical assault by another employee.  Ms. Tressler claimed these wrongs had caused her emotional distress which, in turn, had caused various physical ailments. The employer settled.  Both the IRS and Tax Court denied a §104(a)(2) exclusion because the settlement language failed to properly link the payments she received to physical injuries she sustained; they were just linked to her claim for emotional distress.  It was all in her head.

It did not have to be this way.  I think we can learn from this case how to write better settlement agreements.

Details below the fold.

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Lesson From The Tax Court: Failure To Understand Issue Preclusion May Trigger Sanctions

Some people just cannot take no for an answer.  That is one of the reasons §6673 permits the Tax Court to impose a penalty of up to $25,000 on taxpayers who stubbornly present either frivolous or groundless arguments.

It is sometimes difficult, however, to distinguish a “no” from a “not now.”  Karson C. Kaebel v. Commissioner, T.C. Memo. 2021-109 (Sept. 9, 2021) (Judge Halpern), teaches a good lesson about issue preclusion, which is the important legal doctrine that tells us when “no” means “no.”  The taxpayer there asked the Tax Court to make the IRS take back a certification it had sent to the State Department.  But the reasons the taxpayer offered had already been rejected by both the Tax Court and the Court of Appeals in prior cases brought by the taxpayer about different subjects.  Judge Halpern explains why those no’s were really and truly no’s.  He also considers imposing §6673 penalties for the taxpayer’s intransigence.  So this will be a good lesson to learn, if for no other reason than to avoid penalties!   Details below the fold.

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Lesson From The Tax Court: Retirement Plan Drafting Error Loses Taxpayer $51k Deduction

As tax practitioners know, to err is human, but to forgive requires a new set of regs.  Gayle Gaston v. Commissioner, T.C. Memo. 2021-107 (Sept. 2, 2021) (Judge Marvel), teaches us the lesson that if you want to get the §404(a) deduction for contributions to a profit-sharing plan, you need to be sure to properly link the plan to the taxpayer’s trade or business. In this case, the taxpayer received substantial deferred compensation payments from Mary Kay Cosmetics after her separation from that company and made substantial contributions to a retirement plan her tax advisor drafted for her.  Unfortunately, her one-participant profit sharing plan did not identify any trade or business as the source of the plan contributions.  That was error.  Both the IRS and the Tax Court were unforgiving.  Details below the fold.

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Blue J Predicts With 77% Confidence That Reserve’s § 501(c)(15) Appeal Will Be Dismissed By The Tenth Circuit

Benjamin Alarie & Bettina Xue Griffin (Blue J Legal), Captive Insurance Appeal in Reserve Mechanical Will Likely Fail, 172 Tax Notes Fed. 1431 (Aug. 30, 2021):

In this article, Alarie and Griffin examine the Tax Court’s decision in Reserve Mechanical [T.C. Memo. 2018-86] and the strength of its appeal on the issue of whether the taxpayer was exempt from tax as a valid insurance company under section 501(c)(15).

Conclusion
Blue J predicts with 77 percent confidence that Reserve’s appeal will be dismissed by the Tenth Circuit.

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Lesson From The Tax Court: IRS Can Issue Multiple 'Final' Spousal Relief Determinations

Yogi Berra would have been a great tax practitioner.  In Nilda E. Vera v. Commissioner, 157 T.C. No 6 (Aug. 23, 2021), Judge Buch does his best Yogi Berra imitation by teaching us that just because the IRS issued one “final determination” about an innocent spouse claim does not prevent it from issuing a second “final determination” to the same taxpayer when the taxpayer resubmits the same claim for the same year.  That means taxpayers potentially get a second opportunity to petition the Tax Court for review of an IRS rejection even when the taxpayer missed the first opportunity.  The Tax Court thus interprets the law to encourage taxpayers to keep resubmitting equitable relief claims because one never knows when the IRS might issue a second final determination, either deliberately or, as here, because of a goof-up.  As Yogi might have said: it ain't final until it's final!  So when at first your claim's denied, file, file again.  In the context of §6015(f) relief requests, that is not actually a bad result.  Details below the fold.

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Lesson From The Tax Court: The 411 On Section 911

The pullout from Afghanistan has dominated the news, and many of our lives.  While it is natural to think of the war as fought by U.S. soldiers, we cannot forget the considerable number of defense contractor personnel who provided significant support.  According to this report, there were over 88,000 contractor personnel in Afghanistan nine years ago.  Many were U.S. citizens.  While the number has dropped significantly in recent years, it appears multiple thousands of non-military U.S. citizens needed to be evacuated back to the United States this year.

Today's lesson involves one such contractor and the proper application of the §911 exclusion to her.  Whatever you may think about the tax issue, I know you join me in hoping this taxpayer has made a safe return to the U.S.

Section 911 allows certain taxpayers—called “qualified individuals”—to exclude from their gross income certain amounts of income earned from outside the United States.  The case of Deborah C. Wood v. Commissioner, T.C. Memo. 2021-103 (Aug. 18, 2021) (Judge Lauber), looks at whether a civilian defense contract worker in Afghanistan could use §911 to exclude her wage income.  It teaches a short but complete lesson on what it takes to be a qualified individual for the §911 exclusion.  It is worth your time to read and think about.  Details below the fold. 

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Lesson From The Tax Court: The Refund Lookback Period Trap

Collection Due Process (CDP) hearings are generally all about collection.  Thus, if a taxpayer says that the IRS failed to apply an available credit to the tax at issue, that is a proper issue to bring up in a CDP hearing.  In Amr M. Mohsen v. Commissioner, T.C. Memo. 2021-99 (Aug. 11, 2021) (Judge Kerrigan), the taxpayer said the IRS should have applied an overpayment credit from a previous year to the tax sought to be collected.  The reason that the claimed credit was not available to be used is the lesson for today: there were no payments within the refund lookback period.  Oh, snap!  The trap!  Details below the fold. 

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Lesson From The Tax Court: The Concept Of Reasonable Collection Potential

"Him that makes shoes go barefoot himself". 
        -Robert Burton, The Anatomy Of Melancholy (1641)

One key concept for submitting a successful Offer In Compromise (OIC) is something called the Reasonable Collection Potential (RCP).  RCP is not a hard-and-fast calculation.  It contains lots of wiggle room for savvy taxpayers.  But there are limits.  Jerry R. Abraham and Debra J. Abraham v. Commissioner, T.C. Memo. 2021-97 (Aug. 3, 2021) (Judge Urda), teaches a very useful lesson in both the extent of, and limits to, the wiggle room in RCP calculations.

The irony in this case is that the taxpayer is a very savvy, experienced and successful tax attorney who specializes in OICs.  So he definitely knew what he was doing.  Yet he was unable to secure for himself what he undoubtedly secures for clients.  You could call this the case of the barefoot shoemaker.  Why that is so is the lesson for us all.  Details below the fold. 

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Tax Prof Challenges Constitutionality Of New York's Remote Worker Tax

Bloomberg, New York’s Remote Work Tax Rule Faces ‘Unconstitutional’ Test:

A New York rule that allows the state to tax nonresident personal income while working from home is facing a fresh constitutional challenge by a tax law professor given the rise in remote work due to the Covid-19 pandemic.

In the petition, Edward A. Zelinksy, a professor at Yeshiva University’s Cardozo Law School in New York City and resident of New Haven, Conn., requested the Tax Appeals Tribunal to revisit and reverse a 2003 decision in Zelinksy v. Tax Appeals Tribunal, New York’s Department of Taxation and Finance has used the case to claim tax dollars on days worked outside of state.

Zelinsky filed an amended New York state nonresident income tax return in 2019, claiming a tax refund of $10,615 for levies paid to the state while working remotely at home in Connecticut. The state tax department has not responded to the amended return or to the requested refund, according to the petition.

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Lesson From The Tax Court: Trailer Home Is Union Electrician’s Tax Home

The concept of tax home can be elusive because it is so dependent on facts and circumstances. In William Geiman v. Commissioner, T.C. Memo. 2021-80 (June 30, 2021), Judge Urda teaches us which facts and circumstances are important in determining the tax home of a union member.  There, the Court finds that the taxpayer’s trailer home was also his tax home even though he did no work in the town where the trailer home was located.  This case may give us a useful way to approach a tax home determination, by asking where was the taxpayer’s last known tax home and then seeing if the facts of the year in question changed the answer.   See if you agree.  Details below the fold.

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Lesson From The Tax Court: COGS Are Not Deductions

Today’s lesson is short, but not so sweet for the losing taxpayers in BRC Operating Company LLC, Bluescape Resource Company LLC, Tax Matters Partner v. Commissioner, T.C. Memo. 2021-59 (May 12, 2021) (Judge Pugh).  The taxpayer had claimed $160 million in Cost of Good Sold (COGS) for tax years 2008 and 2009.  But the taxpayer had no sales of goods in those years.  Judge Pugh teaches us a seemingly simple lesson:  you don’t get to claim COGS without any actual goods being sold.  Once again we learn how the concept COGS differs from the concept of deductions.  I last discussed this three years ago in Lesson From The Tax Court: Into The Weeds on COGS, TaxProf blog (June 25, 2018).

The shortness of the lesson, however, belies a metaphysical murkiness lurking underneath it.  Just what the heck is COGS, anyway?  On the one hand it’s not a deduction because it comes in the process of adjusting gross receipts to determine gross income.  On the other hand, it functions like a deduction, to account for the expense of producing income.  Judge Pugh appears to believe it is required by the Constitution.  That may be true if accountants had written the 16^th Amendment.  But they didn’t.  So I’m not so sure there is any constitutional basis for the concept (pun intended).   I believe that murkiness is best explained by §1001.  Details below the fold.

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Lesson From The Tax Court: No Deduction For Under-The-Table Cash Payments

When my son took an informal job as a “ranch hand” this past May, he was delighted to receive unrecorded cash payments.  He thinks it means he does not have to report them as income.  He will discover differently next filing season when we prepare his taxes.  But he is not alone in thinking that unrecorded cash payments are like eating someone else's dessert: the calories don't count.

The attractive obscurity of unrecorded and unreported payments for workers, however, presents a problem for those who employ them.  Employers would like to deduct those labor costs under §162.   In Engen Robert Nurumbi v. Commissioner, T.C. Memo. 2021-79 (June 30, 2021) (Judge Pugh), we learn that the Tax Court will not even use the Cohan rule to rescue a taxpayer who seeks to deduct unrecorded cash payments made to workers.  Mr. Nurumbi’s unrecorded cash payments to his workers may have helped them hide their income, but it also bit him on the butt when he tried to deduct the payments.  As part of this short and blunt lesson, I address the question of whether the Cohan rule might actually be mandatory.  Details below the fold. 

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8th Circuit Again Finds University Of Iowa Administrators Personally Liable For Deregistering Christian Student Group That Required Leaders To Affirm 'Basic Biblical Truths Of Christianity'

Following up on my previous post, 8th Circuit: University Of Iowa Administrators Are Personally Liable For Deregistering Christian Student Group After It Denied Leadership Role To Gay Student:  Intervarsity Christian Fellowship v. University of Iowa, No. 19-3389 (8th Cir. July 16, 2021):

Employees of the University of Iowa targeted religious student organizations for discriminatory enforcement of its Human Rights Policy. After the district court ordered it to stop selectively enforcing the policy against one religious group, the University deregistered another—InterVarsity Graduate Christian Fellowship. InterVarsity filed suit. On cross-motions for summary judgment, the district court held that University employees violated InterVarsity’s First Amendment rights and denied qualified immunity. We affirm. ...

InterVarsity has been active at the University for over twenty-five years. The group is affiliated with InterVarsity Christian Fellowship/USA, “a national ministry” to “establish university-based witnessing communities of students and faculty who follow Jesus as Savior and Lord, and who are growing in love for God, God’s Word, and God’s people of every ethnicity and culture.”

Membership and participation in the University’s chapter of InterVarsity is open to all students, but those who seek leadership roles are required to affirm a statement of faith, which includes “the basic biblical truths of Christianity.”

Over twenty-five years, Iowa had no problem with InterVarsity. But in June 2018, [the University] charged that InterVarsity’s constitution violated the Human Rights Policy. ... [T]he University deregistered the group a few weeks later.

We are hard-pressed to find a clearer example of viewpoint discrimination. The University’s choice to selectively apply the Human Rights Policy against InterVarsity suggests a preference for certain viewpoints ...  over InterVarsity’s. ...

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Lesson From The Tax Court: For Whom The Bankruptcy Tolls

Most tax practitioners are vaguely aware of bankruptcy law.  Today we learn something more.

Bankruptcy can have significant benefits for taxpayers.  First, it can stop IRS collection action.  Second, it can shake off a tax liability sooner than the 10 year time period Congress gives the IRS to collect.  Third, it can be a pre-payment forum, an alternative to the Tax Court, where the taxpayer can contest an unassessed liability.

Along with benefits, however, come costs.  The biggest cost is tolling.  Bankruptcy tolls various time periods for the IRS to assess or collect.  Two recent cases teach us just how costly bankruptcy tolling bad can be for taxpayers.  Dave Andrew Lufkin Sr., v. Commissioner, T.C. Memo. 2021-71 (June 8, 2021) (Judge Greaves), teaches how bankruptcy tolls tax collection.  Marc. S. Barnes and Anne M. Barnes v. Commissioner, T.C. Memo. 2021-49 (May 4, 2021) (Judge Lauber), teaches how bankruptcy can also toll assessment:  it illustrates the confusing exception to discharge for tax debts that are unassessed but assessable as of the petition date.   Details below the fold.

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Lesson From The Tax Court: The CDP Butterfly

It’s hard to catch a butterfly.  I have fond childhood memories of chasing them (and lightening bugs, too).  And when you do catch them you must handle them carefully because they are delicate.

Collection Due Process (CDP) hearings are like butterflies: taxpayers must act quickly to catch the first opportunity before it flits away and dies; and, even when caught, CDP hearings require careful handling.  Alhaji B. Benson v. Commissioner, T.C. Memo. 2021-78 (June 29, 2021) (Judge Urda), teaches us how even though taxpayers actually can get two CDP hearings, missing the first CDP opportunity forecloses challenging the underlying tax liability in the second opportunity.  Monique D. Long v. Commissioner, T.C. Memo. 2021-81 (June 30, 2021) (Judge Lauber), teaches us how it is all too easy to bungle a CDP hearing.

As usual, details below the fold.

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Lesson From The Tax Court: Restitution Overpayment Does Not Reduce Penalties On Deficiencies

Today’s lesson teaches that a taxpayer’s payment of criminal restitution does not lower penalties associated with the repaid tax.  In Monty Ervin v. Commissioner, T.C. Memo. 2021-75 (June 23, 2021) (Judge Lauber), the taxpayer was subject to a criminal restitution order.  The IRS assessed the restitution amount and the taxpayer fully paid it.  The IRS later sent an NOD proposing deficiencies smaller than the already-paid restitution, as well as §6651 penalties-by-another-name for failure to file and failure to pay.  In affirming the IRS’s ability to assess and collect these associated amounts, Judge Lauber gives a good lesson in the difference between restitution assessments and deficiency assessments.

My colleagues over at Procedurally Taxing have given extensive coverage to restitution assessments and associated case law.  For those who want the deeper dive, I highly recommend plunging into Keith Fogg’s excellent 2019 post, “Interest and Penalties on Restitution-Based Assessments.”  Keith also blogged today’s case last week, where he gives his always useful insights.  And, for those who want the cutesy-cutesy version of today's case, there is this amusing summary given by Lew ("Don't Contact Me") Taishoff.

Still, I think the following lesson may be useful for readers unfamiliar with the area.  The key takeaway is to see how and why IRS assessments of criminal restitution orders are different from tax assessments, even though the payment of criminal restitution is treated as a payment of a tax obligation.  Confused?  Details below the fold.

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Lesson From The Tax Court: A Lesson Of Interest

We worked through Spring and Winter, through Summer and through Fall,
But the mortgage worked the hardest and the steadiest of us all.
It worked on nights and Sundays, it worked each holiday,
Settled down among us and it never went away.

-Ry Cooder, “The Taxes on The Farmer Feeds Us All,” Into The Purple Valley (1972)

Today’s lesson is the taxpayer version of that famous Depression-era song: the accumulation of interest on tax liabilities is relentless, and difficult to reverse.  In Kannarkat P. Verghese et al. v. Commissioner, T.C. Memo. 2021-70 (June 7, 2021) (Judge Gustafson), the taxpayers were assessed a deficiency in 2014 for their tax years 1997 and 1998, as a result of over 13 years of audit and litigation between the IRS and three partnerships in which the taxpayers held an interest.  The taxpayers promptly asked for most of the accumulated interest to be abated per §6404.  They diligently pursued that request through 7 years of administrative and judicial proceedings.  Finally, last week, the Tax Court largely upheld the IRS’s refusal to abate the interest, teaching us our lesson.  The lesson cost these taxpayers over $80,000 in accrued interest (on liabilities of $54,000).  Not to mention attorneys fees.  But you can learn this lesson for free.  Just click on "continue reading..." 

Oh, and we also get a bonus lesson on §6603.  Apparently no one told these taxpayers they could suspend the running of interest by making a deposit in the nature of a cash bond.  Whoops.

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Lesson From The Tax Court: Accounting For Attorney Malpractice Settlements

Sometimes, losing plaintiffs think their attorney messed up.  Sometimes, they are so sure that they sue their attorney for legal malpractice.  I think of those as lawsuits-within-lawsuits, kind of like the story-within-a-story literary device, perhaps most famously used by Shakespeare in Hamlet.  In a malpractice action, the original lawsuit becomes a lawsuit-within-a-lawsuit because the court decides the malpractice action in part by making a counterfactual inquiry on what could have been the outcome in the original lawsuit.

Sometimes, plaintiffs actually win the malpractice action.  More often they settle, accepting some amount of money from the attorney (or, more often, the attorney’s insurer) in exchange for promising to go away and never come back.

The extent to which an attorney malpractice settlement constitutes gross income is the ostensible lesson in two recent cases.  In Carol E. Holliday v. Commissioner, T.C. Memo. 2021-69 (June 7, 2021) (Judge Pugh), and in Debra Jean Blum v. Commissioner, T.C. Memo. 2021-18 (Feb. 18, 2021) (Judge Urda), the Tax Court rejected both taxpayers’ attempt to exclude settlements of their attorney malpractice claims from gross income, even though both taxpayers may well have been able to exclude settlements of the original action.  Using an “in lieu of” test, the Tax Court said that the settlement of the malpractice claim was different than settlement of the original claim.  The original claim had become merely a lawsuit-within-a-lawsuit, a play-within-a-play, and thus had an insufficient nexus with the actual payment to support exclusion.

The less obvious lesson in these cases is how the ostensible lesson creates a bargaining chip for malpractice attorneys sitting at the poker table of settlement negotiations.  Taxpayers might account for the tax treatment of malpractice settlements either by structuring the settlement to make the payments eligible for exclusion, or by grossing up the settlement to reflect taxes imposed that would not have been imposed on settlement of the original action.  Details below the fold.

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Lesson From The Tax Court: The Perils of Stipulations

Tax Court procedure marches to a different beat from other federal courts.  For example, when a taxpayer files a Petition contesting a Notice of Deficiency (NOD) the taxpayer cannot voluntarily dismiss the case the way litigants can do in federal district court.  See Lesson From The Tax Court: The Hotel California Rule, TaxProf Blog (Nov. 12, 2018).  And it is not just pro se litigants who get tripped up, which is to be expected despite the heroic guidance given by the Tax Court on its webpage.  Experienced practitioners sometimes goof this up as well.

The recent case of Donald Bailey and Sandra M. Bailey v. Commissioner, T.C. Memo. 2021-55 (May 10, 2021) (Judge Pugh), teaches an important lesson about the crucial role of stipulations in the Tax Court’s decisional process: litigants must have a firm grasp of their case very early, or risk stipulating themselves into defeat as the taxpayers did in this case.  Details below the fold.

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Lesson From The Tax Court: The Structure Of Substantiation Requirements

Say you have 20 boxes of 5 different sizes.  Each size comes in 2 different colors  You can organize them in two ways.  You could create 5 groups of sizes, subdivided into 2 colors each.  Or you could create 2 groups of color, subdivided into 5 sizes each.  Or you could, like many of our clients, smash the boxes, throw then in a closet, and hope you never need them again.

Organizing boxes of deductions involves similar choices. The Tax Court keeps telling us that taxpayers bear the burden to prove their entitlement to deductions.  Taxpayers repeatedly fail to learn the lesson. Viola Chancellor v. Commissioner, T.C. Memo. 2021-50 (May 4, 2021) (Judge Urda), teaches a nice lesson on how one might organize various deductions according to the applicable substantiation requirement.  Judge Urda’s opinion addresses deductions taken on Schedule C by dividing them into two groups depending on their substantiation requirements.  Organizing deductions by their substantiation requirements is useful because taxpayers can use the Cohan rule to fill some substantiation requirements, but not others.  Spotting when and how to use the Cohan rule can be useful for tax preparation and planning, especially when your client’s dog ate the receipts — an increasingly tenuous claim in light of electronic receipts.  So I think it’s a lesson worth learning.  Details below the fold.

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Lesson From The Tax Court: CDP Settlement Officer Must Work Previously Rejected OIC

Last week’s case of Katherine Mason, et. al, v. Commissioner, T.C. Memo. 2021-64 (May 20, 2021) (Judge Holmes), teaches that the IRS Office of Appeals must consider in a CDP hearing the merits of an Offer In Compromise (OIC) that a prior office found was submitted solely to delay collection.  I kid you not.  Agreeing with the taxpayer that “the CDP process is aimed very deliberately to give most taxpayers an opportunity to delay collection,” Op. at 21, Judge Holmes held that the CDP Settlement Officer abused her discretion when she refused to consider an OIC on its merits, even though she found it had been properly rejected for having been submitted precisely for purposes of delay.  Yes folks, welcome once again to the wacky world of Collection Delay Process.  I also see the case as teaching us both the value—and the limits on value—added by judicial review.  Finally, I think the taxpayer simply won the opportunity to lose again.  See if you agree.  Details below the fold. 

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Lesson From The Tax Court: A Timely Lesson For Filing Returns

This year, the tax filing deadline for most folks is today, Monday, May 17th (here in Texas we get until June 15th because of the winter freeze).  The May 17th date is thanks to this questionable national extension issued by the IRS.  I say questionable because it is not clear why §7508A or any other statute gives the IRS the authority to extend the statutory deadline nationwide this year.  But no one is complaining.

And the IRS needs the extension as much as taxpayers do.  TIGTA reported in March that the IRS had still not processed almost 12 million 2019 paper returns as of last December 20th.  That should not be a criticism of the IRS.  While perhaps not the “master class” tweeted by Ms. Yellen, the IRS has done remarkably well to keep the machinery of tax collection moving during this time of COVID and Congressional Simon-Says statutes requiring immediate distribution of multiple Economic Impact Payments.  It would be difficult to expect more of any agency.  In short, everyone needs a little more time this year.

So today is Tax Day!  It's a great time for the lesson I see in William J. Spain and Idovia A. Spain v. Commissioner, T.C. Memo. 2021-58 (May 11, 2021) (Judge Lauber): how to comply with filing requirements and how to substantiate that compliance.  Sure, it’s a CDP case, but the lesson is equally applicable to all those last-minute tax return filings that will happen today.  In today’s case, the taxpayer’s careless CPA used his office postage meter to mail the Tax Court petition, but put no date on the envelope.  He relied on the U.S. Post Office to pick up the mail and postmark it.  Bad move.  The USPS did not postmark the envelope.  That failure at least created an opportunity to rescue the situation, but the CPA failed there as well.  The sad details are below the fold.

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Lesson From The Tax Court: The Measure Of Intent For Gift Exclusions Under §102(a)

When my church stopped in-person worship services in 2020, we kept paying our part-time child-care workers.  We first paid them with PPP loan money (which we treated as wages).  When that ran out, we decided to continue payments.  Why did we do that?  First, they were part of our church family and we knew that losing those amounts would be a hardship for them.  Second, we wanted to retain goodwill so they would come back when we resumed in-person worship.  So we had dual intent, mixed motives.  Which dominated would determine whether those continued payments were taxable compensation or non-taxable gifts.  How is a Court supposed to figure that out?

Juan Pesante, Jr., and Maria A. Moreno-Pesante v. Commissioner, (Bench Opinion, May 6, 2021) (Judge Copeland) teaches how the Tax Court measures the intent of a payor to determine whether a taxpayer may exclude a payment as a gift under §102(a).  There, the payor had sent mixed messages on whether a $25,000 payment to Mr. Pesante was a gift.  The Tax Court agreed with the IRS that the payment was not a gift.  Judge Copeland’s reasoning gives a great road map for how taxpayers and their tax advisors should approach this messy life-in-all-its-fullness issue.  Details below the fold. 

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Michael Jackson's Estate Beats The IRS: Tax Court Sets FMV Of His Name And Likeness At $4 Million, Not $161 Million

Wall Street Journal, Michael Jackson Estate to Face Smaller Tax Bill After Court Ruling:

Michael Jackson’s estate prevailed over the Internal Revenue Service on several key issues in a closely watched court case, an outcome that will push the estate’s tax burden below the government’s initial assessment.

In a ruling issued Monday, U.S. Tax Court Judge Mark Holmes found that the singer’s name and likeness were worth $4 million when he died in 2009 at the age of 50, not the $161 million the government had claimed. The IRS won on some other points about the value of other Jackson assets, but will get far less than the hundreds of millions of dollars in taxes and penalties it had sought from the estate.

The government and the estate settled some issues, and the case came down to the question of how to value three main assets: Mr. Jackson’s name and likeness and two entities tied to the music business.

The estate initially started with some lower values, but by Monday’s decision, it had said those three assets were worth $5.3 million combined. The government had started with higher values and an estate tax bill topping $500 million, but eventually concluded those three assets were worth $481.9 million combined. Judge Holmes, in his ruling, said they were worth $111.5 million. The estate’s actual tax bill will be determined later. ...

A central question in the case was this: Was it foreseeable that the estate would—as it since has done—build a successful business around Mr. Jackson’s image? Or was that such a long shot that the estate could plausibly claim, as it initially did, that Mr. Jackson’s name and likeness was worth $2,105? As Judge Holmes put it, the estate was “valuing the image and likeness of one of the best known celebrities in the world—the King of Pop—at the price of a heavily used 20-year-old Honda Civic.” ...

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Lesson From The Tax Court: The Multiple Paths For Loss Deductions

Section 165 permits certain groups of taxpayers to deduct certain losses of capital under certain circumstances.  I emphasize to my students that §165 is, at bottom, a capital recovery provision.  There is no deduction for lost opportunities, lost profits, or lost pets.  It's only for losses of capital “sustained during the taxable year and not compensated for by insurance or otherwise.” §165(a).

Ronnie S. Baum and Teresa K. Baum v. Commissioner, T.C. Memo. 2021-46 (Apr. 27, 2021) (Judge Kerrigan) teaches a nice basic lesson on the multiple ways taxpayers can deduct the loss of money under §165.  There the taxpayers claimed to have lost money in a stock purchase deal gone bad.  They tried to claim a theft loss deduction of $300,000 for tax year 2015.  The Tax Court said no.  The lesson I see is not so much about the rules for theft losses.  Rather, the reasons why these taxpayers lost gives a nice lesson in the various options taxpayers have in deducting losses.  It's a woulda-coulda-shoulda lesson.  In fact, I think the Baums may still be able to get the deduction, for a different reason in a different year.  I may be wrong!  I invite your thoughts below the fold.

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Law Prof Stacy Leeds Challenges Oklahoma's Attempt To Tax Her Tribal Income After McGirt

Following up on Stacy Leeds (Arizona State; Google Scholar) & Lonnie Beard (Arkansas), A Wealth of Sovereign Choices: Tax Implications of McGirt v. Oklahoma and the Promise of Tribal Economic Development, 56 Tulsa L. Rev. __ (2021):  Stacy Leeds, the nation's first Native American female dean, has filed this 12-page individual income tax protest letter with the Oklahoma Tax Commission after they adjusted her 2019 return. She has given me permission to share the letter "in hopes that the treaty arguments and other legal authorities are 'out there' for educational purposes":

On March 4, 2021, I received your letter postmarked February 25, 2021 notifying me that you adjusted my Oklahoma 2019 income tax return. I hereby protest and object to all aspects of your adjustment. Under Oklahoma law, the laws of the United States and the laws of the Cherokee Nation, your adjustment is inappropriate and without legal authority. I respectfully request you reverse your course of action and take the additional steps outlined in my protest letter. ...

For your records, I have attached a copy of my Arkansas income tax returns. The Arkansas return confirms the amount paid to Arkansas matches the credit taken on my Oklahoma return. Under Oklahoma law, I am entitled to a tax credit for taxes paid to another state and my return was correct.

I have uploaded the following information into your online system proving my legal status as a Cherokee Nation citizen and my legal status as a Cherokee Nation resident. ...

Your letter incorrectly summarizes Oklahoma law with respect to Oklahoma income tax authority over resident tribal citizens. Your letter instructs me (and similarly situated persons who receive this form letter) that Oklahoma will “disallow or adjust” all income unless all three requirements are met: “be a tribal member, live and work on Indian land to which the member belongs.” (emphasis added)

This language is contrary law and very misleading. There is no requirement that a tribal citizen “live and work on Indian land.” A tribal citizen need only live within their Nation’s jurisdictional boundaries and derive their income from sources inside that same Nation.

Oklahoma lacks authority to tax the income of resident tribal citizens. A resident tribal citizen’s income does not simply qualify them to ask Oklahoma officials for an “exemption” every year on a required Oklahoma income tax filing. Oklahoma is without any governmental authority over that person, as it relates earnings derived inside Indian country.

At present, you require each resident tribal citizen to carry the burden and expense of annually filing an Oklahoma tax return and producing repetitive additional documentation in order to be considered for an exemption. This affords Oklahoma repeat decision-making authority over tribal citizens inside Indian country. Like McGirt v. Oklahoma, this is an Oklahoma overreach unsupported by legal authority.

Only those tribal citizens residing outside their tribe’s jurisdiction, or who derive Oklahoma income from outside their tribe’s jurisdiction, should bear the burden and expense of filing Oklahoma income tax returns and producing several unnecessary documents year after year. Should a material change in their tax circumstance occur that truly subjects them to Oklahoma authority, then they should have a duty to file.

To Oklahoma’s (substantial) financial benefit, OTC’s letters and instructions mislead tribal citizens to such a degree that tribal citizens are highly unlikely to seek an exemption or challenge Oklahoma’s inflated authority. This results in millions of dollars of overpayment by tribal citizens who are unlawfully subjected to Oklahoma income taxes. This over-taxation occurs, in large part, because Oklahoma knowingly misrepresents the law. The United States Supreme Court has repeatedly rejected Oklahoma’s extension of state jurisdiction over Indians inside Indian country.

I respectfully ask that you correct this language in future correspondences and be more transparent in your form letters and instructions to the public. You have a duty to truthfully communicate. You have a substantial interest in working together with tribal Nations, but instead you mislead and deceive tribal citizens under threat of penalty.

The default is not Oklahoma jurisdiction. The default is that Oklahoma lacks jurisdiction to tax the earnings of resident tribal citizens.

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Lesson From The Tax Court: Abatement Of Assessment Brings No Relief From Liability

Letters from the IRS are often confusing, both to clients and to practitioners.  So when the taxpayers in Robert Craig Colton and Alina Mazwin v Commissioner, T.C. Memo. 2021-44 (Apr. 21, 2021) (Judge Lauber) received a letter from the IRS saying “you do not owe us any money” for the very year they were disputing in Tax Court, you would not blame them for thinking that the IRS had conceded the case.  It hadn't.  The letter was only telling them that a premature assessment of the deficiency had been abated, not that the IRS's judgment about the underlying liability had changed.  The case teaches the important lesson that assessment and liability are different.  One must always be aware of the distinction between an assessment (or abatement) and the underlying liability.  Details below the fold.

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Lesson From The Tax Court: Blind Reliance Is Not Reasonable Reliance

The Tax Code’s complexity is legend.  And logarithmic.  The more complex a taxpayer’s financial affairs become, the more difficult it becomes for even reasonable taxpayers to avoid errors.  In recognition of that, almost all of the major penalty statutes allow taxpayers to avoid penalties by showing that they had reasonable cause for errors found on audit.

When complexity hits a certain level, taxpayers turn to professionals for help.  Sometimes taxpayers think doing so absolves them of responsibility for any subsequent errors.  They think that relying on professional help is by itself reasonable.  Today’s case shows why that is not true.

Duane Pankratz v. Commissioner, T. C. Memo. 2021-26 (Mar. 3, 2021) (Judge Holmes), teaches that whether a taxpayer has reasonable cause to avoid penalties depends on much more than simply relying on a CPA to properly prepare the return or identify missing information.  There, the taxpayer engaged in a variety of business activities through 11 corporate entities.  After audit, the IRS proposed to assess over $10 million in deficiencies and penalties.  That’s a lot of error.  The taxpayer claimed to have a reasonable cause for the error: my tax professionals did not tell me.  Why that claim failed provides the main lesson.  Details below the fold. 

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Federal Judge Dismisses Santa Clara Law Students' COVID-19 Tuition Refund Class Action

Karen Sloan (Law.com), Santa Clara University Escapes Law Students' COVID Tuition Refund Class Action:

A federal judge in California has dismissed a class action brought by three Santa Clara University law students who sought a tuition refund after their classes moved online last spring due to COVID-19.

In her March 29 decision, U.S. District Judge Lucy Koh of the Northern District of California wrote that references to on-campus classes and activities on the university’s website, course catalogues and bulletins do not constitute a specific promise to students that classes would be held in-person—as the plaintiffs argued. Statements made in those documents are too general to “impose contractual obligations” on the university, Koh found. ...

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Lesson From The Tax Court: The Incoherence Of §6751(b)

Two recent Tax Court cases show us that while the §6751(b) supervisory approval requirement does apply to a tax penalty mechanically applied by a human employee it does not apply to the same penalty mechanically applied by a computer.  As a result, two similarly situated taxpayers get treated differently.  One gets penalized and the other does not.  It is an understandable result, but not a sensible one.  To me, it shows the incoherence of the statute.

In Andrew Mitchell Berry and Sara Berry v. Commissioner, T.C. Memo, 2021-42 (Apr. 7, 2021), Judge Marvell holds that a §6662(b)(2) understatement penalty is invalid without proper supervisory approval when proposed as a matter of routine in a 30-day letter issued by a Revenue Agent.  In contrast, Anna Elise Walton v. Commissioner, T.C. Memo. 2021-40 (Mar. 30, 2021) (Judge Urda) explains why supervisory approval is not required for the very same penalty if it is first proposed in a computer-generated CP2000 notice, issued without any human involvement.  Both the 30-day letter and the CP2000 notice serve the same function, to encourage the taxpayer to engage with the IRS to ensure the accuracy of their returns.  Yet the penalty proposed in one requires 2 humans to approve and the penalty proposed in the other requires no human approval.

These cases are straightforward applications of the statute.  They are unremarkable in their conclusions that human-proposed penalties need human review but computer-proposed penalties do not.  That is what the statute indeed says.  However, what makes them worth your time is that they demonstrate the strange interaction of penalty statutes and tax administration.  Here we have two equally culpable (or innocent, take your pick!) taxpayers, but only one gets hit with the same mechanically-computed penalty and that solely because of the difference in how the penalties are first proposed.  The difference is between what is routine and what is automatic.  It’s a difference created by how the IRS operates, the language of the statute, and the Tax Court’s interpretation of that statute.  And it’s a difference that makes little sense, at least to me.   I think there is a better distinction to be made.

If you are already a tax penalty jock and know how incoherent the system is, you do not need this lesson.  Otherwise, I invite you to dive into the details below the fold. 

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8th Circuit: University Of Iowa Administrators Are Personally Liable For Deregistering Christian Student Group After It Denied Leadership Role To Gay Student

Following up on my previous posts (links below):  Inside Higher Ed, Appeals Court Says Iowa Administrators Are Personally Liable in Lawsuit Brought by Christian Student Group:

A federal appeals court ruled Monday that University of Iowa administrators can be held personally liable and sued for damages due to their actions deregistering a Christian student group that denied a leadership position to a gay student. [Business Leaders in Christ v. University of Iowa, No. 19-1696 (8th Cir. Mar. 22, 2021)].

The case involves a student group called Business Leaders in Christ, whose members believe that same-sex relationships are “outside of God’s design.” After the group denied an executive leadership position to a gay student in 2017 on the stated grounds that the student “disagreed with, and would not agree to live by [BLinC’s] religious beliefs,” the university began a process that ultimately led to the revocation of the group’s status.

BLinC sued and, in a 2019 decision that alarmed advocates for LGBTQ+ students, a district court judge held that the university selectively enforced its Human Rights Policy and violated BLinC members’ constitutional rights to free speech, free association and free exercise of religion. The university did not appeal the judge's holding that it infringed on the BLinC members' First Amendment rights.

Rather, at issue in the appeal was whether the three individual Iowa administrators named as defendants could be personally liable and sued for damages, or whether they are shielded by qualified immunity, a legal doctrine that grants government officials immunity from civil lawsuits except in cases where their conduct violates “clearly established statutory or constitutional rights of which a reasonable person would have known.”

In a decision that hinged on an assessment of whether the rights at issue were “clearly established,” the U.S. Court of Appeals for the Eighth Circuit partially reversed the ruling of the district court, which had granted the administrators qualified immunity [Business Leaders in Christ v. University of Iowa, No. 19-1696 (8th Cir. Mar. 22, 2021)]. The appeals court held that the administrators can be held personally liable in relation to the students’ free expression and expressive association claims, but not in relation to claims related to free exercise of religion.

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Eleven Tax Profs File Amicus Briefs In Supreme Court Supporting Disclosure Of Donors To Nonprofits

Americans for Prosperity Foundation v. Rodriquez (No. 19-251), decision below:  903 F.3d 1000 (9th Cir. 2018)

Question Presented
Whether the exacting scrutiny this Court has long required of laws that abridge the freedoms of speech and association outside the election context—as called for by NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958), and its progeny—can be satisfied absent any showing that a blanket governmental demand for the individual identities and addresses of major donors to private nonprofit organizations is narrowly tailored to an asserted law-enforcement interest.

Brief of the California Association of Nonprofits as Amicus Curiae in Support of Respondent (Daniel Hemel (Chicago) & Anna-Rose Mathieson (California Appellate Law Group, San Francisco)):

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Lesson From The Tax Court: Passport Revocation Act Differs From Codification

Justice John Marshall is typically credited as creating the idea that the judicial branch has the power to declare Acts of Congress unconstitutional.  See Marbury v. Madison, 5 U.S. 137 (1803).  But courts exercise that power cautiously, refusing to confront allegations of unconstitutionality if they can plausibly dodge the issue. See generally, Gunnar P. Seaquist, The Constitutional Avoidance Canon of Statutory Construction, The Advocate 25 (Summer 2015).

Robert Rowen v. Commissioner, 156 T.C. No. 8 (Mar. 30, 2021) (Judge Toro), shows us the caution of the Tax Court.  There, the taxpayer invited the Court to declare the passport revocation process, created by Congress in the FAST Act of 2015, unconstitutional.  The Court unanimously dodged the invitation, based on the taxpayer’s failure to distinguish between an Act of Congress and the codification of an Act.  The Tax Court viewed the only part of the FAST Act at issue to be the part codified in the Internal Revenue Code in §7345.  It held that since §7345 does not, on its own, trigger any deprivation of property or liberty, this was not the proper case for the Court to rule on the constitutionality of the entire passport revocation process.  I invite readers to form their own conclusions about the plausibility of the Court’s dodge.  Details below the fold.

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