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

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

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

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

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

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

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

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Lesson From The Tax Court: Failing Business No Reason To Stop Collection In CDP Hearing

Collection Due Process (CDP) is designed to protect taxpayers from abusive collection actions by the IRS.  American Limousines, Inc. v. Commissioner, T.C. Memo. 2121-36 (Mar. 25, 2021) (Judge Halpern), teaches that CDP does not require the IRS to stop trying to collect from a business just because the business was failing.  There the taxpayer owed over $1.1 million in employment taxes.  The Office of Appeals rejected both the taxpayer’s installment payment offer of $2,000 per month, and its alternative proposal to be placed in CNC.  The taxpayer said that the Office of Appeals should have put it into CNC to allow its business to improve.  The Tax Court upheld the Appeals determination, finding that Appeals satisfactorily balanced the need for collection against the difficulties enforced collection would create for the taxpayer.  Details below the fold.

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Lesson From The Tax Court: S Corp Payments To Sole Shareholder Were Wages

I think of corporations as a type of vessel that sails the seas of commerce.  Like real ships, corporations are commanded by officers.  All crew, including officers, are compensated for their services.  At the end of the commercial voyage, however, an end marked either by time or transaction, profits earned are distributed to the owners of the ship.  When the officers are also the owners it becomes difficult to distinguish payments that represent wages for their services in commanding the ship from payments that represent distribution of profits.  Yet for both employment and income tax reasons, such distinction must be made.

In Lateesa Ward and Ward & Ward Company v. Commissioner, T.C. Memo. 2021-32 (Mar. 15, 2021) (Judge Holmes), we learn why payments from the taxpayer’s S corporation to the taxpayer were wages and not distributions of profit.  The case teaches a basic employment tax lesson for S Corps and a basic income tax lesson for sole shareholders.  Details below the fold.

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D.C. Circuit: Law Prof May Be Entitled To Attorney's Fees Due To Her 'Serious Scholarly Interest' After Beating IRS In FOIA Litigation

Kwoka v. IRS, No. 19-5310 (D.C. Cir. Mar. 9, 2021):

This case presents a recurring question in our court: under what circumstances is a prevailing plaintiff in a Freedom of Information Act (FOIA) case—here a law professor [Margaret Kwoka (Denver)] seeking information from the Internal Revenue Service—entitled to an award of attorney’s fees? The district court denied the professor’s request for fees. For the reasons set forth below, we vacate and remand for further proceedings consistent with this opinion. ...

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Lesson From The Tax Court: The Presumption Of Regularity For NODs

Tax protestors are the cowbirds of the tax ecosystem, forcing the employment of resources that could be put to more productive use.  Nonetheless, tax protestors sometimes provide a service: they help us revisit basic lessons about tax and tax administration.  Today’s lesson is one such basic lesson: about the presumption of regularity.

The presumption of regularity is a broad doctrine that courts use when faced with disputes about the legitimacy of federal agency actions. In Brian E. Harriss v. Commissioner, T.C. Memo. 2021-31 (Mar. 11, 2021) (Judge Thornton), the taxpayer argued that a Notice of Deficiency (NOD) issued to him was invalid because the IRS employee who signed it was not authorized to sign it.  In rejecting the argument, Judge Thornton teaches a useful basic lesson in how the presumption of regularity applies to NODs.  Details below the fold.

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WSJ: He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income.

Wall Street Journal, He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income.:

Konstantin Anikeev, an experimental physicist, assembled everything he needed for an inquiry far outside his field.

His materials included American Express cards, the government’s view that credit-card rewards aren’t income, and his own willingness to spend time buying gift cards and money orders. He pulled the concept from personal-finance websites: Exploit the difference between unlimited 5% rewards and lower fees on gift cards and money orders. ...

It (mostly) worked.

Mr. Anikeev’s financial-optimization plan in 2013 and 2014—including $6.4 million in credit-card charges—led to an Internal Revenue Service audit and a finding that he and his wife had more than $310,000 in income that should have been taxed.

Judge Robert Goeke’s decision last month largely affirmed longstanding Internal Revenue Service practice, which says credit-card rewards are usually nontaxable rebates [Anikeev v. Commissioner, T.C. Memo. 2021-23 (Feb. 23, 2021)]. In other words, buying a pair of shoes for $100 and getting a 5% reward is really a $95 purchase, not $5 of income. But the judge also offered the IRS avenues for tougher enforcement. ...

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Lesson From The Tax Court: New 'Consequential Moment' Rule For §6751 Supervisory Approval

Section 6751(b)(1) causes no end of interpretive trouble for the Tax Court, no end of administrative difficulties for the IRS, and no end of windfalls for those lucky taxpayers who get to avoid penalties because the Tax Court later decides the IRS committed procedural errors.

In Brian D. Beland and Denae A. Beland v. Commissioner, 156 T.C. No. 5 (Mar. 1, 2021) (Judge Greaves), the Court has once again changed how it interprets §6751(b)(1).  It now says written supervisory approval must be made before an ill-defined “consequential moment.”  Here, that moment came when the Revenue Agent (RA) and her immediate supervisor met in person with the taxpayers to discuss a proposed Revenue Agent Report (RAR).  Contained in the RAR was a proposed fraud penalty.  But the supervisor—sitting next to the RA—had not given written approval for the fraud penalty before the meeting.  Too late!  The lucky taxpayer was thus able to avoid contesting the merits of a fraud penalty.  There is also a lesson here about administrative summonses, but may be more a lesson for the Tax Court than from the Tax Court because this opinion appears to rest, in part, on a misunderstanding of summons law.  Details below the fold.

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Lesson From The Tax Court: No Second Bite In CDP For Rejected OIC

One overarching theme of my Tax Procedure course is that tax collection is a process, not an event.  Many events occur during the time between assessment of a liability and the collection of that liability, and it is easy to fixate on them in isolation, forgetting their place in the process.  One important event can be a Collection Due Process hearing and subsequent appeal to Tax Court.  Since I started writing these posts (back in September 2017) we’ve learned a lot of lessons from the Tax Court about the shape and scope of CDP.  In Craig L. Galloway v. Commissioner, T.C. Memo. 2021-24 (Feb. 24, 2021) (Judge Urda), we learn that what a taxpayer can do in a CDP hearing may be limited by earlier events in the collection process.  Details below the fold.

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Lesson From The Tax Court: The Fearsome Scope Of Evil §280E

When Congress creates a tax benefit, it often qualifies that benefit.  Many time Congress does that in the very provision granting the benefit.  For example, the exclusion for employee fringe benefits in §132 contains many qualifiers, such as a non-discrimination requirement for several of the benefits. Other times, however, Congress writes a completely different statute to qualify a benefit.  You find many of these statutes gathered in Chapter 1 (“Normal Taxes), Subchapter B (“Computation of Taxable Income”), Part IX (“Items Not Deductible”), starting with §261.  Just when a taxpayer gets all happy by being allowed a deduction by some statute, one of these swoops in to deny or qualify the deduction.  So I call these the “evil 200’s.”

Section 280E creates a draconian qualification for businesses engaged in the trafficking of substances that are illegal under federal law.  Because marijuana is still illegal under federal law, that has caused no end of tax headaches for businesses that are perfectly legal under state law.  Those businesses keep attacking the scope of §280E, with decidedly mixed results.

In San Jose Wellness v. Commissioner, 156 T.C. No. 4 (Feb. 17, 2021) (Judge Toro) the Tax Court interpreted §280E broadly to prohibit deductions for depreciation and for charitable contributions.  While one might read the opinion as saying that §280E prohibits deductions for all expenditures made by a marijuana business, regardless of that expenditure’s relationship to the operation of the business, I do not think it actually goes that far.  At least I hope not.  Details below the fold.

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Lesson From The Tax Court: The §104(a)(2) Causality Rule

Two years ago on Valentine’s Day I was rear-ended.  The accident was, literally, a pain in the neck but the injury was relatively minor.  The insurance company fixed my car and also sent me a $2,800 settlement check.  Section 104(a)(2) permits me to exclude all of that $2,800 because of what I call the causality rule: taxpayers can exclude from income any amounts received “on account of” a personal physical injury.

We learn a good lesson about the causality rule in Timothy Stassi and Cindi Stassi v. Commissioner, T.C. Summ. Op. 2021-5 (Feb. 7, 2021) (Judge Kerrigan).  There, Ms. Stassi had sued her former employer.  They settled.  Part of the settlement check was to compensate her for having suffered through an unpleasant work environment, which (generously interpreted) caused a painful outbreak of shingles.  Both the IRS and the Tax Court said the payments were not “on account of” her physical injuries within the meaning of §104(a)(2).  Thus, Ms. Stassi could not exclude any part of the settlement check.

In this post I also want to draw readers’ attention to certain language in Judge Kerrigan’s opinion.  Yes, it is just a summary opinion and so carries no precedential weight, but if the opinion truly reflects Judge Kerrigan’s view of how the §104(a)(2) exclusion works, then it may signal a change in the law. Detail below the fold. 

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Lesson From The Tax Court: When A Hotel Becomes A Tax Home

The concept of “tax home” is central to the §162 deduction for business travel.  Akeem Adebayo Soboyede v. Commissioner, T.C. Summ. Op. 2021-3 (Jan. 26, 2021) (Judge Greaves) teaches us that a tax home is not where a taxpayer actually has a home, but is rather where the taxpayer ought to have a home.  In this case, the taxpayer performed legal services in Minnesota and in the Washington D.C. area.  The taxpayer’s principal residence was in Minnesota.  When in D.C., he mostly stayed in a suburban hotel.  The IRS and Tax Court decided that the taxpayer ought to have lived in the D.C. area because that is where he made most of his money and spent most of his work time.  It was thus his tax home for §162 purposes.  Part of this lesson is thus learning how to work deductions for business travel when a taxpayer’s primary residence is in their secondary work location.  Details below the fold. 

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Lesson From The Tax Court: No Product? No §162 Deduction!

Section 162 has simple language.  It permits deduction for all “the ordinary and necessary expenses paid or incurred in carrying on a trade or business.”  The simplicity is deceptive.  All the terms need further interpretation.  In William Bruce Costello and Martiza Legarcie v. Commissioner, T.C. Memo. 2021-9 (Jan. 25, 2021) Judge Halpern teaches us one interpretation of “carrying on a trade or business”: you need a product.  In this case the taxpayers owned land on which they sequentially tried raising chickens, crops, and beef.  None of the efforts resulted in salable product.  The Tax Court agreed with the IRS that these activities did not amount to carrying on a discernible business because the taxpayers never sold anything.  The Court thus denied deductions for the costs associated with the activities.

The need for product is key.  Other Tax Court cases teach us that a taxpayer does not actually have to sell product to be carrying on a business, but still needs to have product.  No product, no §162 deduction.  No kidding.  Details below the fold.

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Lesson From The Tax Court: No Deduction For Disguised Dividends

A lesson that comes up often in my tax class is how economic substance trumps transactional form.  One common example is when a corporate taxpayer seeks to deduct payments that seem to be compensation payments.  Sometimes, however, not all is what it seems and the corporation is really distributing corporate profits rather than incurring a corporate expense.

In last week’s case of Aspro, Inc. v. Commissioner, T.C. Memo. 2021-8 (Jan. 21, 2021), Judge Pugh’s clear and crisp opinion teaches us how the Court decides whether compensation payments are really disguised dividends, a lesson we can use to help clients avoid the mess that this taxpayer got into.

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Lesson From The Tax Court: The CDP Silver Linings Playbook

Tax practitioners tend not to know much about bankruptcy.  Today’s lesson is for them.  In Wiley Ramey v. Commissioner, 156 T.C. No. 1 (Jan. 14, 2021), Judge Toro held that a CDP notice properly sent to a taxpayer’s last known address triggers the time period for the taxpayer to request a CDP hearing, even if the CDP notice is actually delivered to a different person who shares that address.  That is the tax lesson most folks will see in this case, and it’s a good one.

I see an additional lesson, a bankruptcy lesson.  While the taxpayer’s failure to timely request a CDP hearing meant no he received no Tax Court review of the administrative hearing, the news is not all bad.  The lesson for today is about silver linings:  the taxpayer’s equivalent hearing still got the delay benefits of CDP, and that delay did not count against Mr. Ramey should he file bankruptcy and seek a discharge of the tax liabilities at issue.  Practitioners would not be crazy to put this lesson in a Playbook, a CDP Silver Linings Playbook.  Yeah, it was a good movie, too.  More below the fold.

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Lesson From The Tax Court: Too Much Control Over IRA Distribution Makes It Income

Note: The Tax Court has migrated to a different operational internet platform.  As of last Friday, any opinions (if any) issued by  the Court since it closed its old platform in late November, are not accessible.  Further, older opinions are also not accessible, unless another website (such as leagle.com or casetext.com) captured a copy before the old platform closed.  That is why I am unable to provide a link to this week's case.  If any reader has public link to the opinion I would be grateful.

A fundamental concept I teach my tax students is the idea of control.  Taxpayers who engage in schemes where they ostensibly never touch a payment but in reality control its disposition often cannot escape taxation.  In Brett John Ball v. Commissioner, T.C. Memo. 2020-152 (Nov. 10, 2020) (Judge Halpern), the taxpayer caused his self-directed IRA to distribute money to a wholly owned LLC, then caused the LLC to issue short-term loans to real estate entities.  When the loans were repaid, Mr. Ball re-deposited the money into the IRA.  The taxpayer had some decent arguments on why he should not have to report the IRA distributions as income.  Judge Halpern rejected those arguments, teaching us a lesson about how much control is too much control.

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A Year Of Lessons From The Tax Court (2020)

• Jan. 6:  Taxpayer Who Got $1.6m Assessment Reduced To $170k Not Entitled To Costs (Klopfenstein v. Commissioner, T.C. Memo. 2019-156 (Dec. 9, 2019) (Judge Lauber) — § 7430)
• Jan. 13:  A Practical Interpretation Of The Penalty Approval Statute § 6751 (Belair Woods LLC v. Commissioner, 154 T.C. No. 1 (Jan. 6, 2020) (Judge Lauber); Tribune Media Co. v. Commissioner, T.C. Memo. 2020-2 (Jan. 6, 2020) (Judge Buch) — § 6751)
• Jan. 20:  Employee Cannot Deduct Expense That Could Have Been Reimbursed (Near v. Commissioner, T.C. Memo. 2020-10 (Jan. 14, 2020) (Judge Kerrigan) — § 162)
• Jan. 27: §6672 Trust Fund Recovery Penalty Is Really A Penalty ... Sort Of (Chadwick v. Commissioner, 154 T.C. No 5 (Jan. 21, 2020) (Judge Lauber) — § 6672)

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Lesson From The Tax Court: Taxpayers Behaving Badly (2020)

This will be my last post until January.  I will be spending my days (except for Christmas Day) grading exams.  Grades are due Monday, January 4th so you will likely see my next Lesson From The Tax Court on January 11th.

My last blog of the year is a list of some of the cases I read during the year where something in the facts made me just shake my head (SMH in texting parlance).  You can find the previous lists here (for 2018) and here (for 2019).  This year I have five to share with you.  I present them in chronological order.  I invite you to consider which of them may be examples of just an empty head and which are examples of something worse.

New this year is a feature I am calling the Norm Peterson Award.  You will find more explanation below the fold.

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Lesson From The Tax Court: The Right Way To Do Conservation Easements

Over 40 years ago, Congress modified §170 to permit deductions for donations of partial interests in land when such donations advanced an important public purpose such as protecting environmentally or historically important land from development.  Starting in the early 2000’s, however, developers and tax shelter promoters began exploiting conservation easements to provide huge tax deductions for donations that provided little or no conservation benefit.  The problem reached the point that the IRS issued Notice 2017-10 which described certain syndicated conservation easement arrangements and listed them as tax shelter transactions. This informative Senate Finance Committee Report from August 2020 details the abuses.

But not all conservation easements are tax shelters.  Kumar Rajagopalan and Susamma Kumar v. Commissioner, T.C. Memo. 2020-159 (Nov. 19, 2020) (Judge Holmes) shows how taxpayers can properly deduct the donation of a conservation easement if they have good planning, good representation, and good luck.  Details below the fold.

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Lesson From The Tax Court: International Pilot’s Tax Home Argument Does Not Fly

Douglas H. Cutting v. Commissioner, T.C. Memo. 2020-158 (Nov. 19, 2020) (Judge Pugh), teaches a useful lesson about that puzzling concept called “tax home” as it relates to the §911 foreign earned income exclusion.  Taxpayers can claim the §911 exclusion if their tax home is in a foreign country.  Mr. Cutting's wasn’t, even though his personal home — the place he returned to when not flying — was Thailand, where he lived with his wife and step-daughter.  A tax home, however, is not where the heart is.  Details below the fold.

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Lesson From The Tax Court: Taxpayer Wins CDP Case But Cannot Recover Costs

The Tax Code contains a variety of statutes designed to protect taxpayers from unreasonable and arbitrary decisions by the IRS.  I think of them as quality control measures: they require supervisory approval of certain decisions, such as the decision to impose a penalty (§6751) or the decision to open a second examination (§7605(b)).  One can also think of quality control as any procedure that allows a different decision-maker to enter the picture, not just a supervisor.  That was the lesson last week, when the Office of Chief Counsel entered the picture and fixed a problem.

But no matter what quality controls the IRS uses, or what training it gives its employees, final decisions about either the assessment or collection of taxes are sometimes simply not defensible.  Getting such decisions corrected in court costs taxpayer both time and money.  Section 7430 permits such taxpayers to recover the costs they incurred to fix an unreasonable decision.  In that sense, it is another quality control measure.

In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150 (Nov. 9, 2020) Judge Marvel teaches a lesson on the limits a taxpayer’s ability to recover costs under §7430.  There, the Office of Appeals made an indefensible decision about the collection of the Dangs’ unpaid taxes and the IRS conceded the case in Tax Court.  Nonetheless, the Dangs were not eligible to recover the costs they incurred in fixing that unreasonable CDP decision.  Details below the fold.

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Lesson From The Tax Court: How To Beat The Bureaucracy

My friends joke that my time as an attorney in the IRS Office of Chief Counsel was spent in the belly of the Beast.  I’m not a fan of that analogy because it implies the IRS is a single entity.  As regular readers of this blog (if any exist) know, I regularly argue against that view.  The best way to think of the IRS---both in theory and practice---is that it is a collection of different offices (or functions) each of which has certain defined authorities.  Folks, it’s a bureaucracy, not a beast.

Today’s case, Colleen Michelle Leith, Petitioner, and Oraine J. Leith, Intervenor v. Commissioner, T.C. Memo. 2020-149 (Nov. 4, 2020) (Judge Vasquez), teaches a great lesson on how getting to a different bureaucratic decision-maker can turn defeat into victory.  There, the taxpayer sought spousal relief and lost in the IRS.  Although the Tax Court decision is in her favor, she really won the case in the Office of Chief Counsel.  Details below the fold. 

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Lesson From The Tax Court: To Get Administrative Grace You Must Follow Administrative Rules

Today’s lesson is about timing, and the concept of administrative grace. Section 165 permits taxpayers to deduct losses from theft and §165(e) provides the timing rule: the loss “shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.”

Rev. Proc. 2009-20 gives taxpayers who seek to deduct losses from certain Ponzi-type schemes some very generous safe harbors that relieve them of difficult substantiation requirements. But taxpayers seeking such shelter must navigate the specific procedural rules outlined in the Rev. Proc. One procedural rule is a bright-line timing rule about the year in which taxpayers could take the loss deduction. Taxpayers who do not use the Rev. Proc. are subject to the normal burdens of proving up the amount and timing of their theft losses.

In a consolidated case, Michael C. Giambrone et al v. Commissioner, T.C. Memo. 2020-145 (Oct. 19, 2020) (Judge Lauber), the taxpayers did not follow the Rev. Proc. 2009-20’s timing rule, but argued they should still get the relief given by the Rev. Proc. because their timing was consistent with the statutory timing requirement. Judge Lauber said no. Details below the fold.

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Lesson From The Tax Court: Losing Gambler Gets Twice Lucky In Tax Court

Taxpayers rarely walk away from casinos richer than when they entered.  The odds are not in their favor.  If a slot machine pays out $1,200 or more, however, the casino will still report that win on a W-2G, even if the taxpayer loses all of it before leaving the casino.  The theory is that $1,200 is income to the taxpayer and the taxpayer’s choice to use it for more gambling is no different than the taxpayer’s choice to use that $1,200 for other consumption.

The IRS recognizes that the reality is different from theory and so it permits taxpayers to net their gambling gains and gambling losses for each visit to---or session at---a casino.  In the unlikely event they leave the casino a net winner, those wagering gains are gross income which must be reported.  If they leave a net loser, they may be able to deduct those wagering losses against wagering gains up to the amount of wagering gains.  Tax Court precedents uphold this per-session method of accounting for gambling gains and losses.  In addition, plenty of precedent requires taxpayers to substantiate their wagering losses for each session.

In John M. Coleman v. Commissioner, T.C. Memo. 2020-146 (Oct. 22, 2020), Judge Lauber bucked both sets of precedents to allow the taxpayer a gambling loss deduction equal to over $350,000 of gambling wins reported on various W-2Gs.  There are good reasons for why Judge Lauber did this, but the bottom line is that this taxpayer got twice lucky.  It helped that he was represented pro bono by two high-powered tax attorneys from Morgan Lewis.  Let's look at what we can learn from them and from this case.  Details below the fold.

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Lesson From The Tax Court: §6662 Penalties Treated As One For Supervisory Approval Requirement

Last week, the Tax Court issued an important opinion on the §6751(b)(1) supervisory review requirements.  In Jesus R. Oropeza v. Commissioner, 155 T.C. No. 9 (Oct. 13, 2020) (Judge Lauber), held that the 20% penalty under §6662(b)(6) is the same as the 40% penalty under §6662(i) and therefore the failure to secure proper approval for assertion of the former in an RAR precludes assertion of the latter in a later NOD.  The latter subsection simply “enhances” the amount of §6662(b)(6) penalty and does not impose a separate penalty.

The path of the law is not linear. Doctrinal development sometimes involves two steps forward, one step backwards, and maybe even a step or two sideways.  In Oropeza the Tax Court took what some may view as a step sideways, and what the government will likely view as a step backwards.  The decision seems in tension with prior Tax Court opinions that treat §6662 as containing multiple penalties for supervisory approval purposes, including an opinion by the same judge about the same taxpayer!  The upshot of today’s opinion is that practitioners need to read NODs very carefully. Details below the fold.

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Lesson From The Tax Court: The Slippery Slope Of Tax Court Review

Today’s post is about how the Tax Court reviews decisions of the IRS Whistleblower Office (WBO).  If you want to report a tax cheat, you have a variety of choices, detailed in this IRS webpage.  Typically, you write a letter or submit a Form 3439-A.  But if you want to also claim an award for blowing the whistle, you must submit a Form 211 with the IRS Whistleblower Office (WBO).  That is because the WBO is the office in the IRS that decides whether the information you gave resulted in additional collections of tax.  If it did, you get a cut.  If you don’t like the amount of the award, you can ask the Tax Court to review the WBO’s decision on the amount.

When the WBO decides that you are entitled to no award, however, it could be for a variety of reasons, only some of which are reviewable by the Tax Court.  In John Worthington v. Commissioner, T.C. Memo 2020-141 (Oct. 8, 2020) Judge Gustafson teaches the difference between those decisions the Tax Court will review and those it will not; it turns on the difference between the words “rejection” and “denial.”  To me, this case represents a wobbly first step onto a slippery slope towards reviewing IRS audit decisions.  That is not what WBO review used to cover but times, they may be a-changing!  Details below the fold.

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2d Circuit: Manhattan DA Can Obtain Trump's Tax Returns

New York Times, The Manhattan D.A. Can Obtain Trump’s Tax Returns, an Appeals Panel Rules:

The Manhattan district attorney can enforce a subpoena seeking President Trump’s personal and corporate tax returns, a federal appeals panel ruled on Wednesday, dealing yet another blow to the president’s yearlong battle to deny prosecutors his financial records Trump v. Vance, No. 20-2766 (2d Cir. Oct. 7, 2020)

The unanimous ruling by a three-judge panel in New York rejected the president’s arguments that the subpoena should be blocked because it was too broad and amounted to political harassment from the Manhattan district attorney, Cyrus R. Vance Jr., a Democrat. ...

Mr. Trump is expected to try to appeal the decision in the United States Supreme Court.

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Lesson From The Tax Court: Why Vacation Home Losses Are Difficult To Deduct

Tax shelters come in many forms.  Some shelters are activities that have no genuine economic purpose; they exist simply to generate tax benefits.  Some micro-captive insurance arrangements are a great example, as you can learn from this wonderful brief by former tax officials filed recently in a Supreme Court case (I blogged about the case here).  Other shelters are activities that allow taxpayers to deduct otherwise non-deductible personal expenses.

Today’s case involves that second kind of tax shelter.  Taxpayers who own vacation properties can generate deductions for maintenance, utilities, and depreciation by renting out the properties even while also using the properties for personal pleasure.  Thus, the rental activity can help ameliorate the personal costs of ownership by turning otherwise personal costs into rental costs.  And if the rental costs exceed the rental income, why then taxpayers have a loss and many taxpayers will try to use that loss to shelter non-rental income.

In Ronald J. Lucero and Mary L. Lucero v. Commissioner, T.C. Memo. 2020-136 (Sept. 29, 2020) Judge Pugh teaches a great lesson about the limits of using beach houses as tax shelters.  The taxpayers owned a beach house in Sea Ranch, California and rented it out.  They had net losses.  The Court did not allow them to deduct those losses to shelter non-rental income, even though their personal use was only about one week each year.  It’s a nice lesson on how the restrictions on deductions in §280A and §469 work.  Details below the fold.

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The Supreme Court’s 2019 Term In Tax

Jasper L. Cummings, Jr. (Alston & Bird, Raleigh, NC), The Supreme Court’s 2019 Term in Tax, 168 Tax Notes Fed. 2175 (Sept. 21, 2020):

In this ninth annual review of Supreme Court opinions involving tax matters, Cummings notes that the Court has mostly abandoned standard legal decisions to focus on political themes, which he identifies in several decisions. ...

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Lesson From The Tax Court: State Law Matters

My wife has spent her COVID time organizing efforts to celebrate Earth Day next April in our fair city of Lubbock, Texas.  Her efforts are paying off.  She and her colleagues are now to the point where they need to operate through a tax-exempt entity.  Well-meaning friends tell her “oh, it’s easy, just go fill out some forms and submit them to the IRS.”  Those friends think that forming a nonprofit entity is a one-step process, done at the federal level.  They do not realize that it is a two-step process: one must first form the entity under state law and then ask for tax-exemption from the IRS.  Today we learn that the choice of entity formation will affect the federal tax treatment of that entity.

In Clinton Deckard v. Commissioner, 155 T.C. No. 8 (Sept. 17, 2020) (Judge Thornton), the effect of state law was to preclude the taxpayer from electing S Corporation status.  There Mr. Deckard formed a nonprofit corporation under Kentucky law but soon started operating it for profit.  After a couple of years of losses, he tried to elect S Corporation status for the entity so he could pass through and deduct those losses.  Judge Thornton held he was bound to the corporate form he had created under Kentucky law.  State law matters.  Details below the fold. 

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Lesson From The Tax Court: Receipts Are Not Enough

In Anna M. Armstrong v. Commissioner, T.C. Sum. Op. 2020-26 (Sept. 17, 2020), Judge Panuthos teaches that substantiation does not just mean showing the amount of an expense; it means showing entitlement to deduct that expense.  It's an exemplary lesson in substantiation, including a review of the Cohan doctrine, and of the home office deduction.  Along the way, we learn just how tax practitioners can give value to their clients: teach them that receipts are not enough.

At first glance, this case might seem unimportant because it concerns below-the-line miscellaneous itemized deductions for unreimbursed employee expenses.  Section 67(g) totally disallows those types of deductions for tax years 2018-2025.

But I think this opinion is worth your time.

First, COVID.  Congress might actually re-authorize the deduction of unreimbursed employee expenses for tax year 2020 as part of the next COVID relief bill.  I do not have any inside knowledge on this, but some in Congress might view reviving unreimbursed employee expense deductions as a benefit to taxpayers forced to work from home during COVID shutdowns.  Others might believe that Congress gave enough relief in the Economic Impact Payments.  And this tax benefit is one that invites conflict and, hence, litigation.  Regardless of what Congress does, those taxpayers who are independent contractors continue to qualify for a home office deduction and this opinion teaches how to substantiate that use.  I give a couple of COVID thoughts at the end of the post.

Second, Judge Panuthos gives a wonderfully compact, lucid explanation of what taxpayers and their representatives need to know about substantiation.  I repeatedly tell my students that when you want to understand the law, find a good trial court opinion that explains it.  This is one of those opinions.  It’s a great teaching case.

Finally, some readers might find current utility from these lessons because 2017 and possibly 2016 are still open years.  Besides, taxpayers frequently stumble over the substantiation rules, especially for establishing a home office, whether or not they are taking deductions above or below the line.  For all those reasons I invite you to continue reading....

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Tax Profs On Both Sides In Case Pending in Supreme Court: CIC Services v. IRS

Currently before the Supreme Court is a case called CIC Services v. IRS. It involves the question of whether §7421 — Commonly called the Anti-Injunction Act (“AIA”) — prevents CIC from suing the IRS over the propriety of Notice 2016-66. That Notice declares certain micro-captive insurance arrangements as “transactions of interest.” It triggers certain reporting requirements for both CIC (as a material advisor) and CIC clients who have engaged in the arrangements described in the Notice. CIC asserts the Notice was illegally issued.

CIC (and another entity who has since dropped out) sued in federal district court, asking the court to (1) declare Notice 2016-66 invalid and (2) permanently enjoin the Service from enforcing the Notice. The district court dismissed the suit as barred by both the AIA and the Declaratory Judgment Act (DJA), 28 U.S.C. §2201(a). The AIA says that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” The DJA permits suits for declaratory judgements except for suits “with respect to Federal taxes....”

A split Sixth Circuit panel affirmed. A closely divided Sixth Circuit then denied CIC’s petition for rehearing en banc. How closely divided? Six judges thought the rehearing petition should be denied. Six dissenting judges thought it should be granted. One judge said he thought the dissenters had the better of the argument but he was going to vote to deny because of circuit precedent. He expressed the hope that the Supreme Court would take the case. And, guess what? The Supreme Court took the case.

A summary of the Parties' argument and the Tax Prof briefs comes below the fold

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Lesson From The Tax Court: Rejected e-Filed Return Starts The SOL On Assessment

Perspective is important.  As we regularly see in politics and protests, different groups have different points of view.  In tax law, disputes between taxpayers and the IRS quite often stem from different perspectives on the law.  Courts are called upon to adopt one or the other perspective in resolving the dispute.

In Robin J. Fowler v. Commissioner, 155 T.C. No. 7 (Sept. 9, 2020), Judge Greaves adopts a strongly taxpayer perspective of the law.  He holds that even though the IRS rejected an e-filed return the return still triggered the 3-year limitation period on assessment.  This elevates the taxpayer perspective on the importance of the limitation period over the IRS perspective on the importance of being able to process a return.

The decision may be a consequential one, both for taxpayers and the IRS.  And not just because it's a fully reviewed opinion — a "we really mean it" opinion.  It may be consequential because of its ripple effects.  For example, will taxpayers whose e-filed returns are rejected now escape a late filing penalty if they either fail to resubmit or resubmit much later?  Further, both the IRS and taxpayers will now need to figure out whether the Court’s opinion applies to all e-file rejections or just certain ones and, if so, which ones.  Hello litigation.

If the IRS appeals the decision, a reviewing court may well take the IRS perspective.  After all, the Supreme Court has said, more than once, that “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.” Bufferd v. Commissioner, 506 U.S. 523, 528 (1993).  That perspective, however, raises its own set of problems.  More on that below the fold.

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Lesson From The Tax Court: Form Over Substance Gives Taxpayers A Double Tax Benefit

Today’s lesson is about form and substance.  Tax practitioners are often called upon to decide what transactional form best accomplishes a client’s substantive purpose.  The power to choose the form of transactions sometimes creates a tension with the underlying economic substance when taxpayers and their advisors use form to disguise substance in the never-ending quest to gain tax benefits.  Courts and the IRS regularly police transactions using various doctrines to decide when form must yield to substance (e.g. step transaction doctrine, economic benefit doctrine).   When form is too much in tension with substance, substance wins.  Congress has attempted to codify this idea in §7701(o).

Today's lesson illustrates where tax law permits form to triumph over substance.  In Jon Dickinson and Helen Dickinson v. Commissioner, T.C. Memo. 2020-128 (Sept. 3, 2020)(Judge Greaves) the taxpayers were able to obtain the double tax benefit of donating appreciated shares of stock to charity by being very careful with the form of the donation.  Congress explicitly permits the form of a transaction to govern the tax result in charitable stock donation.  The tricky part of this case was that the taxpayers were donating shares of a closely held corporation.  And that implicates the assignment of income doctrine, one of those substance-over-form doctrines that courts use.  To see how Judge Greaves resolves the tension in favor of the taxpayer, see below the fold.

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Lesson From The Tax Court: Audit Reconsideration Is Not CDP

I cannot say it often enough: the IRS is not an entity.  It’s a collection of functions that, taken together, administer the internal revenue laws written by Congress.  So when someone says “the IRS did this” or “the IRS did that” they really mean that an action was taken by a discrete function, office, or employee within the organization we call the IRS.

Today we learn why taxpayers (and their representatives) need to understand how IRS functions relate to one another.   The taxpayer in Duy Duc Nguyen v. Commissioner, T.C. Memo. 2020-97 (June 30, 2020) (Judge Pugh) thought he was dealing with “the IRS” but he was really dealing with two separate functions: Exam and Appeals.  Because the information he supplied to Exam was not also supplied to Appeals, he was unable to contest the merits of an assessment in his CDP hearing.  Details below the fold.

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Arizona Supreme Court Agrees With Tax Prof Amicus Brief: Invest in Education's Ballot Initiative Summary Is Accurate

Lily Batchelder (NYU), Jeremy Bearer-Friend (George Washington), John R. Brooks (Georgetown), Paul Caron (Dean, Pepperdine), Adam Chodorow (Arizona State), Steven Dean (Brooklyn), David Gamage (Indiana), Jacob Goldin (Stanford), Hayes Holderness (Richmond), Ariel Jurow Kleiman (San Diego),  Richard Pomp (Connecticut), Erin Scharff (Arizona State), Darien Shanske (UC-Davis), Daniel Shaviro (NYU), Jay Soled (Rutgers), Kathleen DeLaney Thomas (North Carolina) & Vanessa Williamson (Brookings Institution), Amicus Brief of Tax Scholars in Support of Appellants:

It is hard to describe tax law succinctly. The federal Internal Revenue Code is over 6,000 pages and contains over 4 million words. As scholars who write about taxation, we are well aware of this challenge. Nevertheless, the 100-word summary that appeared on Invest in Education’s petitions accurately describes its proposed change to Arizona tax law.

Arizona's Invest in Education initiative would establish a new, separate surcharge of 3.5% on taxable income above certain threshold amounts. This new surcharge shall be imposed “[i]n addition to any other tax imposed by this chapter” and, it will be “collected regardless of whether the income tax rate brackets in this chapter are changed, replaced or eliminated by an act of the legislature.”

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Lesson From The Tax Court: The Cost Of Inattention

When I teach Civil Procedure, I joke that the acronym SOL is particularly appropriate for Statutes of Limitations.  Students laugh.  But blowing an SOL will not only cause clients to cry tears, it may well cause clients to cry “malpractice!”

Tax law is full of SOLs.  We easily think of the ones that limit the IRS's ability to assess or collect.  But SOLs affect taxpayers as well, notably the §6511 SOL for filing refund claims.  Last week’s case of Robert William Porporato v. Commissioner, T.C. Sum. Op. 2020-24 (Aug. 18, 2020) (Judge Panuthos) teaches a lesson in vigilance: the taxpayer lost a potential $12,000 refund because of the §6511 SOL.  While this taxpayer was pro-se all the way, and so had no one to blame but himself, the case is a useful lesson for practitioners: don’t let the sneaky §6511 SOL rules catch you napping.  Details below the fold.

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Lesson From Tax Court: §6662 Contains Multiple Penalties For §6751 Supervisory Approval

While §6662(a) seems to impose a single accuracy-related penalty, a recent case teaches that it actually imposes a panoply of penalties for purposes of the §6751(b) supervisory approval requirement.  We learn that if the IRS is either careful or lucky, it can cure one defective §6662 penalty approval by later asserting a different §6662 penalty amount.

In Jesus R. Oropeza and Fabiola Anaya Oropeza, T.C. Memo. 2020-111 (July 21, 2020) (Judge Lauber), the IRS first proposed a 40% §6662 penalty in a pre-NOD document but failed to obey §6751(b)(1).  Despite that failure, the Court upheld a later NOD’s alternative 20% §6662 penalty.  Details below the fold.

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Lesson From The Tax Court: The Unwritten Advantage Of Small Case Procedure

Taxpayers who petition the Tax Court to contest $50,000 or less of a proposed deficiency can elect to have their case heard under the procedures authorized by §7463 and set out in Tax Court Rules 170-174.  Cases decided under these small case procedures are called S-Cases.

The written advantages of S-Cases include a quicker trial date and a more informal trial.  In Adam Jordan Winslow v. Commissioner, T.C. Summ. Op. 2020-22 (Aug. 3, 2020) (Judge Colvin), the Court allowed the taxpayer a highly dubious alimony deduction based on an argument that would probably not have succeeded in a regular case.  To me, the case shows us an unwritten advantage of S-Cases: the Court may be willing to apply the law in a more relaxed fashion when presented with a sympathetic taxpayer.  Details below the fold.

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Lesson From The Tax Court: You Get What You Pay For

It’s sweet to beat the IRS.  It’s even sweeter to make the government pay your costs.  The taxpayers in Gary M. Dennis and Sharon D. Dennis v. Commissioner, T.C. Memo. 2020-98 (July 1, 2020) (Judge Panuthos) learned the sad lesson that victorious taxpayers won’t receive an award of costs and fees under §7430 when their only cost was their time and labor.  Details below the fold.

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Lesson From The Tax Court: The CDP Consequences Of A Failure To Communicate

In the movie Cool Hand Luke, the consequences of an alleged failure to communicate fell on the prisoner Paul Newman.  Here’s the clip.  It was a meme before memes were memes.  Last week, the Tax Court decided the consequences of a failure to communicate will fall on IRS.

The lesson is on the meaning of the word “opportunity” in §6330(c)(2)(B), which allows taxpayers to contest the merits of an assessed tax liability in a CDP hearing if they did not “otherwise have an opportunity to dispute such tax liability” before the assessment.

In Rickey B. Barnhill v. Commissioner, 155 T.C. No. 1 (July 21, 2020) (Judge Gustafson) the Court held that mere receipt of Letter 1153—giving the taxpayer a pre-assessment opportunity to contest a proposed Trust Fund Recovery Penalty—would not automatically prevent a taxpayer from contesting the merits of that liability in a later CDP hearing.  As a result, so long as the taxpayer alleges a failure to communicate during the pre-assessment administrative hearing, the question of who was at fault for failure must be decided by trial, at which the IRS would have the burden to prove it was not at fault.

While the case will not likely become a movie, or even a gif, it is an important decision to know about.  It seems to give taxpayers a potentially explosive expansion of their CDP rights.

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Lesson From The Tax Court: How Evil §481 Forces Income Recapture

I have always struggled with basis.  In the 1990’s I rented out a 1-Bedroom condo.  When my 1995 return was picked up for audit, a kindly revenue agent pointed out that one needs to exclude the proportionate value of land from depreciation, even for a condo.  Who knew?  The excess depreciation I had taken in the audited year was disallowed, resulting in increased gross income.  But the agent did not make me recapture in the audit year the excess depreciation I had taken in prior years, some of which were closed.  I would account for that, the agent explained, when I sold the condo.  I looked up §1016 and, sure enough, one must adjust basis by the greater of depreciation allowed (actually taken) or allowable (what you shudda taken).  Lesson learned.

The unhappy taxpayers in Gary Pinkston and Janice Pinkston, T.C. Memo. 2020-44 (April 13, 2020)(Judge Lauber) learned a harsher lesson: they may have to recapture over $1.1 million of prior years’ excess depreciation as gross income in the year of audit.  That is because §481 sometimes forces taxpayers to recapture income in the audit year that was improperly omitted in prior years.  You can find the sad details on how that works below the fold. 

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

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

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

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

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

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

Details below the fold.

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

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

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

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Supreme Court Denies Certiorari In Altera

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

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

Prior TaxProf Blog coverage:

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

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

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

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

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

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

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

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

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

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Lesson From The Tax Court: Do The Right Thing

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

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

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