TaxProf Blog

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

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

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

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

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

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Lesson From The Tax Court: Get It In Writing!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Distinguishing Investment From Business Activity

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

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

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

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

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

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Lesson From The Tax Court: Hoist By His Own Petard

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

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

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Lesson From The Tax Court: Telling Stories

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

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

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

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Lesson From The Tax Court: Nothing Personal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Herzig: Supreme Court To Consider Proper State To Tax Trusts

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Drawing The Line

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

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

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

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

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

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

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Lesson From The Tax Court: Jurisdiction To Determine Jurisdiction

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

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

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

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

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

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

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Lesson From The Tax Court: The Pain of Disappointment

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

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

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

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Nick Saban Beats The IRS In Tax Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Taxpayers Behaving Badly

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

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

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

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

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

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

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

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Lesson From The Tax Court: Counting The Days

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

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

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

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Lesson From The Tax Court: The Hotel California Rule

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

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

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

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

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

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

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

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

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

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

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

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

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

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Preacher Taxed On Gifts From Congregation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Tax Prof Amicus Brief In State Corporate Income Tax Case

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: No Stopping The Perpetual Debate About Conservation Easements

The recent case of Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner v. Commissioner, 151 T.C. No. 3 (Aug. 27, 2018) teaches yet another lesson on the importance of the perpetuity requirements when claiming a charitable deduction for the donation of a conservation easement. Last October I blogged about another conservation easement case, Palmolive Building Investors v. Commissioner, 149 T.C. No. 18 (Oct. 10, 2017). I did not get into the substance of the law in that blog, but instead focused on the Golsen rule and why the Tax Court needed to put its best analytical foot forward. I referred readers to Peter Reilly’s great blog post on Palmolive for the substance.

I encourage readers who don't know the Golsen rule to review the Golsen post, because Harbor Lofts is a case that the taxpayers may appeal to the First Circuit Court of Appeals. That is important because it’s the First Circuit who disagreed with the Tax Court’s position regarding the subordination requirement at issue in Palmolive. While today’s case involves a different part of the perpetuity requirement (and so there is no First Circuit precedent to bind the Tax Court), the Tax Court is again agreeing with the IRS in reading the perpetuity requirement strictly, this time finding that a long-term lease is not sufficient to meet the perpetuity requirements. If the Tax Court’s opinion is appealed to the First Circuit, the First Circuit may decide to take the same liberal interpretation of the perpetuity requirement as it did in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), the case that was like Palmolive.

Today’s post will therefore comment on the Tax Court’s approach to interpreting the perpetuity requirements for conservation easements.  Long story short, I agree with it.  The First Circuit’s liberal approach, while understandable, is wrong.  This post will explain why. To do so, I will have to dip into the substantive law with the caveat, as always, that what I say is subject to correction from alert readers who know this area better than I do.  In particular, I will doubtless expose my ignorance by asking why the taxpayers did not structure the donation differently.  It was likely for a reason that I just cannot see.  The fun starts below the fold. 

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U.S. Appeals Court Urged to Curb IRS Sway Over Cannabis Industry

National Law Journal, US Appeals Court Urged to Curb IRS Sway Over Cannabis Industry:

A Colorado law firm is pressing claims that the Internal Revenue Service wields too much power over the cannabis industry, urging a federal appeals court to curb the agency’s authority to unilaterally determine that state-legal businesses are breaking federal law.

Thorburn Walker, a firm that has become go-to tax counsel for many Colorado dispensaries, has asked the U.S. Court of Appeals for the Tenth Circuit to reconsider a panel decision in Alpenglow Botanicals v. United States of America. The three-judge panel on July 3 said a taxpayer does not have to be convicted of a drug crime for the IRS to revoke its ability to deduct marijuana business expenses.

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Lesson From The Tax Court: The Misunderstood Trust Fund Recovery Penalty

A recent Tax Court case teaches a lesson about the §6672 Trust Fund Recovery Penalty (TFRP), and about the proper scope of a Collection Due Process hearing.  In Kathy Bletsas v. Commissioner, T.C. Memo. 2018-128 (Aug. 14, 2018), the IRS found Ms. Bletsas to be a responsible person who willfully failed to turn over trust fund taxes.  So the IRS assessed a §6672 penalty against her and filed a Notice of Federal Tax Lien (NFTL) to encumber all her property and rights to property.  Ms. Bletsas asked for and received a Collection Due Process (CDP) hearing about the NFTL. 

Represented by the indefatigable Frank Agostino (and by Malinda Sederquist), she argued that the collection decision to file an NFTL was an abuse of discretion because the IRS was getting steadily paid through an Installment Agreement (IA) with the employer and so did not need to file the NFTL against the Ms. Bletsas.  And, hey, she wasn’t really a responsible person anyway!

Trust fund taxes?  Responsible person?  TFRP?  To learn what that’s all about and what lesson Judge Lauber teaches, read on.  No one would blame you, however, if you instead clicked over to YouTube to watch this old Johnny Carson clip with Robin Williams and Jonathan Winters...

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Facebook, Coke Could Face Tax Hit After 8th Circuit's Transfer Pricing Ruling in $1.4 Billion Case Is 'Unmitigated Disaster' For Medtronic

Bloomberg, Facebook, Coke Could Face Tax Hit After Ruling Against Medtronic:

Last week, Medtronic suffered a legal setback in its bid to avoid a $1.4 billion U.S. tax bill — a ruling that may have costly implications for other multinationals battling the Internal Revenue Service over the use of overseas payments to lower their taxes.

Companies including Facebook and Coca-Cola have been fighting the IRS for years over strategies related to so-called transfer pricing — a way that some companies cut their tax liabilities by assigning lower prices for things like intellectual property that they shift to subsidiaries in low-tax jurisdictions such as Ireland or the Cayman Islands.

A federal appeals court on Aug. 16 sent the Medtronic case back to the U.S. Tax Court, saying the judge in a 2016 decision against the world’s biggest medical device maker hadn’t adequately explained how she’d reached her conclusion [Medtronic v. United States, No. 17-1866 (8th Cir. Aug. 16, 2018)]. No dates have been set yet for when the case will return to Tax Court.

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Lesson From The Tax Court: No Relief For Miscalculating ACA Premiums

A pair of cases over the past few weeks teach a lesson about the Affordable Care Act (ACA) premium assistance tax credit calculations.  The cases are Terry Jay Grant and Twila Rose Grant v. Commissioner, T.C. Memo. 2018-119 (Aug.1, 2018) and Luis Palafox and Hilda Arellano v. Commissioner, T.C. Memo. 2018-124 (Aug. 7, 2018).

Readers are no doubt aware that the ACA (a/k/a Obamacare) requires all individuals to purchase health insurance, requires all health insurance plans to contain certain provisions, and subsidizes the purchase of health insurance via a tax credit mechanism.  At the federal government level, the ACA splits up regulatory duties between HHS and the IRS.  HHS regulates stuff like the content of health plans, the establishment of the health exchanges and eligibility requirements, reimbursement policies, and procedures.  The IRS regulates the collection of taxes Congress enacted to fund the law, including the “shared responsibility payment” owed by taxpayers who fail to purchase health insurance (which, as Justice Roberts explained to a surprised readership, is a “tax” for constitutional purposes but not a “tax” for statutory purposes).  But there are several provisions that require significant coordination between the two agencies.

The health care premium subsidies Congress put in the Tax Code are one such provision.  To help certain individuals afford the mandatory health insurance coverage, Congress chose to subsidize the cost of insurance with federal funds.  Congress chose a tax credit as the mechanism to implement the subsidy.  Located in §36B it is there called the Premium Assistance Credit, but is commonly called the Premium Tax Credit (abbreviated PTC).  Certain taxpayers can choose to take the credit as an advance, commonly called the Advance Premium Tax Credit (APTC).   The APTC is paid directly to the insurance provider and not to the individual taxpayers.  

This subsidy structure creates two problems.  First is an awkward timing problem because taxpayers must guesstimate their eligibility for the subsidy and then true-up over a year later when they file their tax returns.  Second is a communication problem because the federal monies are paid directly to the insurance provider who must then properly communicate the amounts to the taxpayers so the taxpayers can do the true-up.

The two cases teach a lesson about the timing problem and the harsh consequences for messing up the guesstimate.

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9th Circuit Withdraws IRS's Victory In Altera 2-1 Decision Issued After Judge's Death

Following up on my previous post, 9th Circuit Reverses Tax Court In Altera, Revives Cost-Sharing Regs In Major Loss For Intel, Other Tech Companies:  in a surpising sequence of moves, the Ninth Circuit has  named Judge Susan Graber as a replacement judge for the late Judge Stephen Reinhard, who cast the deciding vote in the 2-1 case before his death, and has withdrawn its opinion in Altera “to allow time for the reconstituted panel to confer on this appeal,” even though no petition for rehearing has been filed.

• Forbes, Ninth Circuit Pulls Back Big IRS Victory Issued After Judge's Death
• Law360, 9th Cir. Withdraws IRS Win In Altera Cost-Sharing Row
• Leandra Lederman (Indiana), Update on Altera

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Partnering With Business: State & Local Tax Opportunities In Digital Sales

Peter Manda (Chicago), Partnering with Business: SALT Opportunities in Digital Sales, 88 State Tax Notes 425 (Apr. 30, 2018):

In this viewpoint, I evaluate the potential for state and local governments to raise revenue in a post-Quill world. I then examine dynamic sales and how they work, assess the state of current technology affecting online sales, and propose dynamically taxing electronic transactions (including retail sales) as the economy shifts toward a cashless society.

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Classic Lesson From The Tax Court: The Ole December 31st Check Problem

'm on vacation this week but I wrote up this Classic Lesson before I left so you could have something to chew on as you drink your morning beverage of choice.

Timing is at least as important in tax as it is in comedy. Although less common than it used to be before the age of direct deposit and mobile banking apps, the question sometimes arises about when must a taxpayer report as gross income a check received on December 31st but not cashed until January. The flip side is when may a taxpayer take a deduction for a check sent out on December 31st but not cashed until January.

Taxpayers tend to want to push off reporting income into a later year and tend to want to pull back deductions into the current year. Specifically taxpayers who receive a check on the last day of the year would like to say they don’t have income until they cash the check in January. But at the same time, taxpayers who write a check for a deductible expense on the last day of the year want to deduct that expense in that year and not the next.

Taxpayers cannot have it both ways. The good news is that the IRS has long allowed checks mailed on December 31st to be deductible in the year mailed, even when not cashed until January, so long as the taxpayer has truly parted control over the delivery of the check. See Treas.Reg. 1.170A-1(b).

The bad news is that taxpayers are also generally required to report checks received on December 31st as income. The rationale for that, however, is not entirely clear, as one sees in the classic case of Kahler v. Commissioner, 18 T.C. 31 (1952).

 

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WSJ: How One Man Used The ‘Innocent Spouse’ Rule To Win Some Relief In Tax Court

Wall Street Journal Tax Report, So Your Wife Embezzled $500,000 and the IRS Wants to Tax You: How One Man Used the ‘Innocent Spouse’ Rule to Win Some Relief in Tax Court:

Rick Jacobsen’s wife embezzled nearly $500,000.

After her conviction, the Internal Revenue Service asked him to pay more than $100,000 of taxes due on her theft. Yes, embezzled funds are taxable, and Mr. Jacobsen and his wife had filed joint tax returns.

But Mr. Jacobsen fought back, arguing his own case before a Tax Court judge. He said he didn’t know about the embezzlement and shouldn’t be forced to pay because he was an “innocent spouse.” In an opinion released last month, he won relief from about $150,000 of tax, interest and penalties [Jacobsen v. Commissioner, T.C. Memo. 2018-115 (July 25, 2018)]. ...

Mr. Jacobsen’s odyssey through the tax system shows the perils of signing a joint return with a tax cheat. It also shows that innocent spouses can sometimes escape dire tax consequences with a lot of time and effort, even if they can’t afford a lawyer. ... 

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Lesson From The Tax Court: The Power Of The Form 872 Waiver

This past week I learned a lesson about partnership tax returns from the case of Inman Partners, RCB Investments, LLC, Tax Matters Partner, v. Commissioner, T.C. Memo. 2018-114 (July 23, 2018).  Partnership taxation is definitely out of my comfort zone, so I am quite grateful for the help of my colleagues on the double-super-secret-tax-profs-rule-the-world listserv that Paul Caron started back in 1995, shortly after the internet got its graphical interface.  They got me straight on some terminology and sent me off reading some cool stuff.  Still, readers may well spot error, and if you do, please give a correction in the comments.  I am especially hesitant when I think I spot an error in a Tax Court opinion as I did here.  I know full well the error could be mine.

Inman is a case where the partners, but not the partnership, had signed a Form 872 waiver for their 2000 tax year.  The IRS issued a FPAA to Inman Partners.  Inman petitioned the Tax Court and it’s argument was a procedural one: the FPAA was too late because it was issued more than three years after the due date of the Partnership Return.  In response the IRS said “Hey, we got these here waivers!”  Inman said: “those were just signed by the individual partners and were not signed by the partnership and so they cannot waive the limitation period for the FPAA against the Partnership.”   

Judge Holmes held that the language in the Form 872 was strong enough to also waive the limitation on assessment for the related partnership for an earlier tax period.  It might be, however, that the language worked only because of the statutory scheme then in place for partnership audits.  Congress nuked that scheme in the December 2017 tax reform legislation.  Does Inman give us any insights on whether the Form 872 language still works?  For a quick swim through the murky waters of partnership procedure, I invite you to dive below the fold. 

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9th Circuit Reverses Tax Court In Altera, Revives Cost-Sharing Regs In Major Loss For Intel, Other Tech Companies

Wall Street Journal, IRS Wins Court Case Over Intel Corp.:

The Internal Revenue Service won a court case closely watched by technology companies, as an appeals court upheld a regulation governing how corporations divide expenses between their domestic and foreign operations.

Tuesday’s ruling by a panel of the Ninth Circuit Court of Appeals in San Francisco represents a loss for Intel, whose Altera subsidiary challenged the regulation when it was a separate company [Altera Corp. v. Commissioner, Nos. 16-70496, 16-70497 (9th Cir. July 24, 2018)]. Tech companies had billions of dollars at stake in the case because the rules at issue determine where they report some deductions.

The U.S. Tax Court, which handles disputes between taxpayers and the IRS, ruled in favor of Intel [Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015)]. The IRS appealed the decision.

“We conclude that the regulations withstand scrutiny under general administrative law principles, and we therefore reverse the decision of the Tax Court,” wrote Chief Judge Sidney Thomas.

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NY Times: Montana Governor Sues IRS, Warning Of ‘Foreign Money’ In Elections:

New York Times, Montana Governor Sues I.R.S., Warning of ‘Foreign Money’ in Elections:

Gov. Steve Bullock of Montana, a Democrat who has crusaded against the loosening of campaign finance rules, is suing the Trump administration to block it from eliminating a mandate that politically active nonprofit groups disclose the identities of their major donors to the government.

The Treasury Department announced last week that the Internal Revenue Service would no longer require a range of nonprofit organizations to identify any contributors giving more than $5,000, in a move it described as bolstering privacy and easing administrative burdens for those groups. Previously, certain nonprofits had to name their large donors to the government even though they were not supposed to be disclosed to the public.

The change in rules stirred immediate political controversy because of its effect on so-called “dark money” groups, which spend money in elections but are not required to reveal the sources of their funding except to the I.R.S. Under the new reporting regime, groups associated with organizations like the National Rifle Association, Planned Parenthood and Americans for Prosperity, the conservative advocacy network backed by the billionaire Koch brothers, would no longer have to list their donors, even to the government.

But in a lawsuit filed on Tuesday in Federal District Court in Montana, Mr. Bullock and his administration alleged that the Trump administration had flouted proper government process in eliminating the disclosure requirements. The suit asked the court to issue a judgment voiding the new I.R.S. policy. ...

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Lesson From The Tax Court: Origin Of The Claim Test For §162

Last week’s post involved taxpayers whose tax troubles arose from events related to the Great Recession. Those troubles resulted in litigation and a lesson about how the Tax Court applies an “origin of the claim” test in evaluating claimed §104(a)(2) exclusions.

This week’s post also involves a taxpayer whose life took a downturn during the Great Recession. Only this week we look at the more traditional application of the “origin of the claim” test when taxpayers seek to deduct litigation expenses. In Sky M. Lucas v. Commissioner, T.C. Mem.o 2018-80 (June 11, 2018) the IRS sent Mr. Lucas an NOD asserting a tax deficiency of $1.7 million for 2010. Part of that deficiency was due to the disallowance of about $3 million in legal and professional fees related to Mr. Lucas’ divorce litigation.  The multi-year litigation was a fight over some $47 million.  No wonder it was expensive. In the end, Mr. Lucas got to keep most of that.  Mr. Lucas thought he could deduct his litigation costs.  For a great lesson in how the Tax Court applied the origin of the claim test to deny him the deduction, see below the fold.

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22 Tax Profs File Amicus Brief: The Section 107 Housing Allowance For 'Ministers Of The Gospel' Violates The First Amendment's Establishment Clause

Ellen Aprill (Loyola-L.A.), Reuven Avi-Yonnah (Michigan), Linda Beale (Wayne State), Samuel Brunson (Loyola-Chicago), Neil Buchanan (George Washington), Patricia Cain (Santa Clara), Adam Chodorow (Arizona State), Mark Cochran (St. Mary's), Bridget Crawford (Pace), Jonathan Forman (Oregon), Gregory Germaine (Syracuse), David Herzig (Valparaiso), Benjamin Leff (American), William Lyons (Nebraska), Roberta Mann (Oregon), Lori McMillan (Washburn), Joel Newman (Wake Forest), Henry Ordower (St. Louis), Katherine Pratt (Loyola-L.A.), Daniel Schaffa (Richmond), Erin Scharff (Arizona State) & Theodore Seto (Loyola-L.A.), Amicus Curiae Brief of Tax Law Professors in Support of Appellees (Gaylor v. Mnuchin, Nos. 18-1277 & 18-1280, 7th Cir. :

Section 107 allows “ministers of the gospel” to exclude the value of housing benefits from income, whether provided in-kind or as a cash allowance, at a cost of approximately $9.3 billion in forgone taxes over a ten-year window. The trial court dismissed the challenge to Section 107(1), which excludes in-kind housing, on standing grounds, but that section remains relevant to the analysis of Section 107(2). Supporters argue that Section 107(2), which excludes cash allowances, comports with the First Amendment’s Establishment Clause because (1) it is part of a broad policy expressed in a number of provisions that exempts housing provided for the convenience of the employer and (2) tax exemptions do not subsidize religious actors. Alternately, they argue that Section 107(2) is permitted as an accommodation for religion because it equalizes treatment of different religious groups and avoids church/state entanglement. Finally, they claim that eliminating Section 107(2) would imperil other exemptions.

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