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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Following up on my previous posts:

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: One Year At A Time

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

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Carried Interest Warning From Court May Be Trouble For Treasury

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

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

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

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Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Payments v. Deposits

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: The Proper Role Of Delay In CDP

I often call CDP “Collection Delay Process.”  That is not pure snark.  Part of the purpose of CDP is to pause collection long enough to give taxpayers adequate time to present information to a human IRS employee and explain why the IRS should not be collecting from them.  What constitutes adequate time turns on the plausibility of the taxpayer’s story.  That is today’s lesson.  

The problem with CDP is that many, if not most, of the taxpayers who press the pause button do so simply for the purpose of delay and not for the purpose of explanation.  Time and again one finds taxpayers who invoke their CDP rights and then do nothing else.  They do not present a collection alternative, do not submit forms showing their assets and liabilities, do not respond to Appeals employee’s requests for information.  More importantly, they do not give a plausible story on why the IRS should stop collection.  Instead they give only excuses as to why they need more and more delay.

IRS employees in Appeals become jaundiced.  When so many requests lack substance, it is all too easy to start thinking that all requests lack substance.  The resulting temptation is to discount taxpayer excuses for delay and move ahead with collection. 

Two recent Tax Court opinions show both the frustrations felt by IRS Appeals employees and the dangers of assuming all taxpayers simply want delay.  Together they teach why delay is indeed a necessary part of the CDP process.  In Derrick Barron Tartt v. Commissioner, T.C. Memo 2019-112 (September 3, 2019)(Judge Lauber) the taxpayer sought delay for delay’s sake.  The case shows us the kind of situations that IRS Appeals employees see as a general rule.  In contrast, the case of Taryn L. Dodd v Commissioner, T.C. Memo 2019-107 (August 22, 2019)(also Judge Lauber) shows us the exception to the rule and why Appeals must sometimes give a taxpayer repeated and repeated and repeated opportunities to provide information.

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Lesson From The Tax Court: The Functional Definition Of 'Return'

I have blogged before about the myth that our system of taxation is one of “self-assessment.”   Our system is better described as one of self-reporting.  It depends on taxpayers properly reporting their items of income and deductions.  The IRS can do the rest. 

Section 6011 requires taxpayers to self-report on “a return or statement according to the forms and regulations prescribed by the Secretary.”  The most common return is the Form 1040.  Taxpayers who fail to file returns or who file fraudulent or frivolous returns are subject to various consequences.  For example, the three year statute of limitations on the IRS to audit a tax year is only triggered when the taxpayer files a return. §6501(c).  If what is filed is not a return, then the IRS can assess the penalties imposed by §6651(a) for the failure to file a return.  

It thus becomes important to know: what constitutes a “return”? 

Two recent Tax Court cases teach that a “return” is not simply a form but is a form which serves a function.  In Seaview Trading, LLC v. Commissioner, T.C. Memo. 2019-122 (Sept. 16, 2019) Judge Ruwe held that a copy of a return sent to a Revenue Agent could not function as a “return.”  In George J. Smith and Sheila Ann Smith v. Commissioner, T.C. Memo. 2019-111 (Sept. 3, 2019) Judge Halpern held that taxpayers who filed a completely frivolous Form 1040 had still filed a “return.”  Details below the fold.

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Apple Takes On EU In World's Biggest Tax Case: $14 Billion

Bloomberg News, Apple Takes on EU’s Vestager in Record $14 Billion Tax Fight:

Apple fights the world’s biggest tax case in a quiet courtroom this week, trying to rein in the European Union’s powerful antitrust chief ahead of a potential new crackdown on internet giants.

The iPhone maker can tell the EU General Court in Luxembourg that it’s the world’s biggest taxpayer. But that’s not enough for EU Competition Commissioner Margrethe Vestager who said in a 2016 ruling that Apple’s tax deals with Ireland allowed the company to pay far less than other businesses. The court must now weigh whether regulators were right to levy a record 13 billion-euro ($14.4 billion) tax bill.

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Lesson From The Tax Court: Administrative File Notes Are Not Ex-Parte Contact

Tax collectors have an tough and lonely job.  I know.  I collected taxes for Arlington County, Virginia shortly after law school.  And when I was in IRS Office of Chief Counsel, my clients were Revenue Officers (ROs), the IRS employees whose dolorous job is to collect unpaid taxes. 

When a taxpayer receives a CDP hearing, ROs are prohibited from making ex part contacts with anyone in Appeals about the substance of the collections under review.  If the RO wants to communicate with anyone in Appeals about matters that are not ministerial, administrative, or procedural, they must give taxpayers an opportunity to participate in the discussion. Rev. Proc. 2000-43, §3, Q&A-6.   If they violate the ex-parte prohibition, then the CDP hearing becomes tainted and the ex part nature of the contact must either be cured or else the case be reassigned.  Rev. Proc. 2012-18, §2.10(1).

Not every communication from an RO to Appeals is a prohibited ex parte contact.  Last week’s case of Jason Stewart and Kristy Stewart v. Commissioner, T.C. Memo 2019-116 (September 10, 2019) (Judge Kerrigan) teaches a lesson in what does not constitute a prohibited communication from an RO to the Settlement Officer in a CDP hearing.  Details below the fold.

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29 Tax Profs Say Deference To Tax Court Is Not Needed In Altera

Bloomberg Tax, Deference to Tax Court Isn’t Needed in Altera Case, Academics Say:

Intel-owned Altera misrepresented how the Ninth Circuit should treat conflicting decisions between its own three-judge panel and the U.S. Tax Court, a group of legal academics said.

“No special deference is due to Tax Court decisions,” the 29 academics argued in an amicus brief filed with the U.S. Court of Appeals for the Ninth Circuit. They were responding to Altera's request for a rehearing in a tax dispute with the IRS.

The 29 Tax Profs signatories are:

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Lesson From The Tax Court: Transfer Of Partnership Shares Changes Interest Deduction

Tax law is full of lessons where taxpayers exalt form over substance, then get caught.  Last week’s lesson---where a charity in name was a business in substance---was one of those.  We can think of those as “dog bites man” lessons, because they are common.

This week’s lesson is more of the “man bites dog” variety.  In William C. Lipnick and Dale A. Lipnick v. Commissioner, 153 T.C. No. 1 (Aug. 28, 2019) (Judge Lauber), it was the IRS that relied on form and the taxpayer who argued substance.  Mr. Lipnick had received real estate partnership shares from his Dad by gift and bequest.  The partnership passed through interest expenses on real estate loans.  Mr. and Ms. Lipnick deducted those expenses on their Schedule E.  The IRS insisted the Lipnicks treat the expenses as investment interest (deducted on Schedule A) because Dad had so treated them.  In his usual no-nonsense clear and direct style, Judge Lauber explains why the IRS position was incorrect: its reasons were formalist and ignored how the substance of the interest payments had changed once the partnership shares passed from father to son.  Details below the fold.

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Lesson From The Tax Court: Charity Used To Gin Up Business Loses Tax Exemption

I don’t carry a cell phone for a variety of idiosyncratic reasons.  My accommodating wife lets me keep our home phone, a land-line we got 20 years ago.  She no longer answers it, however, because we get a lot of spam calls.  Sure, it’s on the FTC’s Do Not Call Registry, but that does not protect us from certain types of spam, particularly charity spam and polling spam.

This charity loophole in the Do Not Call system is the basis for today’s lesson in substance over form.  In Giving Hearts, Inc. v. Commissioner, T.C. Memo 2019-94 (July 29, 2019), Judge Guy teaches how the operational test in tax exempt entity taxation looks through formal agreements to focus on function.   Thus, a charity created to provide cover for a replacement windows telemarketing business was not really a charity.

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Lesson From The Tax Court: The Proper Role Of Market Value In Casualty Loss Deductions

I teach the §165 casualty loss deduction even though Congress has suspended it until 2026.  That is because Congress continues to permit casualty loss deductions for federally declared disasters, as defined in §165(i).  Since global climate change is causing more intense hurricanes, and may also increase the frequency of earthquakes, we can expect plenty of opportunities to apply the casualty loss deduction rules in the coming years.  You can find a list of federally declared disasters here.

When I teach §165, I emphasize to my students that mere loss of fair market value (fmv) is neither sufficient to trigger the deduction nor always the measure of the deduction.  The taxpayer must tie the loss of market value to the physical damage caused by the casualty.  Last week's case of Robert G. Taylor, II v. Commissioner, T.C. Memo 2019-102 (August 19, 2019)(Judge Paris) teaches that lesson.  There, a Houston taxpayer sold his home as a $12 million teardown after Hurricane Ike, but could not tie the loss of market value to the physical damage sustained and so lost that issue in Tax Court.  Details below the fold.

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Hemel: Bullock v. IRS And The Future Of Tax Administrative Law (Part II)

TaxProf Blog op-ed:  Bullock v. IRS and the Future of Tax Administrative Law (Part II), by Daniel Hemel (Chicago):

In Bullock v. IRS, a federal district court in Montana held that states have standing to challenge the IRS’s rollback of information reporting requirements and that those requirements can only be amended through notice and comment. As my last post explained, the immediate significance of the decision is that noncharitable tax-exempt entities—including but not limited to politically active section 501(c)(4) groups—will have to disclose their large-dollar donors to the IRS (though not to the public). But the potential implications are much broader than that. The decision in Bullock suggests a possible new path for states to exert influence over federal tax policy through administrative law litigation. This post explores that possibility.

Bullock is the latest in a series of cases that might be seen as auguring the end of “tax exceptionalism.” By “tax exceptionalism,” I refer to the long-held view that general principles of administrative law—such as Chevron deference for agency statutory interpretations and the notice-and-comment requirement for agency rules—do not apply in the tax domain. Paul Caron put forward an early and influential critique of that view in his unforgettably titled 1994 article “Tax Myopia, or Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers.” Kristin Hickman advanced the attack on tax exceptionalism in a series of significant articles starting in the mid-2000s. The effort to end tax exceptionalism scored a major victory in January 2011 when Chief Justice John Roberts, in the case of Mayo Foundation for Medical Education and Research v. United States, said that the court was “not inclined to carve out an approach to administrative review good for tax law only.” Declarations of the “death of tax exceptionalism” soon followed.

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Hemel: Bullock v. IRS And The Future Of Tax Administrative Law (Part I)

Following up on my previous post, Federal Judge Overturns IRS Rule To Shield Political Donor Identities:  TaxProf Blog op-ed:  Bullock v. IRS and the Future of Tax Administrative Law (Part I), by Daniel Hemel (Chicago):

The world of “dark money” became a bit less opaque at the end of last month when a federal district court in Montana struck down an IRS revenue procedure that had shielded section 501(c)(4) organizations from having to disclose large-dollar donors to tax authorities. The decision in the case—captioned Bullock v. IRS—is significant both because of its immediate implications for the oversight of section 501(c)(4) groups and other exempt organizations as well as its broader ramifications for judicial review of IRS actions. Tax law practitioners and professors—whether or not they focus on exempt organizations in their work, study, and teaching—should take note.

This is the first of two posts on Bullock v. IRS and its implications. Here, I’ll lay out the facts of the case and some thoughts on discrete legal issues that it raises. In the next post, I’ll try to situate Bullock within the wider debate over tax exceptionalism (and its alternative, which we might call “tax ordinaryism”). I’ll argue there that Bullock represents both a continuation of the trend toward tax ordinaryism and a novel twist.

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Law Degree Held Against Defendant In Tax Scam

Peter J. Reilly (Forbes), Law Degree Held Against Defendant In Tax Scam:

Anthony Charles Dwight Box was at what I consider the end of the line in tax litigation — appealing his sentence from prison — when he heard from the Eleventh Circuit last month. It was not good news. The Circuit Court approved the 36 month sentence handed down by Judge Federico Moreno of the Southern District of Florida.

Judge Moreno had made an upward adjustment from the 24 to 30-month sentence called for by the guidelines because Mr. Box's legal education should have made him know better, a conviction in 1989 and failure to make any restitution.

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Lesson From The Tax Court: A Lesson Of Interest

Politicians love to brag about the voluntary nature of the U.S. tax system.  Back in 1862, the first Commissioner of Internal Revenue, George Boutwell, reported glowingly that, “sustained by the patriotic sentiments of the people, it is a matter for congratulation that the taxes assessed have, with few unimportant exceptions, been paid with cheerfulness...”  Those with boots on the ground had a different view: “Human nature must greatly change, before we shall find that patriotism is more universal than selfishness,” wrote the tax assessor Charles Emerson in 1867.

Good tax administration works with, rather than fights against, the selfishness of human nature.  One way to do that is by creating structural mechanisms that put taxpayers into a default posture of compliance.  Withholding is one of those.  Another way is to give taxpayers incentives to accurately comply with their reporting and payment obligations, incentives such as avoiding penalties and interest.

Enhancing taxpayer compliance is a central purpose of both penalties and interest.  See Policy Statement 20-1 in IRM 1.2.1.12 (08-01-2019).  Last week’s case of Jon D. Adams v. Commissioner, T.C. Memo. 2019-99 (Aug. 12, 2019) (Judge Urda) is an object lesson in how penalties and interest do that.  In particular the case illustrates how the difficulty in obtaining relief from interest, coupled with the very robust statutory interest rates, suggest that imposition of interest is more than just a mechanism to compensate the government for the lost time value of money; it is a compliance tool.

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Amazon Wins $1.5 Billion Ninth Circuit Tax Dispute Over Intangible Assets Shifted To Europe

Amazon.com v. Commissioner, No. 17-72922 (9th Cir. Aug. 16, 2019):

The panel affirmed the Tax Court’s decision [148 T.C. 108 (2017)] on a petition for redetermination of federal income tax deficiencies, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement.

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation.

At issue is the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation, the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets.

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Lesson From The Tax Court: Know The Difference Between IRAs And 401(k)s

Every year I lecture on the time value of money.  Part of the lecture compares a normal taxed savings account funded with after-tax dollars to a tax-free retirement account funded with pre-tax dollars.  At the end of my assumed 40-year investment period the difference astonishes the students and drives home my main point about the time value of money.

The effectiveness of my point does not depend on which type of tax-deferred retirement account is being used.  I figure most of my students will make use of a traditional IRA, or Roth, or spousal, or will be able to make use of a 401(k) plan or a 408(k) SEP plan.  It does not matter which type of plan they use: the power of tax deferral works in all of them.

But the type of retirement plan can make a huge difference to the treatment of early withdrawals.  That is the lesson from last week’s case of Lily Hilda Soltani-Amadi and Bahman Justin Amadi v. Commissioner, T.C. Summary Opinion 2019-19 (Aug. 8, 2019) (Judge Armen).  The taxpayers there had made an early withdrawal from their 401(k) plan to help buy their first home.  The distribution would have been penalty-free had it come from an IRA.  But it came from a 401(k) and so, while permitted, it carried with it the §72(t) 10% penalty.  Details below the fold.

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Lesson From The Tax Court: Appeals Is Still Part Of The IRS, Really!

I find it useful to think of tax administration as comprising two overarching functions: (1) determining tax liabilities and (2) collecting tax liabilities.  The IRS Office of Appeals (“Appeals”) supports both functions by mediating disputes between taxpayers and either the IRS exam function or collection function.  In Aldo Fonticiella v. Commissioner, T.C. Memo. 2019-74 (June 13, 2019), Judge Gerber teaches us that even though Appeals has a different (and wider) set of powers that often allow it to settle disputes without litigation, it still functions as an integral part of the IRS, no matter how many times Congress puts “Independent” in its title.

Taxpayers unhappy with Appeals look for creative ways to avoid its decisions.  In 2011, one such taxpayer argued that all Appeals work product violated the U.S. Constitution.  His theory was that Appeals Officers were “Officers of The United States” within the meaning of the U.S. Constitution.  That meant they had to be appointed by the President with the consent of the Senate.  Because they were not, they could not wield any power over taxpayers.  That made all their work illegal and without effect.  In Tucker v. Commissioner both the Tax Court (135 T.C. 114, 2010) and the D.C. Circuit (676 F.3d 1129, 2012) rejected the argument.  Not a single judge agreed with the taxpayer.

Creativity begets creativity.  In Fonticiella, Judge Gerber considers and rejects a companion argument, that Appeals is a “de facto independent agency” whose very existence is an affront to the U.S. Constitution.  While that is a loser argument today, it may become a winner eventually as Congress keeps trying to transform Appeals into a mini-me Tax Court.  The recently enacted Taxpayer First Act, P.L. 116-25, moves in that direction, although not far enough, IMHO, to affect the rationale for Judge Gerber’s decision.  You can read more about it below the fold.

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Federal Judge Overturns IRS Rule To Shield Political Donor Identities

Bloomberg, Judge Overturns IRS Rule to Shield Political Donor Identities: 

A federal judge in Montana overturned an Internal Revenue Service rule that would allow many political non-profit groups to keep their donor lists private [Bullock v. Rettig, No. CV-18-103-GF-BMM (D. MT July 30, 2019).

The ruling upends a change the IRS made last year that permitted so-called Section 501(c)4 groups, known as “social-welfare” organizations, to keep their donor lists private. A federal judge said the IRS didn’t follow proper procedure in writing the rule and needs to allow the public to weigh in on the change before altering the tax code.

“Then, and only then, may the IRS act on a fully informed basis when making potentially significant changes to federal tax law,” U.S. federal Judge Brian Morris said in the opinion published Tuesday evening. ...

The ruling is a blow to Treasury Secretary Steven Mnuchin who touted the rule, saying it protected donor privacy because the IRS didn’t need the information to enforce tax laws. Democrats had criticized the agency’s move, saying it opened up the possibility for foreign interests to influence elections.

Update:  Bloomberg Tax, IRS Could Face More Court Battles After Nonprofit Donor Ruling:

The IRS may be vulnerable to more court challenges after a federal judge struck down agency guidance that rolled back nonprofit donor disclosure requirements, according to tax professionals.

The ruling upends a position that the Internal Revenue Service and Treasury Department have taken for a long time that guidance falling short of a regulation doesn’t have to go through a full notice-and-comment period, said Kristin Hickman. ...

“The fact that the judge declared a revenue procedure to be a legislative rule is a big deal,” said Hickman, a professor at the University of Minnesota Law School who specializes in tax administration and administrative law.

The decision could subject other revenue procedures—or revenue rulings—to challenges from taxpayers if Morris’s ruling stands, said Lloyd Hitoshi Mayer, a professor at University of Notre Dame Law School. This, however, may not work in every case. The fact that the donor disclosure change amended a nearly 50-year-old rule seemed to play a large role in the judge’s decision, Mayer said.

For background of the case, see:

• Daniel Hemel (Chicago), Montana vs. the Koch Brothers
• New York Times, Montana Governor Sues I.R.S., Warning of ‘Foreign Money’ in Elections

Lesson From The Tax Court: How A New Work Location Becomes A Tax Home

The Bureau of Labor Statistics says here that almost half of U.S. families headed by a married couple were two-earner households in 2018.  Having a two-earner household has many advantages over a one-earner household, the most obvious one being more income.  Today’s lesson, however, is a cautionary one.  Two rules about tax homes may lessen the take-home earnings of the second income: the rule about married couples and the rule about temporary employment.

In Hector Baca and Magdalena Baca v. Commissioner, T.C. Memo. 2019-78 (June 26) (Judge Holmes), the couple lived in El Paso where both had worked.  In 2011 Mr. Baca got a new job in Midland, a city some 300 miles away.  But it was an on-call job, where any one job call could be his last.  At issue for tax years 2012 and 2013 was whether he could deduct his travel costs between El Paso and Midland.  Judge Holmes said no.  The fact that Ms. Baca's job remained in El Paso did not affect the location of Mr. Baca's tax home.  Married taxpayers can have two tax homes and Mr. Baca's was Midland.  Thus Mr. Baca's costs of Midland travel and lodging could not be deducted from the money he made there.  That reduced the advantage of this married couple's second income.  Details below the fold.

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Lesson From The Tax Court: The Role Of Abuse In Spousal Relief Claims

Divorce brings all kinds of consequences.  Today’s lesson is about one of the tax consequences.  In last week's case of Brigette Ogden v. Commissioner, T.C. Memo. 2019-88  (July 15, 2019) (Judge Halpern), the divorced taxpayer sought to be relieved of her obligation to pay tax reported on two prior joint returns.  She sought relief based in part on a claim of spousal abuse and a claim that a state court’s divorce decree absolved her of responsibility.  Judge Halpern’s opinion teaches lessons about: (1) the relationship of spousal abuse to spousal relief in §6015, (2) the relationship of state courts to federal tax law, and (3) the relationship of sub-regulatory IRS guidance---here a Revenue Procedure---to Tax Court review of an IRS decision about spousal relief.  Details below the fold.  It's all about relationships.

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Ex-Wife, Business Partner Denied Refund Beats IRS At Eleventh Circuit

Daily Business Review, Ex-Wife, Business Partner Denied Refund Beats IRS at Eleventh Circuit:

A woman denied a tax refund on $300,000 in income from a family business she paid back to her ex-husband, rather than paying back the federal government directly, has won a ruling from the U.S. Court of Appeals for the Eleventh Circuit in her case against the IRS [Mihelick v. United States, No. 17-14975 (11th Cir. June 29, 20190}.

“Inscribed above the main entrance of the Internal Revenue Service office in Washington, D.C., is a quotation from Supreme Court Justice Oliver Wendell Holmes Jr.: ‘Taxes are what we pay for a civilized society,’ ” Circuit Judge Robin Rosenbaum wrote. “An admirable outlook, yet even Justice Holmes would likely agree that it is uncivilized to impose taxes on citizens for income they did not ultimately receive. But that is precisely the result the government asks us to uphold today.” ...

Rosenbaum cut through layers of tax law and marital property nuances in the 24-page opinion, neatly simplifying a complex dispute.

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Lesson From The Tax Court: Effect Of Lump Sum SSI Election On Premium Tax Credit

Last year I blogged about one unhappy feature of the Affordable Care Act (ACA):  §36B has no wiggle room in it to deal with reasonable taxpayer errors in calculating their Premium Tax Credit (PTC).  As a result, taxpayers sometimes get hit with really big deficiencies, even when the error is someone else’s fault.

Section 36B(f)(2)(B) tries to limit the harshness.  For families whose income is less than 400% of the relevant poverty line, that provision puts a cap on how much an error will cost them.  But that is no help to families who are just outside of the 400% threshold.  Nor does the law permit the Tax Court or the IRS to distinguish between good faith errors and taxpayer negligence.  I like how Christine Speidel put it in this post: “The problem for taxpayers hoping to avoid strict reconciliation is that section 36B simply does not have a mechanism to consider equity in the reconciliation of APTC.”

The good folks at Procedurally Taxing have really been on top of this §36B problem.  Here’s a list of their blog posts on the subject.  In particular, Christine Speidel has a good summary of the law here, and Samantha Galvin illustrates two recent §36B cases here. 

Two recent Tax Court decisions reveal a new dimension to §36B harshness: it’s interplay with the lump-sum SSI election in §86(e).  In Charles W. Monroe and Rebecca A. Monro v. Commissioner, T.C. Memo. 2019-41 (Apr. 24, 2019) (Judge Ruwe), and in Levon Johnson v. Commissioner, 152 T.C. No. 6 (Mar. 11, 2019) (Judge Gerber), the question was whether an SSI lump sum catch-up payment had to be counted in calculating PTC eligibility when the taxpayers had made an election under §86(e) to reallocate the lump-sum payment from current year into prior years.  The Court looked at the text of §36B and said “yep, gotta include the lump sum.” 

I doubt the Court enjoyed coming to its conclusion because the harsh result turns the tax law into a “gotcha” game that even reasonable taxpayers will lose.  But if you learn the lesson these cases teach, you can at least help your clients who are in similar situations. 

There was an alternative interpretation here, however, that practitioners might press upon the Tax Court in future cases.  A closer look at the §36B language suggests it may well have room for a different "plain language" interpretation consistent with the §86(e) policy.  While the Court's holding was not unreasonable, neither was was it desirable, and it was sure as heck not inevitable.  Details below the fold.

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Lesson From The Tax Court: When Does A Business Start?

It takes money to make money.  Generally Congress allows taxpayers to deduct the money it takes from the money they make.  That’s the idea in §162.  But §162’s deceptively simple language----allowing a deduction for all “the ordinary and necessary expenses paid or incurred in carrying on a trade or business”---has gaps, to be filled by other statutes.  For example, §§183 and 212 apply the §162 idea to activities that are not a “trade or business” but still produce income and have associated costs.  And then there is that pesky timing issue: which costs are “expenses” that should be deducted in the current year and which costs should only allowed to be deducted over a longer period of time?  Sections 168(k) and 179 allow taxpayers to accelerate deductions of certain capital costs that otherwise would not qualify as “expenses” under §162’s simple language.

Section 195 deals with another gap:  how to treat the costs of starting a business.  Section 162 does not permit deductions until such time as the taxpayer is actually “carrying on” the business.  Section 195 allows taxpayers to reach back to the time before the business started and deduct their start up costs.  But to get to use §195 a taxpayer must actually start their business.  Last week’s case of Steven Austin Smith v. Commissioner, T.C. Sum. Op. 2019-12 (July 1, 2019) (Judge Vasquez) teaches a nice lesson about what it means to start a business.  There, the court found that a taxpayer was indeed carrying on his business even in a year where he had no sales income.  To be sure, he still lost because he was unable to substantiate his expenses.  There’s a bit of a lesson there as well.  But the main lesson is about when a business starts.

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Lesson From The Tax Court: Yachts Are Pigs

.You can put lipstick on a pig, but it’s still a pig.  According to Wikipedia, that is a late 20th century update to an older expression "A hog in armour is still but a hog.”  Both convey the same idea: superficial alterations do not change the essence of a thing.   

Two recent cases from the Tax Court teach a tax version of that lesson: no matter how much you dress up a yacht in a business suit, it’s still a pleasure boat.  First, in Carlos Langston and Pamela Langston v. Commissioner, T.C. Memo. 2019-19 (Mar. 21, 2019) (Judge Nega), we once again learn a lesson from the Langstons, the same taxpayers who tried to convince Judge Nega that they had converted their home into an income-producing asset.  That was the subject of this prior lesson.  Here, in the same case, they also tried to pass off a modest 58’ 2006 Meridian 580 yacht as a business asset.  I say "modest" advisedly because the second case is Charles M. Steiner and Rhoda L. Steiner v. Commissioner, T. C. Memo 2019-25 (April 2, 2019)(Judge Ruwe) and it involves a decidedly immodest 155’ Super Yacht called “Triumphant Lady.”  After the Steiners decided to sell that yacht they first tried to dress it up as a leasing venture to reduce their considerable carrying costs pending sale. 

Turns out, size did not matter.  Both taxpayers floundered on two of the several sharp shoals in the Tax Code that sink attempts to pass off pleasure boats as businesses.  Taxpayers lured by the siren song of tax breaks should learn the lessons you will find below the fold.

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Tax Profs Weigh In On Supreme Court's Decision On Constitutional Limits Of State Taxation Of Trusts

Following up on Saturday's post, Unanimous Supreme Court: State Cannot Tax Out-Of-State Beneficiary On Undistributed Trust Income:

• Daniel Hemel (Chicago), A Constitutional Right To Skirt State Income Tax?
• Erin Scharff (Arizona State), Presence of In-State Beneficiaries Alone Insufficient For State to Assert Jurisdiction to Tax Trust 
• Carla A. Spivack (Oklahoma City), Due Process, State Taxation of Trusts and the Myth of the Powerless Beneficiary: A Response to Bridget Crawford and Michelle Simon, 67 UCLA L. Rev. Disc. 46 (2019)

Lesson From The Tax Court: Ipse Dixit Cannot Fix It

Mitchel Skolnick and Leslie Skolnick, et al. v. Commissioner, T.C. Memo. 2019-64 (June 3, 2019) (Judge Lauber) teaches an important lesson about the proper use of expert witnesses.  In Skolnick, the Tax Court rejected the taxpayer’s expert witness valuation of of 153 horses at two points in time 7 years apart because the expert did not adequately disclose the facts and methodology used to value each horse.  Judge Lauber held that the taxpayer could not fix the value of the horses through expert’s ipse dixit.

The form of the lesson is also instructive.  Even though the parties went to trial this past April, Judge Lauber’s opinion does not decide the case...directly.  The opinion merely grants an interstitial motion, called a motion in limine, to exclude the expert’s report from the evidentiary record.  One might ask why the Court would take the time to issue an opinion on just one aspect of a case after the bother of a trial.  Why did not the Court just issue an opinion on the merits of the dispute?  After all, if the expert’s opinion is worthless enough to exclude from evidence, it is unlikely to really be helpful in deciding the merits of the case. 

I give my thoughts on both lessons below the fold, although I won’t blame you if you prefer to just watch this classic Monty Python sketch “The Argument Clinic.” Ipse Dixit is the form of argument that predominates in the sketch and is part of what makes it funny.  In real life, however, taxpayer representatives who do not heed today’s lesson will not be laughing. 

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Unanimous Supreme Court: State Cannot Tax Out-Of-State Beneficiary On Undistributed Trust Income

North Carolina Dept. of Revenue v. Kimberley, No. 18–457 (June 21, 2019):

Joseph Lee Rice III formed a trust for the benefit of his children in his home State of New York and appointed a fellow New York resident as the trustee. The trust agreement granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee later divided Rice’s initial trust into three separate subtrusts, and North Carolina sought to tax the Kimberley Rice Kaestner 1992 Family Trust (Trust)—formed for the benefit of Kaestner and her three children—under a law authorizing the State to tax any trust income that “is for the benefit of” a state resident, N. C. Gen. Stat. Ann. §105–160.2. The State assessed a tax of more than $1.3 million for tax years 2005 through 2008. During that period, Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the State. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax as applied to the Trust violates the Fourteenth Amendment ’s Due Process Clause. The state courts agreed, holding that the Kaestners’ in-state residence was too tenuous a link between the State and the Trust to support the tax.

Held: The presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. Pp. 5–16.

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Lesson From The Tax Court: Your Brand Is Your Business

Self-promotion is as American as P.T. Barnum.  So is wanting to avoid tax.  In K. Slaughter v. Commissioner, T.C. Memo. 2019-65 (June 4, 2019), Judge Wells teaches a lesson that all YouTube influencers and their return preparers need to learn: it is difficult to avoid self-employment tax on earnings from self-promotion.  Ms. Slaughter argued that her “brand” was an intangible asset separate from her business of writing crime novels, and so earnings attributed to her brand were not self-employment income.  The Court rejected her attempt to assign part of her earnings to what amounted to her investment in herself.  Her brand was itself her business.  Hey, at least she avoided penalties because her tax position was her accountants’ idea.  However, that leaves the accountants potentially vulnerable to penalties under §6694.  Details below the fold.   

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D.C. Circuit: Black Law Professor Ostensibly Denied Tenure For Lack Of Scholarship May Sue D.C. Law School

Bloomberg Law, Fired Black Law Professor May Sue D.C. Law School:

University of the District of Columbia trustees must face race bias and breach-of-contract claims by a black law professor who was denied tenure and fired. A federal appeals court found that academic institutions shouldn’t receive special treatment under anti-discrimination laws.

The university said it denied Kemit Mawakana tenure because his scholarship was deficient, and a federal trial court granted judgment for the board of trustees.

But a jury could find race was a motivating factor in the university’s decision to deny him tenure, the U.S. Court of Appeals for the District of Columbia Circuit said June 14.

Mawakana v. Bd. of Trs. of Univ. of D.C., No. 18-7059 (D.C. Cir. June 14, 2019) (citations omitted):

Law professor Kemit Mawakana was denied tenure and terminated by his employer, the University of the District of Columbia. He sued the University’s Board of Trustees, claiming the University discriminated against him based on race and violated both the terms and spirit of its contract with him. The district court granted the University’s motion for summary judgment as to each count of Mawakana’s complaint. Mawakana appealed as to three counts. We now reverse as to those counts.

In 2006, Mawakana, a black male, was hired by the University of the District of Columbia (“University”) to serve as a law professor at the David A. Clarke School of Law (“Law School”). Pursuant to his initial employment contract, Mawakana was hired as an Assistant Professor for a three-year period. In 2009, Mawakana’s employment contract was renewed and in 2010 he was promoted to Associate Professor. In July 2011, Mawakana applied for tenure. There is no record evidence that Mawakana heard anything about his tenure application during the 2011-2012 academic year. In early fall 2012, he was invited to and attended a meeting of the faculty subcommittee assigned to review his application. At the meeting the subcommittee assured him that his application was in good shape. A short time later, however, Mawakana attended another subcommittee meeting at which the subcommittee informed him that it had some concerns about his scholarship. In November 2012, Mawakana was invited to and attended a meeting with Law School Dean Katherine “Shelley” Broderick (Broderick), and faculty subcommittee chairman, John Brittain. At the meeting they both suggested that he withdraw his tenure application. Mawakana refused. In February 2013, the subcommittee issued its assessment of Mawakana’s tenure application, concluding that his scholarship was not worthy of tenure and recommending that tenure be denied. The full faculty evaluation and tenure committee reviewed and adopted the subcommittee’s report. Broderick then reviewed and endorsed the recommendation of the full faculty evaluation and tenure committee. University Provost Ken Bain subsequently reviewed and adopted the recommendation of the full faculty evaluation and tenure committee and Broderick. Finally, University President James Earl Lyons upheld the recommendation of Provost Bain. On May 1, 2013, Mawakana received notice that he had been denied tenure and that his employment was to terminate effective August 15, 2013.

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Lesson From The Tax Court: The Long Tail of OICs and IAs

Today’s lesson is about dogs and tails. Tax practitioners often work hard to get their clients into some kind of Offer In Compromise (OIC) or Installment Agreement (IA) with the IRS. Those are the dogs. But a successful IA or OIC involves more than just making timely payments on the deals. It involves an ongoing commitment to properly file returns and pay taxes for up to five years. That’s the long tail. And, to mix metaphors, that long tail can come back to bite a taxpayer who falls out of compliance. That’s the lesson we learn from two recent opinions: (1) Edward F. Sadjadi and Cynthia M. Sadjadi, T.C. Memo. 2019-58 (May 29, 2019) (Judge Cohen) (IRS can collect original liability against taxpayers who fully paid their OIC); (2) Kevin Scott Millen v. Commissioner, T.C. Memo. 2019-60 (May 30, 2019) (Judge Lauber) (taxpayer had his IA terminated even though he never missed a payment).

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Avi-Yonah: Altera Redux

TaxProf Blog op-ed:  Altera Redux, by Reuven Avi-Yonah (Michigan):

On June 7, 2019, the Ninth Circuit Court of Appeals released its long awaited opinion in Altera.[1] Like its predecessor, the new panel chosen after Judge Reinhardt’s death reversed the Tax Court and held that the regulation requiring multinationals that enter into a qualified cost sharing agreement (QCSA) to share the cost of employee stock options is valid.[2]

The issue in Altera has been litigated repeatedly. In Xilinx, the Tax Court held that a previous regulation requiring that all costs be shared including the cost of stock options was invalid because it conflicted with the governing arm’s length standard (ALS).[3] On appeal, the Ninth Circuit first upheld the regulation, but then reversed itself over a strong dissent from Chief Judge Reinhardt.[4]

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Tax Court Disallows Evangelist's Charitable Deduction For $40,000 Of Claimed Ministry Expenses

Don't Mess With Taxes, Evangelist's Almost $40,000 in Deductions Disallowed as Personal Expenses, Not Charitable Gifts:

Robert A. Oliveri, a self-described devout Catholic, spent almost $40,000 in 2012 traveling across the country conducting evangelical activities. The money went toward meals and gifts to strangers and acquaintances to further his religious outreach. ... Oliveri claimed myriad expenses totaling $39,979 as charitable contributions. ... [W]hen he tried to deduct those expenses from his federal income taxes, the IRS said no.

Last week, ... Tax Court Judge [Colvin] agreed with the tax agency, ruling that Oliveri's expenses didn't count as tax deductible charitable contributions and denied almost all those deductions [Oliveri v. Commissioner, T.C. Memo. 2019-57 (May 28, 2019)]. ...

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