Lesson From The Tax Court: Supervisory Approval Of Automated Penalties

Section 6751 requires the IRS to ensure adequate supervisory approval of tax penalties before those penalties are assessed.  But it does not require such approval for any “penalty automatically calculated through electronic means.” §6751(b)(2)(B).

Today we learn a surprisingly nuanced lesson about what constitutes a penalty automatically calculated through electronic means.  In Piper Trucking & Leasing v. Commissioner, 161 T.C. No. 3 (Sept. 14, 2023) (Judge Foley), the IRS assessed penalties against the taxpayer, under §6721, for Piper’s alleged failure to file required information returns.  The initial letter proposing such penalties was automatically generated, based on information received from the Social Security Administration.  But the proposed penalties were the most severe of several alternatives, alternatives that depended on the facts.  Yet no IRS employee was supposed to review the penalty unless and until the taxpayer responded to the initial letter in time.  In this case, the taxpayer made no timely response.  For that reason, the Tax Court held that these penalties fell within the statutory exception and required no human decisionmaker.

This lesson is just another reason why taxpayers need to be sure to respond to all correspondence received from the IRS.  Details below the fold.

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Lesson From The Tax Court: When 'My CPA Did It' Is No Defense To Penalties

Life is complex.  Tax shadows life.  So it is no wonder that Tax law is complex.  And the more complex a taxpayer’s financial life becomes, the more likely they will goof up.  While Congress imposes penalties for errors, it also recognizes the complexity of tax law by allowing taxpayers to avoid most penalties if they can show they had reasonable cause for their errors.  A common defense against penalties is that the taxpayer reasonably relied on the advice of a competent professional.

Sometimes, however, taxpayers think that relying on a professional to prepare the return absolves them of responsibility for any subsequent errors.  Today’s lesson puts the lie to that thought.  Relying on a CPA’s return preparation services is not the same as relying on a CPA’s advice and provides no protection from the various penalties in §6662.

In John R. Johnson, et al. v. Commissioner, T.C. Memo. 2023-116 (Sept. 13, 2023) (Judge Nega), the taxpayer was hit with §6662(b) penalties for substantially understating his income tax liabilities for four years in a row.  That’s a lot of error.  He argued that he had reasonable cause for the errors because he had used a CPA to prepare his returns and he had provided that CPA all the relevant information.  He even put his CPA on the stand.

The failure of that argument provides the lesson.  We learn that to avoid penalties taxpayer must do more than show they relied on a CPA to properly prepare the return, especially when the taxpayer is sophisticated.  Details below the fold. 

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Lesson From The Tax Court: The Boundary Waters Of Equity

Every birthday gives me the opportunity to appreciate the luck I've had in my life.  Last week was my 63rd.  I fondly remembered my summers at  Camp Chippewa, a wonderful summer camp just outside of Bemidji, MN.  One focus of that camp was canoe trips, including trips exploring the Boundary Waters in upper MN and lower Canada.  Those 1-2 week trips were amazing adventures.  Long before cell phones and GPS, we were cut off from any easy access to population centers.  Only if you were careful with your maps would you even know whether you were in the U.S. or in Canada!  And yes, I will connect that up with Today’s Lesson.

These particular reminiscences were sparked by my reading William H. Evenhouse and Nelle L. Evenhouse v. Commissioner, T.C. Memo. 2023-113 (Sept. 7, 2023) (Judge Lauber), because we learn there how the Tax Court interprets §6213 generously to allow certain lucky taxpayers up to 150 days to petition for review of a Notice of Deficiency (NOD).  While the particular taxpayers in this case were not able to get the extra time, the case gives us a good lesson in how the Tax Court decides when a taxpayer gets the 150-day period rather than the usual 90-day period to petition for review of an NOD.  In my mind, it’s a lesson in equity.  That could be very useful if and when taxpayers are able to start arguing for equitable tolling of the usual 90 day period.

Details below the fold.

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WSJ: Money-For-Nothing Lawsuits Against Private-Equity Founders Get Boost

Wall Street Journal, Money-for-Nothing Lawsuits Against Private-Equity Founders Get Boost:

The founders of giant private-equity firms have been paid billions of dollars over the years. Payouts tied to arcane tax deals that brought nearly a billion more are under scrutiny in a Delaware courtroom.

Private-equity titans Apollo Global Management and Carlyle Group CG paid insiders more than $900 million as part of the tax deals. These second windfalls have triggered litigation by investors alleging that the firms paid their founders for nothing in return.

Now, a judge’s ruling on a related case involving fellow private-equity giant KKR gives these lawsuits more heft and could trigger settlement talks between the firms and their investors.

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Lesson From The Tax Court: Cannot Use CDP To Contest Trust Fund Recovery Penalty

Unpaid employment taxes are a substantial problem for both the government and taxpayers. From the government’s perspective this Treasury website tells us that “employment tax violations represented more than $91 billion of the gross Tax Gap and, after collection efforts, $79 billion of the net Tax Gap in this country.”

From the taxpayer’s perspective, dealing with payroll taxes is a real pain.  It’s all too easy to get the tax accounting and quarterly reporting misaligned with the IRS, and resolving those disputes takes time and energy.  Especially when the IRS believes taxes are not being paid, the IRS may start to look at assessing a personal liability against the owners and operators of the business under §6672, the Trust Fund Recovery Penalty (TFRP).

Today we learn that once the IRS assesses a TFRP liability against a taxpayer, that taxpayer will not be able to contest their liability during a later Collection Due Process (CDP) hearing.  In Mark P. Hafner v. Commissioner, T.C. Sum. Op. 2023-27 (Aug. 29, 2023) (Judge Weiler), the taxpayer got hit with a proposed TFRP penalty and contested it in the Office of Appeals.  He lost and the TFRP was assessed against him.  In a later CDP hearing the taxpayer again tried to contest his liability, but both the Office of Appeals and the Tax Court refused to even hear his arguments.  He was not able to use CDP to get pre-payment judicial review of his liability.  Details below the fold.

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Lesson From The Tax Court: The DOI Downside To Disregarded LLC

According to this Wikipedia entry, the “limited liability company ("LLC") has grown to become one of the most prevalent business forms in the United States.”  That is likely because state law gives substantial liability protections to LLCs, similar to traditional corporations, but allows for more flexible ownership and governance structures.  That flexibility also creates more difficulties for creditors to pierce the liability shield.  For a good review of that idea see Dave Rugani, Twenty-First Century Equity: Tailoring The Corporate Veil Piercing Doctrine To Limited Liability Companies In North Carolina, 47 Wake Forest L. Rev. 899 (2012).

LLC popularity is also due in no small part to the 1996 Treasury Regulations that give LLCs the power to choose how to be taxed by the federal government.  For example, a single-member LLC can choose to be recognized as a separate taxable entity or can choose to be totally disregarded.  Many times a single owner will choose disregarded status.  Disregarded status just means that all business activity is the owner’s activity and the owner reports all activity on their Schedule C.  There is no separate entity taxation, even though there is a separate legal entity under state law.

The upside of disregarded status is generally a reduced tax burden and reduced compliance burden.  Today we learn of a potential downside to disregarded status:  a lender’s discharge of a disregarded LLC’s debt results in income to the owner even though neither the owner nor the owner’s personal assets were on the hook to repay the loan and the discharge happened long after the LLC went defunct.  In Steven Jacobowitz v. Commissioner, T.C. Memo. 2023-107 (Aug. 16, 2023) (Judge Ashford), the individual taxpayer was sole owner of an LLC that had taken out a small business loan.  Under state law Mr. Jacobowitz had no obligation to repay the loan.  It was the LLC’s obligation, not his.  However, when the lender discharged the LLC from its obligation to repay, some 8 years after the LLC ceased to exist, that Discharge Of Indebtedness (DOI) was income to Mr. Jacobowitz.  The bummer details are below the fold.

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IRS Backdating Of Documents Highlights Festering Cultural Rot: ‘If The IRS Doesn't Play By The Rules, They're The Mob’

Bloomberg, IRS Backdating Court Order Spotlights Culture, Attorneys Say:

An unusual Tax Court order requiring the IRS to report what it knew and when about misstatements in a conservation easement case, as well as mounting claims of backdating forms at the agency, are highlighting what some tax attorneys said are festering IRS cultural problems, years in the making.

The Tax Court this week ordered the IRS to identify when agency personnel found out about misstatements to the court about the date that a $15.2 million penalty against conservation easement donor LakePoint was approved. ...

Rod Rosenstein, former deputy attorney general under President Donald Trump, is representing LakePoint in a FOIA lawsuit against the IRS and told Bloomberg Tax he’s reached out to the Treasury Inspector General for Tax Administration.

He plans to refer to the watchdog claims made by three other partnerships—Arden Row Assets LLC, Basswood Aggregates LLC, and Delwood Resources LLC—who are asking the IRS to admit its staff backdated penalty approval forms in their cases as well.

“The question is whether we’re seeing one isolated case or whether were seeing evidence of a pattern of misconduct in IRS,” Rosenstein said. “I think if you’ve looked at these other three cases, it does suggest that there is a pattern.” ...

Tax attorneys say it’s the latest chapter highlighting festering issues of IRS culture being taken over by adversarial us-versus-them attitudes at the agency. Conservation easement cases have been especially contentious [Michelle Abroms Levin, a former Justice Department Tax Division attorney,] said.

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Lesson From The Tax Court: Tax Protesting—A Hobby That Eats

Everyone should have a hobby.  Generally, hobbies are good for you, as this Utah State University Mental Health Education post explains.  But some hobbies become cancerous, becoming all-consuming.  Those hobbies are not good for you.  As Benjamin Franklin reportedly put it: beware the hobby that eats.

Protesting your taxes is a hobby that eats.  Bob Wood once wrote this great blog post about stupid tax protest arguments. The legal term for “stupid” is, of course, “frivolous.” Bob rightly says it’s one of the worst names you can be called in the tax world.  I really love his line: “In IRS lingo, it’s about as bad as you can get, just shy of the other “f” word, fraudulent.”

That is why I call tax protestors “hobbyists.”  They simply advance stupid reasons for not paying taxes, to the point where their hobby consumes them and others, at great cost.  That’s the lesson we learn in  Lawrence James Saccato v. Commissioner, T.C. Memo. 2023-96 (July 25, 2023) (Judge Lauber), where the taxpayer failed to file returns for some 14 years.  When caught, he persisted in protesting that he was exempt from income tax because, among other stupid reasons, he was “ a citizen of the State of Oregon” and not a “federal citizen.”  The Court’s reaction was to impose a §6673 penalty on top of a deficiency topping $200k.  His hobby was eating him up.

The sad details are below the fold.  

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2d Circuit: Despite Artist’s Objection, Law School Can Cover Murals Celebrating State’s Role In Underground Railroad And Abolitionist Movement In Response To Student Complaints Of ‘White Savior Complex’

Bloomberg Law, Law School Can Cover Underground Railroad Murals, 2nd Cir. Says:

Vermont Law School can permanently cover a pair of controversial 1994 murals depicting the Underground Railroad without violating an artists’ rights law, the Second Circuit ruled [Kerson v. Vermont Law School, No. 21-2904 (2d Cir. Aug. 18, 2023)].

Artist Samuel Kerson argued the school’s plans to hide his murals behind bolted-in acoustic sheetrock panels violated the Visual Artists Rights Act, which conditionally restrains parties from destroying or modifying works without artist permission. But the law doesn’t require the school to display the art in perpetuity, and permanently hiding it doesn’t run afoul of VARA, a three-judge panel of the US Court of Appeals for the Second Circuit said Friday.

Kerson painted the murals in 1994 to show the history of slavery and the state’s efforts to help slaves seek freedom. The school says that since at least 2001 students have complained about the murals, citing their depiction of slaves as cartoonish caricatures while promoting the “white savior complex.”

The Second Circuit concluded:

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Lesson From The Tax Court: Tax Consequence For Discharge Of Non-Recourse Debt

One of the hard concepts to teach students is the different tax treatments for recourse loans and non-recourse loans.  It gets especially confusing when the sale of underwater property includes a Discharge of Indebtedness (DOI) as part of the sale.  In Michael G. Parker and Julie A. Parker v. Commissioner, T.C. Memo. 2023-104 (Aug. 10, 2023) (Judge Nega), we learn that discharge of non-recourse debt as a result of a property sale cannot generate DOI income (and thus cannot qualify for exclusion under §108) but must instead be used in calculating gain from the sale.

In today’s case the taxpayer’s S Corporation sold some underwater property and the deal included a discharge of part of the unpaid debt.  They argued that they were insolvent at the time of the deal and thus attempted to exclude the DOI from income under the insolvency exclusion allowed by §108(a)(1)(B).  But because the cancelled debt was non-recourse, the taxpayers could not use §108.  Instead, the amount discharged had to be included in the calculation of gain and thus §108 could not apply.  It’s a basic, yet complex, lesson.  Details below the fold.

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Lesson From The Tax Court: Gotta Get Physical For Casualty Loss Deduction

Individuals generally cannot deduct casualty losses, at least through the end of 2025.  §165(h)(5). But Congress continues to permit individual taxpayers to deduct casualty losses if they are attributable to a federally declared disaster. Id. 

And we are having more and more disasters.  Call it climate change, call it a banana, the brutal fact is that “the number of natural disasters per year has increased significantly in recent years.” That quote is from this June 2023 Forbes Advisor article, which goes in to great detail explaining that conclusion.  And there has been a corresponding increase in FEMA disaster declarations over time as well.  See Congressional Research Services “Stafford Act Declarations 1953-2016: Trends, Analyses, and Implications for Congress,” (Aug. 28, 2017). 

So today’s lesson is still useful even if Congress never restores the general casualty loss deduction.  In Thomas K. Richey and Maureen P. Cleary v. Commissioner, T.C. Memo. 2023-43 (Mar. 28, 2023) (Judge Holmes), we learn the basic, but vital, lesson that that a taxpayer must prove that some identifiable event caused actual physical damage to their property.  Just because there is a storm and you then spend money on your property does not prove the storm caused damage to your property.  In today’s case the taxpayers reported casualty losses of some $820,000 for damages to their vacation home and boat.  But they were unable to prove the claimed losses arose from a casualty event.  Details below the fold.

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Lesson From The Tax Court: An Object Lesson On Adequate Business Records

[Author’s Note: this past week I joined the 77.5% of Americans who been infected with COVID.  So tired .... zzzzz ** what?  So this week’s lesson may reflect my COVID-fogged brain.  If you find more errors than usual, I humbly apologize and promise to do better next week.]

Some of my Lessons From Tax Court address substantive tax rules.  Some are about practice and procedure.  Today we have an object lesson: when a taxpayer has a bona fide business but fails to keep adequate records of their business activity, bad things happen.

We all know that taxpayer’s need good records to substantiate claimed deductions. See e.g. Lesson From The Tax Court: Receipts Are Not Enough, TaxProf Blog (Sept. 21, 2020).

This week we also learn that: (1) the failure to keep records allows the IRS to use the bank deposits method to determine income and (2) the same failure also gives the IRS a slam-dunk basis to impose §6662(a) accuracy-related penalties.

The case is Greg A. Ninke and Jane M. Ninke v. Commissioner, T.C. Memo. 2023-88 (July 19, 2023) (Judge Halpern).  Again, nothing really new here.  But it's a useful object lesson. Details below the fold.

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Lesson From The Tax Court: Size Does Not Matter

In Janet R. Braen et al. v. Commissioner, T.C. Memo. 2023-85 (July 11, 2023) (Judge Urda), we learn that there is no charitable deduction for a bargain sale done to settle a lawsuit, even though it was a huge bargain sale.  There, the taxpayers claimed a $5.2 million charitable contribution deduction from a bargain sale they had made with a New York town called Ramapo.  Judge Urda needs every one of 39 pages to explain the complex facts and apply them.  But the basic Lesson I see in the case is this: even a big bargain sale to a charity requires donative intent.  Without a donative intent, there is no §170 deduction, no matter how big the bargain.  Intent is determined by objective facts surrounding the transaction.  Here, those facts showed that the taxpayers’ intent was not to be charitable; their intent was to settle a lawsuit they had filed against the town.  By settling they avoided the risk of a more adverse outcome had the lawsuit proceeded, and they regained their right to develop the land they did not sell.  I confess this is not quite the way Judge Urda sees the case.  So see what you think.  Details below the fold. 

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Lesson From The Tax Court: Creating Your Best Administrative Record

When the Tax Court reviews an IRS Collection Due Process (CDP) decision about collection, it always uses an abuse of discretion standard of review.  That is, it does not simply substitute its judgment for that of the Office of Appeals Settlement Officer (SO), but instead looks to see whether the SO committed an error of law or made a decision that was whacko.

However, in conducting its abuse-of-discretion review, the Tax Court does not always use the same information set.  It depends on where the taxpayer would take an appeal.  If the taxpayer would take an appeal to the 1st, 8th, or 9th Circuits, the Tax Court will base its review solely on the administrative record provided by the IRS.  No new information will be allowed.  However, for appeals to any other Circuit, the Tax Court will also consider any additional information the parties bring up at trial.

Today’s case involves the administrative record review and teaches us what the practitioner can do during the CDP hearing to maximize chances in Tax Court if a petition becomes necessary.  In Duane Whittaker and Candace Whittaker v. Commissioner, T.C. Memo. 2023-59 (May 15, 2023) (Judge Holmes), the taxpayers used their 2019 CDP hearing to submit an OIC.  They not only provided detailed information but they also offered to provide additional substantiation if asked.  Then COVID happened.  In 2020 the taxpayers sent in additional information to show how their financial situation had deteriorated.  Again, they offered to substantiate their claims if asked.  They were not asked.  That turned out to be key because it resulted in information gaps which, if filled, might have led the SO to a different conclusion.

It was these gaps in the administrative record that caused the Tax Court to find an abuse of discretion and remand the case back to Appeals to fill in the gaps.  The Tax Court faulted the IRS for the gaps because the IRS had not asked for more information.  Details below the fold.

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Blue J Predicts: Conflicting Duties And The Trust Fund Recovery Penalty In Cashaw

Benjamin Alarie (Osler Chair in Business Law, University of Toronto; CEO, Blue J Legal) & Christopher Yan (Senior Legal Research Associate, Blue J Legal), A Reexamination of Cashaw, 179 Tax Notes Fed. 2197 (June 26, 2023):

[W]e revisit the intriguing case of Cashaw [v. Commissioner, T.C. Memo. 2021-123 (Oct. 27, 2021)]. This case focused on Pamela Cashaw, an administrator for a financially distressed hospital, who the Tax Court determined was personally liable for a $173,000 trust fund recovery penalty (TFRP) under section 6672. The fundamental issue was whether Cashaw was a responsible person who had willfully failed to fulfill her legal obligation to remit employee payroll tax withholdings, also known as trust fund taxes, thereby warranting the imposition of a TFRP.

In our November article we used Blue J’s TFRP prediction algorithm to assess the likely outcome of an appeal [Cashaw: Conflicting Duties And The Trust Fund Recovery Penalty, 177 Tax Notes Fed. 1257 (Nov. 28, 2022)]. Blue J predicted with 86 percent confidence that the Fifth Circuit would affirm the Tax Court’s decision if it endorsed the Tax Court’s findings of fact. Our analysis also considered alternate scenarios and examined the circumstances under which the Tax Court’s decision might be reversed. That exercise highlighted the importance of scrutinizing various factors in the case.

Now fast-forward to May 31. The Fifth Circuit affirmed the Tax Court’s decision, reiterating Cashaw’s liability for the trust fund recovery penalties. That validated Blue J’s prediction that Cashaw was a responsible person who had willfully neglected to pay. The result from Blue J’s TFRP predictive model, trained on the facts of more than 375 court opinions from 1956 to 2022 (trained up to the date of the prediction), underscores the transformative power of machine learning in conducting nuanced legal analyses.

As we reexamine Cashaw, we not only delve into the context of TFRP and the factors in the appeal but also reflect on the role our machine-learning-based prediction played in the analysis of this case. The alignment of machine-identified factors with those factors that have been decisive on appeal generates support for broader discussions on the future of artificial intelligence in legal decision-making.

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Lesson From The Tax Court: Deducting Graduate School Costs

My desire to become a law professor crystalized during the four years I practiced law after my judicial clerkship.  My academic mentors told me it would be very difficult to get a job in the legal academy because I had been “contaminated” by ... wait for it ... wait for it ... actually practicing law!  They told me I needed to “recommit” myself to academia by going back to law school to get a graduate law degree, called an LLM (for Master of Laws).

So I went to Columbia.  It was not cheap.  As I packed up my office to go back to school, I remember discussing the tax implication with my boss at that time, John Quinn.  John remains one of the attorneys I most deeply admire and respect.  He still practices at his firm Quinn, Racusin & Gazzola.  John and I debated whether I could, or should, deduct the costs of my LLM.  His concern was that because the LLM seemed to qualify me for a new trade or business—being a law professor—its expenses would not be deductible.  He advised me not to attempt a deduction.  I did not follow that advice.  And I got audited.  More on that at the end of this post.

Today we learn why John’s concern was well-founded.  In Ariana K. Uchinzozo v. Commissioner, T.C. Summ. Op. 2023-21 (Judge Carluzzo), we learn that the cost of an MBA is not deductible under §162 when it gives the taxpayer skills for entry into a new business, even if the MBA is not a formal requirement for that new business.  In today's case the taxpayer started a part-time MBA program in 2014 while working for a translation services company.  She deducted her MBA expenses on her 2014 return.  Through her MBA program she got an internship with Mattel and, eventually, a job.  And even though her Mattel job did not require an MBA,  the Tax Court still held she was not entitled to deduct the costs of the MBA because the skills she was learning enabled her to enter a different trade or business than the one she was in the year she took the deduction, 2014.  Details below the fold.

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Lesson From The Tax Court: Freedom, Taxes, And Hobbies

We have great freedoms in this country.  Freedom to express ourselves.  Freedom to fish.  Freedom to write blog posts.  Freedom to pursue any lawful activity to make money.  Truly ours is a great civilization well worth tomorrow's celebration.

But.

To riff on a well worn aphorism: with great freedom comes great responsibility.  In particular, as the Sainted Justice Holmes told us: “Taxes are what we pay for civilized society.... The constitutional right...to earn one's livelihood by any lawful calling certainly is consistent, as we all know, with the calling being taxed.” Compania General de Tabacos v. Collectorv, 275 U.S. 87, 100 (1927).

Three recent cases on Hobby Loss rules teach us about the responsibility of paying taxes to support our freedoms: you cannot lower your taxes by deducting the costs of your personal hobby.  The basic lesson is the importance of record-keeping.  That means more than keeping proper records.  It means properly using the records in a business-like manner.  In contrast, having “meticulous” records may just rescue a taxpayer who erroneously mashes up their hobby with a legitimate business activity on the same Schedule.

Two of the three cases present garden variety fact patterns where taxpayers attempt to disguise personal expenditures as business expenses.  In Donald E. Swanson v. Commissioner, T.C. Memo. 2023-81 (June 29, 2023) (Judge Pugh), the taxpayer was an emergency room doctor and amateur musician who created a vanity website for his music.  In Joseph William Sherman v. Commissionerv, T.C. Memo. 2023-63 (May 17, 2023) (Judge Jones), the retired taxpayer was an avid fisherman who also sometimes hired himself out as a guide, generating some hobby income to reduce his hobby expenses.

The third case is twisty.  In Leslyn Jo Carson & Craig Carson v. Commissioner, Dkt. No. 23086-21S (May 18, 2023) (Judge Morrison), the taxpayers mashed up a hobby activity (kids doing rodeos) with a business activity (ranching).  What triggered the audit was that the ranch was owned by the taxpayer’ wife's mom and they had an agreement that all ranching income would be allocated to Mom and all ranching expenses would be paid for and deducted by the taxpayers.  So the taxpayers essentially reported massive ranching expenses against modest hobby income.  However, these taxpayers' great recordkeeping overcame their poor reporting, winning a no-harm-no-foul ruling from the Tax Court. 

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Legal Education's Reaction To The Supreme Court's Affirmative Action Decisions

Update:  More Legal Education Reaction To The Supreme Court's Affirmative Action Decisions (July 5, 2023)

• Seattle Law School, Supreme Court Affirmative Action Decisions — Rapid Response Webinar (today at 10 a.m. PT/1 p.m. ET) (registration) (speakers)
• AALS, Achieving Diversity without Affirmative Action Conference (July 10) (program) (speakers)

• Will Baude (Chicago), The Unsurprising Affirmative Action Decision in Students for Fair Admissions v. Harvard
• Stephen Carter (Yale), Supreme Court’s Affirmative Action Ruling Follows Half-Baked Logic
• Michael Dorf (Cornell), About that Loophole: Good Luck, Admissions Officers
• Michael Dorf (Cornell), Precedents Out of Context in the Harvard/UNC Affirmative Action Ruling
• Mark Graber (Maryland), "History" and History in Students for Fair Admissions
• William Jacobson (Cornell), Clarence Thomas Reading His Epic Takedown Of KBJ’s Affirmative Action Dissent Left Her “Visibly Angry”
• William Jacobson (Cornell), SCOTUS “Gave Universities a Narrow Opening, and Harvard Just Announced It’s Going to Drive an Affirmative Action Truck Right Through It”
• Brian Leiter (Chicago), The Supreme Court's Affirmative Action in Admissions Decision
• Michael Simkovic (USC), To Circumvent Supreme Court Affirmative Action Ban, Harvard Will Shift to Diversity Statements
• Ilya Somin (George Mason), Thoughts on the Supreme Court's Ruling in the Harvard and UNC Racial Preferences Cases
• Law.com, Legal Academia Disappointed—but Undeterred—by SCOTUS Affirmative Action Ruling (quoting Marc Miller (Arizona), Angela Onwuachi-Willig (Boston University), Aaron Taylor (Executive Director, AccessLex Institute), Anthony Varona (Dean, Seattle), Kevin Washburn (Dean, Iowa))
• Reuters, Post-Affirmative Action, These Law Schools May Provide Path For Others (quoting Erwin Chemerinsky (Dean, UC-Berkeley))
• Reuters, U.S. Supreme Court’s Affirmative Action Ruling a ‘Headwind’ for Lawyer Diversity, Experts Say (quoting Angela Onwuachi-Willig (Boston University), Aaron Taylor (Executive Director, AccessLex Institute), Kellye Testy (President, LSAC), Anthony Varona (Dean, Seattle))

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Lesson From The Tax Court: How To Calculate Insolvency For The §108 Exclusion

While not as certain as death and taxes, small businesses failures are highly probable events.  This webpage from the Bureau of Labor Statistics goes into the gnarly. 

When a small business fails, that often means it cannot repay loans.  A lender will often write off the loan as a bad debt, discharging the borrower from the obligation to repay.  That discharge is taxable income to the borrower, unless they qualify for an exclusion.  Today’s lesson involves the insolvency exclusion in §108(a).  To qualify for that, one has to be (duh) insolvent!  Insolvency is tested at the time of the discharge.  Section 108(d)(3) defines insolvency as "the excess of liabilities over the fair market value of assets."  But nothing in the statutes or regulations defines the term "liabilities."

Katrina E. White v. Commissioner, T.C. Memo. 2023-77 (June 21, 2023) (Judge Paris), teaches a lesson about what types of obligations count as liabilities in determining insolvency for §108(a) purposes.  We learn that a liability which is legally enforceable, and due and owing at the time of the discharge, counts even if the lender takes no action to actually collect or enforce the debt.  Details below the fold.

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Lesson From The Tax Court: The Administrative Record Rule In Whistleblower Cases

Law is a slow-moving conversation.  I tell my students that one law year is seven human years, kinda like one human year is seven dog years.  So it was only a couple of years ago, in 2006, that Congress created the current whistleblower award program in the Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959.  The provisions are codified in §7623.  Since then, the Tax Court has been in a slow-moving conversation with the D.C. Circuit and Treasury to develop the law.

Today we see how the Tax Court engages with Treasury regulations to apply something called the administrative record rule to the specifics of the IRS whistleblower program.  In Jeremy Berenblatt v. Commissioner, 160 T.C. No. 14, (May 24, 2023) (Judge Copeland), the unhappy whistleblower wanted the Tax Court to force the IRS to disclose information that the IRS said was outside the administrative record.  Judge Copeland’s excellent and nuanced opinion explains what constitutes the administrative record and the limited circumstances where a litigant can make the IRS add to the administrative record.  It’s complicated.  But we can find at least two lessons worth noting.  First, the IRS enjoys a very strong presumption that what it provides as the administrative record is complete.  Second, the Treasury regulations defining what constitutes the administrative record also enjoy a strong presumption of completeness.  Even a litigant as well represented as Mr. Berenblatt could not overcome those presumptions.  That is because a litigant must show more than some set of documents were available to the IRS; they must show that the documents or materials were considered, either directly or indirectly by the IRS office making the decision.  Details below the fold.

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Lesson From The Tax Court: The IRS's Substantial Justification Defense To §7430 Fee Awards

Getting an award under §7430 is hard, even if the taxpayer totally wins.  The major stumbling block is a statutory escape hatch called substantial justification.  If the IRS’ shows that its position was substantially justified at the relevant time, the taxpayer is not entitled to fees and costs even if the taxpayer wins on the merits.  But the relevant time may be different depending on whether the taxpayer is seeking recovery of administrative costs or litigation costs.  In Josefa Castillo v. Commissioner, 160 T.C. No. 15 (June 5, 2023) (Judge Kerrigan), we learn that the IRS must be able to show substantial justification at two different points in the process.  There, the Court found the IRS was substantially justified at the litigation stage.  But the IRS may not have been substantially justified at the administrative stage.  That may be why the IRS conceded a §7430 award as to administrative costs, even while successfully resisting an award of litigation costs.  The ultimate result reflects well on the taxpayer’s representative, Professor Elizabeth A. Maresca and her team at the Fordham Low Income Taxpayer Clinic.

This case involves the time period in §6330(d)(1) for taxpayers to seek Tax Court review of an adverse Collection Due Process (CDP) decision.  For decades the IRS and Tax Court believed that 30-day period was a jurisdictional requirement.  The Tax Court simply did not have the power to hear a late-filed petition.  The Supreme Court, however, held otherwise in Boechler v. Commissioner, 596 U.S. ___ (2022).  Today’s lesson concerns the consequences of the Boechler decision on the recovery of costs and attorneys fees under §7430.  It’s a surprisingly nuanced lesson.

Alert readers should note that this is a potentially important lesson for deficiency petitions.  That is because the IRS and Tax Court have a similar long-standing belief that the 90-day period in §6213 for NOD petitions is jurisdictional.  And that position, too, may be soon be rejected, at least by the Third Circuit.  The case to watch for is Culp v. Commissioner.  In this recent oral argument before the Third Circuit, the taxpayer was fortunate to have the terrific advocacy skills of Oliver Roberts and Professor Keith Fogg.  While one never knows until the opinion issues, one gets a sense that the Circuit Court panel was quite sympathetic to the argument that §6213 is not jurisdictional.  The panel even went to the extraordinary length of asking Professor Fogg to give additional oral argument!  For more on the Culp case, see Carl Smith’s post here over at Procedurally Taxing.  But for the lesson on how substantial justification works, the details are below the fold.

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Lesson From The Tax Court: Temporary vs. Indefinite Commutes

When I worked in downtown Washington D.C. I had a 50+ minute commute from my home in Wheaton Md.  But I did not have to drive.  I walked 15 minutes to Wheaton metro, had a 30+ minute metro ride to Federal Triangle, and then a 5 minute walk to my office.  That was a lovely commute.  Longish but low-stress.

Now I work at Texas Tech University in Lubbock.  This is not a town for walking.  So I drive to work.  But it’s only 4-6 minutes from my home.  Sweet!  I really cannot complain. 

Lots of folks, however, have the worst of both worlds: they have a long commute and they have to drive it.  That can be stressful.  And expensive.

It is not surprising that folks with really long drive commutes might think they should be able to deduct their commuting costs, especially if they are at a job where continued employment may be uncertain.  To them, their work seems temporary because they know it might end at any time.  But in Joseph Michael Ledbetter and Ashley Jones Ledbetter v. Commissioner, T.C. Summ. Op. 2023-19 (May 25, 2023) (Judge Paris), we learn that just because work might end at any time does not make it temporary.  It makes it indefinite.  And while travel to a temporary work location outside the area where the taxpayer lives may be deductible, travel to an indefinite work location is not.  Details below the fold.

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Lesson From The Tax Court: Substantiating Gambling Losses On Per-Casino Basis

The old saying “you win some, you lose some” is not true for most recreational gamblers.  For them, the saying is more like “you win some, you lose more.”  But proving that proves a problem.  In Jacob Bright v. Commissioner, Docket No. 10095-22 (May 4, 2023), Judge Buch teaches us how taxpayers can use their player cards to substantiate their wagering losses.  There, Mr. Bright reported some $241,000 of wagering gains on his 2019 return, and an equal amount of losses.  However, he apparently did not follow best practices—as very nicely explained in this article—of keeping daily contemporaneous records.  When audited, the IRS accepted his self-reported income (natch!) but disallowed all the losses for lack of substantiation (double natch!).

In Tax Court, Judge Buch allowed Mr. Bright to introduce reports of his player card activity, from each of the three Casinos he gambled at in 2019.  That created a sufficient basis for the Court to use the Cohan rule, albeit differently for each Casino.  The Court used this method to estimate $191,000 of losses.  In taking this approach for calculating wagering losses, Judge Buch gives us a new idea of “per session” netting worth considering, not only for proving up wagering losses, but also for calculating wagering gains.  I would call it a “per establishment” approach.  It makes a good bit of sense.  Details below the fold.

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Lesson From The Tax Court: On Time Is Late

In law, even more than in comedy, timing can be critical.  In comedy you just lose a laugh.  In law, you lose a case.  In Roy A. Nutt and Bonnie W. Nutt v. Commissioner, 160 T.C. No. 10 (May 2, 2023) (Judge Buch), we learn why a petition seemingly submitted on time will be rejected as late.  There, the Nutts electronically submitted their Petition to the Tax Court on the last day they could file.  Now we all know you really don't want to ever do that.  But sometimes it just happens.  And the last day to file is just as timely as the first day to file.  The Nutts submitted their Petition at 11:05 p.m.  So they seemed to be on time.

The problem was that they were filing from Alabama (Central Time) and the Tax Court’s Clerk’s office is in Washington D.C. (Eastern Time).  Thus, even though they submitted on time, Judge Buch holds that their Petition was filed late, because 11:05 p.m. in Alabama was five minutes after midnight in Washington D.C.  Thus, sticking to its increasingly archaic view that the timing rules for filing a Petition are jurisdictional, the Tax Court dismissed the Petition.

Note this is another precedential opinion issued in a case with unrepresented taxpayers.  Here, the IRS moved to dismiss and briefed the issue, but there was no responding brief to counter the government’s view.  These pro-se taxpayers probably did not know about all the Tax Court precedent applying equitable principles to rescue seemingly late-filed petitions.  I give a close review of those cases in Bryan Camp, Equitable Doctrines and Jurisdictional Time Periods, Part 2, 159 Tax Notes 1581 (June 11, 2018).

To his great credit, Judge Buch has, in a similar case, asked for amicus briefs on the issue.  I hope the Tax Court there comes to a different conclusion.  It’s always a balancing act: weighing the need for taxpayer access to judicial review with the need to obey statutory limits. Perhaps the Tax Court might reconsider how that balance should work for electronically filed documents.  However, as Professor Book puts it in this post over at Procedurally Taxing, after this case taxpayers now have a steeper hill to climb. You will find the sad details below the fold, along with my modest thoughts on how to strike a better balance. 

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Lesson From The Tax Court: Allocating Between Excludable Child Support and Includable Interest

As inflation rises so does interest in interest.  Certainly when my 1-year CD matures next month I will be looking for a rate better than the 2% rate that seemed so great last year!  If I get a 4.5% I will be happy ... but who knows what my dollars will be worth next year?

And that’s how we typically think of interest: it’s all about inflation, the old idea that “dollars tomorrow will be worth less than dollars today.”  But the concept of “interest” is a bit more nuanced than just being compensation for the diminished value of dollars in the future.  It is also a compensation for risk: the risk that the money will not in fact be repaid—think junk bonds.  And interest also compensates for opportunity costs: a lender is giving up the ability to use (consume or invest) that money now.  In short, interest is compensation for multiple consequences of the use or forbearance of money, similar to how rent is compensation for several different sticks of property rights given up by the lessor.

It is for these reasons that interest has always been taxed as a separate item of income, separate and apart from the underlying loan or deferred payment.  We see that lesson again today in Susan D. Rodgers v. Commissioner, T.C. Memo. 2023-56 (May 9, 2023) (Judge Gale), where the taxpayer received periodic payments from the State of Alabama in 2015 that it had collected from her ex-spouse to satisfy a court judgment for child support arrearages, plus interest.  She treated all the payments as excludable child support despite receiving a 1099-INT from Alabama that treated all the payments as interest on the arrearages.

Thus this case also presents a lesson in allocation.  How should a taxpayer decide how much of a given payment represents taxable interest or non-taxable child support?  And on that issue, dear readers, I think the Tax Court may have been misled by the State of Alabama into ignoring federal law to find that all of each payment was interest.  Details below the fold.

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Lesson From The Tax Court: Exclusion Rules For Disability Payments

A tax break is just another way of saying “government subsidy.”  Most folks do not even think about that when they get a medical bill.  They are generally just upset about the size of the co-pay!  But Congress subsidizes medical care by allowing taxpayers to exclude from income everything the health insurance plans pay the medical providers above the co-pay.

The scope of that subsidy, however, depends on who pays for the insurance in the first place.  If the taxpayer pays for the insurance, the exclusion is governed by §104(a)(3).  That provision does not just exclude payments for actual medical services.  It excludes any and all amounts paid on account of physical injury or sickness.  In contrast, if the taxpayer’s employer pays for the insurance, then the exclusion is governed by §105(b) and that is a more restrictive exclusion.  The §105 exclusion is limited to actual reimbursements (or payments) for identified medical care.

The differences between the §104(a)(3) exclusion and the §105(b) exclusion are most apparent when a taxpayer receives disability payments, as we learn in Cynthia L. Hailstone and John Linford v. Commissioner, T.C. Summ. Op. 2023-17 (Apr. 24, 2023) (Judge Leyden).  There, the taxpayer received disability payments and attempted to exclude those from income.  That might have worked under §104(a)(3) if the taxpayers had paid for the insurance, but since the payments at issue came from an employer-paid plan, the exclusion was not permitted, per §105(b).  Details below the fold.

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Lesson From The Tax Court: Better Deals With Appeals

One recurring lesson I teach in Tax Practice and Procedure is that you generally serve your client better by resolving their issues at the lowest level.  That requires helping them be realistic in understanding the range of potential outcomes.  It requires an understanding that IRS offices, such as the Office of Appeals, generally have more discretion than does the Tax Court to resolve problems.  It also requires understanding that when the Tax Court reviews an IRS discretionary action, it will only change that action when it is convinced the IRS decision was bonkers or, in the dry technical terms of the law, the decision was an “abuse of discretion.”  And, no, the Tax Court will not make a taxpayer’s argument for them, as we recently learned in Lesson From The Tax Court: The Tax Court Is Not Your Advocate, TaxProf Blog (Feb. 6, 2023).

Today I present a case where pro se taxpayers learned that lesson the hard way.  In Ronald Powell and Cynthia Powell, T.C. Memo. 2023-48 (Apr. 17, 2023) (Judge Lauber), the taxpayers did not like the Installment Agreement offered them by Appeals.  They thought they could do better in Tax Court.  They thought wrong.  Details below the fold.

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Lesson From The Tax Court: Prepare Once, File Twice

Most of us don’t think about what it means to file our tax return.  We may rely on software or a hired return preparer to transmit our return to the IRS. The returns are either snail-mailed to the applicable Service Center, or they are e-filed to that amorphous “cloud.”  We know it is important to file our returns in order to trigger the 3-year limitation period for assessment in §6501(a).  But once we send them in, we’re done.

But most of us do not claim to live in the U.S. Virgin Islands (USVI).  Taxpayers who do may need to file twice, as we learn in David W. Tice v. Commissioner, 160 T.C. No. 8 (Apr. 10, 2023) (Judge Pugh). a reviewed Tax Court opinion.  In holding that the taxpayer was obligated to file his returns with both the USVI and the IRS, the opinion reverses the Court’s prior approach, which we learned about in Lesson From The Tax Court: Forms Follow Function In Return Filing, TaxProf Blog (Jan. 5, 2018).  Previously, the Court had focused on the passive voice of §6501(a) to decide that filing only once with USVI triggered the three year limitation period when the USVI sent a couple of pages of the return to the IRS.  Today’s opinion reads the active voice of §932(a)(2) as imposing a more robust obligation.  Intervening Treasury Regulations might comfort those who believe they only need file once.  However, more cautious advisors may still want to prepare once and file twice.  See what you think.  Details below the fold.

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Lesson From The Tax Court: The Actual Payment Doctrine

Today is a lesson in timing.  When I teach timing I emphasize to my students that they must analyze income items separately from deduction items.  Today is an example of how the analysis applicable to inclusion can be different from the analysis applicable to deductions.

As to income, we all know about the constructive receipt doctrine.  Even if a taxpayer has not actually received some slug of money, they are deemed to have constructively received it if the money was made available to them in the year and there was no legal restriction on their accessing it.

Today’s lesson teaches that the deduction analysis is different.  To take a deduction the taxpayer must make an actual payment.  There is no such thing as constructive payment.  In Edwin L. Gage and Elain R. Gage v. Commissioner, T.C. Memo. 2023-47 (Apr. 12, 2023) (Judge Holmes), the taxpayers purchased a cashier’s check in December 2012 to settle a lawsuit and gave it to their attorney.  They took a 162 deduction for 2012, even though their attorney did not deliver the cashier's check to to the opposing party until March 2013.  In holding that they could not deduct that payment in 2012, Judge Holmes explains why their commitment to pay and their actual purchase of a cashier’s check did not amount to making an actual payment in 2012.  Details below the fold.

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Lesson From The Tax Court: It Takes More Than Putting In The Hours To Avoid §469 Restrictions

Tax Day approaches.  I know many folks are putting in the hours on preparing tax returns this week ... or else putting in the minutes filing Form 4868.  But we all know—especially when unhappy clients come to us to fix a return messed up by some whack-a-doodle preparer—just putting in hours in filing tax returns does not make one a tax professional.

In Robert L. Drocella and Pamela M. Drocella v. Commissioner, T.C. Summ. Op. 2023-12 (Apr. 3, 2023), Judge Leyden teaches us, and our clients, that simply putting in the hours working on one’s rentals does not make one a real estate professional for §469 purposes.  There the hard-working taxpayers were not allowed to escape §469’s prohibition on taking passive activity losses against active income even though they together put in over 1,500 hours in working their six rental properties.  We learn today there are two other tests to being a real estate professional and these taxpayers failed one of them:  they were unable to show the Court the how the hours they worked their rentals related to the hours they spent earning wages.  Details below the fold.

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The Trump Indictment, Tax Law, And Conway Twitty

New York Times, A Surprise Accusation Bolsters a Risky Case Against Trump:

The unsealed indictment against former President Donald J. Trump on Tuesday laid out an unexpected accusation that bolstered what many legal experts have described as an otherwise risky and novel case: Prosecutors claim he falsified business records in part for a plan to deceive state tax authorities.

For weeks, observers have wondered about the exact charges the Manhattan district attorney, Alvin L. Bragg, would bring. Accusing Mr. Trump of bookkeeping fraud to conceal campaign finance violations, many believed, could raise significant legal challenges. That accusation turned out to be a major part of Mr. Bragg’s theory — but not all of it.

“Pundits have been speculating that Trump would be charged with lying about the hush money payments to illegally affect an election, and that theory rests on controversial legal issues and could be hard to prove,” said Rebecca Roiphe, a New York Law School professor and former state prosecutor.

“It turns out the indictment also includes a claim that Trump falsified records to commit a state tax crime,” she continued. “That’s a much simpler charge that avoids the potential pitfalls.” ...

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Lesson From The Tax Court: Attend Carefully To Your Entity Baskets

Easter approaches.  On that day our church grounds will be overrun with children scampering to collect eggs into the various baskets, bags, and other containers they bring (or we give them if they need).  They do not have to worry about what kind of container they use to collect their eggs.  The candy will taste just as sweet.

You can think of business entities as being like Easter baskets.  They are containers taxpayers use to collect their income.  But unlike the happy children, taxpayers must take care in their choice of container.  That choice can affect the amount of income collected.  And it can leave a sour taste when the basket chosen is not the proper form.  In today’s Lesson, we learn how a taxpayer’s choice of business containers affects their ability to take deductions, and even affects their ability to litigate in Tax Court.

In Greatest Common Factor v. Commissioner, T.C. Memo. 2023-39 (Mar. 23, 2023) (Judge Kerrigan), the individual taxpayer chose to collect income through a C corporation and that choice affected the deductibility of the individual’s home office expenses.  In Techtron Holding, Inc. v. Commissioner, T.C. Memo 2023-29 (Mar. 9, 2023) (Judge Vasquez), the individual taxpayers collected income through ever-changing, multiple baskets of various kinds of business entities.  When the IRS audited and found deficiencies in one of the entities, the Tax Court decided it had no jurisdiction over that entity’s petition because the entity no longer existed at the time the petition was filed.  Details below the fold.

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Lesson From The Tax Court: The Whistleblower Who Blew Too Hard

Section 7623(b)(1) says that the IRS must reward whistleblowers when the information they provide causes the IRS to start “any administrative or judicial action” to collect unreported or unpaid taxes.  In such cases, whistleblowers can get an award of up to 30% of the proceeds actually collected from such actions.  Id.  So what happens if the whistleblower's information does not lead to an administrative or judicial action against the particular taxpayer fingered by the whistleblower, but instead prompts the IRS to create a general administrative program to target taxpayers like the one fingered by the whistleblower?

That was the claim in Thomas Shands v. Commissioner, 160 T.C. No. 5 (Mar. 8, 2023) (Judge Greaves).  There, the whistleblower claimed entitlement to 30% of some $1 billion collected from the IRS’s second Offshore Voluntary Disclosure Initiative (OVDI) in 2011.  His theory was that his blowing the whistle on one particularly influential tax evader prompted both the creation of the second OVDI and a rush by taxpayers to voluntarily disclose under the program.

The Tax Court ruled that Mr. Shands’ claim was overblown (pun totally intended).  Both the statute and implementing regulations make it clear that the relevant “administrative or judicial action” is one against particular identified taxpayers.  The creation of a general administrative program such as OVDI was not the kind of action that triggered a mandatory award.  Therefore, under the newly restricted reading of its authority to review whistleblower petitions, the Tax Court held that it lacked jurisdiction to review whether his information really did or did not contribute to OVDI.  The IRS simply had not started a requisite administrative or judicial action.  Details below the fold.

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Lesson From The Tax Court: Another Reason To Keep Good Records

Last week’s Lesson looked at the inherent unreliability of third-party information returns.  Taxpayers need to keep good records to refute those errors.  This week’s Lesson continues that theme: keeping good records can help avoid a bank deposits analysis.  When the IRS is forced to reconstruct income using the bank deposits method, it puts taxpayers in the hard place of having to prove why every bank deposit should not be counted as gross income for that year.

A pair of opinions issued by Judge Buch on the same day gives us a lesson on the unhappy consequences to taxpayers when their poor record-keeping leads the IRS to use a bank deposits method to reconstruct income.  In both Kevin B. Cheam and Julie Lim v. Commissioner, T.C. Memo. 2023-23 (Feb. 27, 2023), and Lundy Nath and Tanya Nath, T.C. Memo. 2023-22 (Feb. 27, 2023), the taxpayers’ failure to keep adequate books and records forced the IRS to conduct a bank deposits analysis, thus putting the burden on the taxpayers to show which bank deposits represented something other than gross income.  In neither case could the taxpayers show the Court nontaxable sources of income for the deposits the IRS asserted were unreported income.  And their record-keeping failures also hurt them in the usual way on the deduction side as well.  Details below the fold.

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Lesson From The Tax Court: The Inherent Unreliability Of Third-Party Reporting

Third-party reporting has long been crucial to tax administration.  Empirically, it helps taxpayers comply with their reporting duties.  Congress first starting requiring information returns in 1917 and keeps expanding the concept to reach new economic situations, such as the rise of the gig economy and on-line marketplaces.

But third-party information returns are inherently unreliable because they report payments, not income.  That is the lesson we learn in Tanisha Trice v. Commissioner, T.C. Memo. 2023-15 (Feb. 13, 2023) (Judge Gustafson).  In this case we learn the lesson with respect to Social Security Disability reporting.  There, the Form SSA-1099 reported payments to Ms. Trice of $15,365.  Judge Gustafson explains why that alone was not enough to support the Notice of Deficiency as to the payments that Ms. Trice denied receiving.  As to those, the IRS was required to produce additional evidence under §6201(d) because Ms. Trice had reasonably objected to that amount and had fully cooperated with the IRS.  Details below the fold.

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Lesson From The Tax Court: Fill Out The Damn Form

The fuss has focused on FBARs.  The FBAR requirements and penalty provisions have been hotly litigated.  Recently the Supreme Court issued an opinion in Bittner v. U.S., deciding that the penalties were not as harsh as the government thought they should be.

But forget FBAR.  Today’s lesson is about a different, yet equally important, foreign account reporting requirement: the one found in 26 U.S.C. §6048 that relates to foreign trusts.  The FBAR stuff is over in 31 U.S.C. §5314.  Completely different title.

And today’s lesson is not about penalties.  It’s about the assessment limitations period.  In Leigh C. Fairbank and Barbara J. Fairbank v. Commissioner, T.C. Memo. 2023-19 (Feb. 23, 2023) (Judge Weiler), we learn that a failure to comply with the §6048 reporting requirement by never filing the proper form---not even during audit---extends the time in which the IRS can assess really old tax deficiencies.  How old?  Try 15 years old.  Regardless of the outcome in Bittner, folks need to learn this lesson!  Details below the fold.

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Lesson From The Tax Court: The New Evidence Rule In Spousal Relief Cases

When a taxpayer requests spousal relief under §6015, the IRS must decide whether to grant it.  If the IRS denies relief, the taxpayer can petition the Tax Court. §6015(e).  In 2019 Congress created a modified administrative record rule for how the Tax Court is supposed to conduct that review.  Taxpayer First Act, 133 Stat. 981, 988.

It’s awkward.  Congress tells the Court to review the IRS decision de novo but, at the same time, tells the Court to do that using only a limited information set consisting of (a) “the administrative record established at the time of the determination” and (b) “any additional newly discovered or previously unavailable evidence.”  §6015(e)(7).

Sydney Ann Chaney Thomas v. Commissioner, 160 T.C. No. 4 (Feb. 13, 2023) (Judge Toro), is a reviewed opinion where a unanimous Tax Court interprets the phrase “newly discovered or previously unavailable evidence” broadly rather than narrowly, thus creating a new evidence rule (pun intended) that robustly protecting its ability to conduct the required de novo review.  Ironically, the decision worked against the taxpayer in this case because it was the IRS that here wanted to introduce new information (the taxpayer’s social media posts).  The taxpayer objected that those posts had been publicly available during the administrative proceeding; therefore they were not newly discovered or previously unavailable.  The Court rejected that argument and admitted the posts as evidence.

Today’s case is also an illustrative contrast to the T.C. opinion I discussed in last week’s post.  That was a case where the taxpayer was proceeding pro se.  And there the Court had no benefit of briefing from both sides.  I think the Court’s opinion showed it.  In today’s case, the taxpayer was (eventually) represented by one of the best tax attorneys I know, Megan Brackney.  Thus the Court had the benefit of a well-presented taxpayer argument.  The Court also had the benefit of a strong amicus brief submitted jointly by the Center for Taxpayer Rights, the Community Tax Law Project, the UC-SF LITC and the Villanova LITC.  That made the Tax Court’s opinion all the more robust, which is what it will need if and when its decision is reviewed in turn by a Court of Appeals.

Spoiler alert.  This post is a little longer than normal.  Sorry, Lew.

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Lesson From The Tax Court: The Limited Review Of Passport Revocation Certifications

Today’s lesson is about §7345, created by Congress in 2015.  The idea behind §7345 is simple.  If you owe taxes and the government threatens to take your passport, you are more likely to pay up.  But its operation is complex.  It requires the IRS to first certify to the State Department that a taxpayer has a “seriously delinquent tax debt.”  Then the State Department is authorized to take certain actions based on that certification.  Section 7345 permits taxpayers to seek Tax Court Review of IRS Certifications.

The Tax Court does not get many passport cases.  According to the Court’s FY 2024 Budget Request, of the 29,000 petitions filed in 2022, only 25 were §7345 petitions.  For those who are interested in learning more about the Court’s budget request, Keith Fogg posted this great review over on Procedurally Taxing.

So when the Tax Court gets a passport case, it often uses it to shape its §7345 jurisprudence by issuing precedential Tax Court opinions.  Today’s case is one of those. Blake M. Adams v. Commissioner, 160 T.C. No. 1 (Jan. 24, 2023) (Judge Toro), teaches two lessons.  First, the Court holds that it will not look behind the IRS certification to redetermine the merits of the tax liabilities that make up the certification.  Second, the Court also decides it lacks authority to determine whether the assessment underlying the Certification was procedurally defective.

Note that this is a case where the taxpayer was unrepresented.  While the Court’s desire to settle important §7345 issues is understandable, I question whether doing so in a pro-se case is desirable. Next week we will see a case where the Court wrote a much stronger opinion after first suggesting that the pro se taxpayer find counsel (who then filed briefed the issue) and also accepting an amicus brief. I offer my thoughts on this below the fold.

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Lesson From The Tax Court: Mortgage Interest Deductions When The Payor Is Not The Borrower

Families can be complicated.  Tax law can be complicated.  Put those complications together and you get today’s lesson: family obligations to pay interest on a mortgage don’t support the §163 deduction even though they might, informally, be as binding as legal obligations.

In Hrach Shilgevorkyan v. Commissioner, T. C. Memo. 2023-12 (Jan. 23, 2023) (Judge Ashford), the taxpayer paid half the interest due on a mortgage, but he was not the borrower.  The loan had been obtained by his brothers.  And while the complex rules for §163 allow interest deductions in some circumstances when the payor is not also the borrower, this taxpayer was unable to show how the complexities of his particular family arrangement fit into the complexities of the statute.  Details below the fold.

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Lesson From The Tax Court: The Tax Court Is Not Your Advocate

Today I present two lessons.  First, we learn why diabetes is not a per se disability sufficient to avoid penalties for early 401(k) distributions.  Second, we learn that pro se litigants cannot rely on the Tax Court to consider potential arguments they could have raised, but did not.

Diabetes is a well-known and widespread disease, afflicting some 37.3 million people in the U.S., according to the CDC’s 2022 National Diabetes Statistics Report.  That’s just over 11% of the US population.  Medical complications abound, as detailed in this report from the Diabetes Institute Research Foundation.

Managing diabetes and its attendant complications can be difficult and expensive.  In recognition of that, Canada gives this tax credit to Canadians who must manage the disease.  And in the U.S., many of the costs associated with diabetes qualify for the medical expense deduction under §213.  See e.g. IRS Publication 502 (2021) at p. 7 (explaining that cost of blood sugar test kit for diabetes is a qualifying medical expense).

In Robert B. Lucas v. Commissioner, T.C. Memo. 2023-9 (Jan. 17, 2023) (Judge Urda), the unemployed taxpayer took an early distribution from his 401(k) plan to help make ends meet, which included helping to manage his diabetes.  The issue was whether he had to pay the §72(t) 10% penalty for early distributions.  He could avoid the entire penalty if his diabetes qualified as a disability, and he could avoid some of it if the distribution was used for expenses allowable as a §213 deduction.  As to the first, Judge Urda teaches us why diabetes is not, in and of itself, a disability sufficient to escape the 10% penalty.  As to the second, Judge Urda notes the issue but, because the taxpayer did not raise it, “[w]e accordingly deem the issue forfeited.”  Op. at 4.  In doing that, Judge Urda teaches an important lesson on the role of the Tax Court.

Details below the fold.

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2nd Circuit To Decide Whether Vermont Law School Can Cover Underground Railroad Murals Against Artist's Wishes

Following up on my previous posts (links below), Bloomberg Law, Law School’s Covering of Slavery Murals Probed by 2nd Cir.:

Vermont Law School found a somewhat receptive Second Circuit as it defended a ruling allowing it to permanently cover murals depicting the Underground Railroad without violating an artists’ rights law.

Artist Samuel Kerson argued that the school hiding his two 1994 murals behind bolted-in acoustic panels violated the Visual Artists Rights Act, or VARA, during Friday’s oral argument at the US Court of Appeals for the Second Circuit. But the school says it complied with the law when it hid murals that students complained about for decades as “cartoonish” depictions of slaves and promotion of the “white savior complex.”

The dispute raises questions regarding how far VARA limits the property rights of the owners of their physical art, and the reach of exceptions written into the law. The US District Court for the District of Vermont’s ruling said that “no court has ruled that VARA protects the artist’s interest in keeping his art visible or on display.”

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WSJ Op-Ed: The Ninth Circuit Upholds A Wealth Tax

Wall Street Journal Op-Ed:  The Ninth Circuit Upholds a Wealth Tax, by Christopher Cox (Former Rep. (1989-2005) & SEC Chair (2005-2009)) & Hank Adler (Chapman):

The 16th Amendment authorizes the federal government only to tax income, but some members of Congress would love to tax wealth as well. That is widely understood to be unconstitutional, but a recent ruling from the Ninth U.S. Circuit Court of Appeals upholding a form of wealth tax could upend that conventional wisdom if it is allowed to stand.

The case, Moore v. U.S., involves a unique provision of the 2017 Tax Cuts and Jobs Act, which imposed a one-time retroactive tax applicable to individual U.S. shareholders of foreign corporations. Under previous law, U.S. taxpayers had to pay taxes on overseas corporate income when that income was repatriated to the U.S. in the form of dividends. The 2017 act abolished the tax on overseas income, bringing the U.S. tax system into line with those of most other developed countries. But it also created a “mandatory repatriation tax” on the corporation’s undistributed income since 1986, payable not by the corporation but its shareholders.

The result was that without selling their stock or receiving a dividend, U.S. investors were deemed to have received “income” and suddenly became liable for the new tax. ...

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Lesson From The Tax Court: Corporations In The Bardo

Lincoln in The Bardo is not a book for everyone.  It’s main characters (none of whom are Lincoln) are caught in the bardo, an indeterminate space between death and final after-life, whatever one conceives that to be.  But they are slow to realize it, clinging to a belief in their continued existence as they were.  Filled with unreliable narrators and casually vacillating in time and space, the novel is not an easy read.  But it is well worth the effort, being a lovely meditation on the meaning of life and the meaning of death.

XC Foundation v. Commissioner, T.C. Memo. 2023-2 (Jan. 5, 2023) (Judge Lauber), is an easy read about a corporation in the bardo.  It teaches a practical lesson: always ensure that your corporate client is fully alive and well under state law before you try to file a petition.  There, a corporation attempted to file a petition to contest an IRS decision to revoke its 501(c)(3) status.  Well, actually, the corporation did not file the petition.  It couldn’t.  It was caught in a kind of bardo, an indeterminate space between corporate life and permanent corporate death.  California, the state that had given it life, had suspended its charter, killing its capacity to sue and be sued.  But like the characters in the novel, it ignored its own death and tried to convince the Tax Court to do so as well.  It turns out that taxpayers in the bardo cannot file petitions that the Tax Court can hear, just as Lincoln could not hear the pleas of the novel's characters.  They are the pleas of ghosts.  Details below the fold.

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Lesson From The Tax Court: The Meaning Of 'Business Premises' In §119

It’s a new year.  And what better way to start than with the fundamental lesson I teach my students in our first few classes:  “Everything is income.  Everything including all your non-cash receipts.”  Yeah, I actually sing that to the class, to the tune of Everything is Awesome from the Lego movie.  It scans.  Treas. Reg. 1.61-1(a) emphasizes that point when it tells us that “Gross income includes income realized in any form, whether in money, property, or services.”

So employer-provided housing is income to an employee, just as if the employer paid the employee cash and the employee spends that cash to rent a house.  But we all know that Congress also permits taxpayers to exclude certain types of income from taxation.  Part of the art of tax practice is to try and find applicable exclusions to reduce the gross income that must be reported.  One such exclusion is §119 which sometimes permits an exclusion for the value of housing provided by an employer to an employee.

In Cory H. Smith v. Commissioner, T.C. Memo. 2023-12 (Jan. 12, 2023) (Judge Toro), we learn a useful lesson about the scope of the business premises requirement in §119: housing that is not within the physical boundaries of the employer’s facilities is highly unlikely to qualify for the §119 exclusion.  Mr. Smith’s employer hired him to work in Pine Gap, Australia.  It provided a house for him to live in about 11 miles away from his office, in a small city outside of Pine Gap.  While Mr. Smith initially properly reported the provided housing as income, he later got mixed up with some super aggressive tax advisors who convinced him to amend his returns to exclude the housing.  His tax advisors told him he could do that under §911, even though that reneged a Closing Agreement he had signed.  That bum advice gave us Lesson From The Tax Court: The Finality Of Closing Agreements, TaxProf Blog (Sept. 12, 2022).  Today, Judge Toro examines and rejects Mr. Smith’s alternative loser argument that he could exclude housing allowance payments under §119.  Details below the fold.

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Lesson From The Tax Court: Taxpayers Behaving Badly 2022

This will be my last new post until January. Next Monday, December 19, my annual Year Of Lessons From The Tax Court will appear in this space. It is a chronological listing of all the Lessons I posted in 2022, with links to each Lesson, the primary case discussed, and the judge who wrote the opinion. You can find last year's edition here.

I will be spending my days (except for Christmas Day) grading exams.  Grades are due Monday, January 2 and then I resume teaching on January 11, so you will not likely see my next Lesson From The Tax Court until January 23 (the week after the MLK holiday).

As is now customary, my last new 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), here (for 2019), here (for 2020), and here (for 2021).  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.

And again this year I am giving out a Norm Peterson Award.  You will find more explanation below the fold.

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Lesson From The Tax Court: It’s Not Income If You Pay It Back In Time

We all know that taxpayers do not have to report loans as income.  But it's not clear why.  It has something to do with the obligation to repay.  It might be the obligation to repay burdens other assets so the loan does not represent an actual increase in wealth.  Or it might be the obligation to repay creates an open transaction that crosses tax years and, for good administrative reasons, we simply presume the loan amount will be repaid in full.  For more details, see Lesson From The Tax Court: The Phantom Of The Tax Code—Discharge Of Indebtedness, TaxProf Blog (Feb. 19, 2018).

But what about when a taxpayer simply receives a payment that is not a loan, but appears to be a payment the taxpayer has a right to keep?  When it later turns out to be erroneous, and the taxpayer repays it, was it even income to start with?  Today we learn that if repayment of an erroneous distribution occurs in the same tax year as the distribution, there is no income to report.  That was good news for the taxpayers in Elijah Servance and Corliss Severance v. Commissioner, T.C. Summ. Op. 2022-23 (Nov. 21, 2022) (Judge Copeland), who received disability payments from Hartford Life Insurance Co. that they repaid in the same year.  The IRS said the payments were income.  The Tax Court held for the taxpayers.  Sure, the taxpayer lost the other, bigger, issue in the case—the one that got the Tax Analyst Headline of “Couple Could Not Exclude Retirement Benefits From Income.”  But this smaller issue about their disability insurance payments gives us two great lessons: one in tax law and one in tax procedure.  Details below the fold.

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Lesson From The Tax Court: The Employer/Employee Gift Rule

Relationships can be messy.  That is true whether they are work relationships or romantic relationships.  But it is especially true for romantic relationships with co-workers.  Throw in a power disparity (in either direction) and the relationship becomes even trickier.  That is why I suspect most readers subscribe to the standard advice to avoid romantic relationships with co-workers—even if they honor that advice in the breach.  After all, the standard advice is often easier said than done. Humans are not little neat boxes where you can separate relationships into “work” and “personal.”  It’s messy.

That messiness invades tax law.  The Supreme Court has said as much in how it tells us to apply the §102(a) exclusion from income for gifts.  Congress has tried to lessen the §102(a) mess with a bright line rule in §102(c) that prohibits the exclusion when a gift is from employer to employee.  Call that the employer/employee gift rule.  In Jennifer Joy Fields and Walter T. Fields v. Commissioner, T.C. Sum. Op. 2022-22 (Nov. 10, 2022) (Judge Panuthos), we see the employer/employee gift rule applied to a CEO’s decision to help an employee buy a home with company money.  Despite their personal relationship, the employer/employee relationship meant there was no exclusion.

Today’s lesson seems especially timely in light of the approaching holiday season with all its messy relationship and gift-giving complexities.  Details below the fold. 

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Lesson From The Tax Court: An Object Lesson For Tax Professionals

It is not always easy to follow the advice you give others. A common question I get is "how long should I keep my tax records?" My somewhat snarky reply is “as long as you need to.” The response is not entirely snarky because even though each tax year stands alone, events that occur in one year might have tax repercussions many, many years later.

In Betty Amos v. Commissioner, T.C. Memo. 2022-109 (Nov. 10, 2022) (Judge Urda), the taxpayer failed to keep records as long as she needed to is.  It is an object lesson for all of us. Ms. Amos was a highly successful tax practitioner, a CPA, who had decades of high-level business experience.  On her 2014 and 2015 returns she reported about $100,000 of IRA income against which she claimed over $4 million of net operating losses (NOLs) that dated back to 1999. While she could produce her 1999 tax returns showing the NOLs, she could not produce the underlying records substantiating what she had then reported, causing Judge Urda to write “It beggars belief that she would be unaware...[of] her responsibility to demonstrate her entitlement to the deductions she claimed.” Op. at 11.  Details below the fold. 

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Lesson From The Tax Court: The Impact Of De Novo Review In Spousal Relief Cases

I don't just inflict misery on tax students.  I also teach a class in Civil Procedure to first year law students.  One recurring lesson there concerns the different standards courts of appeals use when reviewing trial court decisions.  I want my students to learn to that the applicable standard of review matters.  It not only makes a huge difference in the outcome of the current case, but it also can make a huge difference in the precedential effect of that case on later cases.

We learn today how the different standards of review affect both outcomes and precedential value of old spousal relief cases.  We also learn how the Tax Court might be induced to finesse the bastardized administrative record rule in §6015(e)(7).  In Pia O. Bacigalupi v. Commissioner, Docket No. 20480-21 (Order of Oct. 27, 2022) (Judge Holmes), the IRS Office of Appeals decided Ms. Baciglupi should be held to the joint liability she had agreed to bear when she signed the joint returns.  They were unmoved by her present circumstances and denied her request for §6015(f) equitable relief.  Despite the record review rule, Judge Holmes allowed her to testify, and on the basis of that testimony disagreed with the IRS about two crucial factors for spousal relief.  Under an abuse of discretion review, that disagreement would not have mattered but under the de novo review, it made all the difference.  The de novo review standard also allowed Judge Holmes to ignore certain precedents unfavorable to Ms. Baciglupi.  Notice, however, this is just an unpublished bench opinion, so don’t get too excited.  For more about that, I recommend Keith Fogg’s excellent post from last week on bench opinions in general and this case in particular.  Meanwhile, you will find today's lesson in more detail below the fold. 

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Lesson From The Tax Court: Fake It Till You Make It

Today’s lesson is how to win a valuation dispute with the IRS.  I don’t teach much about valuation in my basic tax course. When we work problems involving property, the problems generally tell students to assume a certain fair market value (FMV) for the property.  For example, when I teach the deductions allowed by §170 for contributions of property to a charity, what I want students to learn is the reduce-to-basis rule.  To work that particular rule, those problems just assert an FMV because I’m trying to get them to focus on what kind of property is being donated and to what kind of charity.  See e.g. last week’s lesson “The Reduce-To-Basis Rule For §170 Deductions,” TaxProf Blog (Oct. 17, 2022).

I tell students that in real life, valuation is often open to dispute.  That is because facts matter.  And facts may often be disputed.  Moreover, assumptions matter as well.  And assumptions may often be questioned.

This week, we learn a great lesson from the Tax Court on how to win a valuation dispute against the IRS: have a better expert.  While that is easy to say, the 43-page opinion in Champions Retreat Golf Founders LLC et al. v. Commissioner, T.C. Memo. 2022-106 (Oct. 17, 2022) (Judge Pugh), teaches how it is not always easy to do. Today’s case involves the valuation of a conservation easement.  The taxpayer’s expert was not the best, but the IRS’s expert was worse.  So the taxpayer won.  The lesson is kind of like the old joke that you don’t have to outrun the bear: a taxpayer’s valuation does not have to be the best possible; it just has to be better than the IRS’ valuation.  Details below the fold.

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