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

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

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

Details below the fold

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

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

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

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

Details below the fold.

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

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

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

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Lesson From The Tax Court: Ask The Right Court

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Counting The Days

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

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

Christianity Today, Churches Still Depend on Clergy Housing Allowance:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Distinguishing Employees From Independent Contractors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Take The Administrative Appeal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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COVID-19 Tuition Refund Fights Heat Up In Appeals Courts

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

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

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

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

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Lesson From The Tax Court: The Presumption Of Regularity

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

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

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

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Lesson From The Tax Court: The Qualifying Child Misnomer

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

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

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

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Lesson From The Tax Court: The Tacit Consent Rule

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

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

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

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

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

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

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

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

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

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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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