Paul L. Caron
Dean


Monday, July 13, 2020

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

CoveyIn 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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July 13, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, July 6, 2020

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


LifeGrowing 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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July 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, June 29, 2020

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

Tennel_CheshireCongress 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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June 29, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, June 22, 2020

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

Tax Court (2017)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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June 22, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, June 15, 2020

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

Tax Court (2017)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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June 15, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, June 8, 2020

Lesson From The Tax Court: Do The Right Thing

Tax Court (2017)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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June 8, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, June 1, 2020

Lesson From The Tax Court: Litigation Funding Agreements Were Not Loans

Tax Court (2017)David A. Novoselsky and Charmain J. Novoselsky v. Commissioner, T.C. Memo. 2020-68 (May 28, 2020) (Judge Lauber), teaches us that a repayment contingency in a litigation funding agreement means the funds are not a loan for federal income tax purposes.  Mr. Novoselsky was a lawyer who received $1.4 million in advances to fund litigation. Repayment was contingent on litigation success.  He did not report it as income.  He should have.  Details below the fold.

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June 1, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (5)

Tuesday, May 26, 2020

Lesson From The Tax Court: Appeals Can Change Its Mind

Tax Court (2017)Last week’s case of Abigail Richlin v. Commissioner, T.C. Memo. 2020-60 (May 18, 2020) (Judge Halpern) is a textbook example of how one hand of the IRS bureaucracy might pat your back even as another hand slaps you upside the head.  There, the taxpayer had received a favorable decision from Appeals in a first proceeding, but then received an unfavorable decision on the exact same issue in a later proceeding.  Judge Halpern’s sturdy opinion gives us a terrific lesson on the difficulties taxpayers face in navigating a bureaucracy like the IRS.  Details below the fold.

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May 26, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, May 18, 2020

Lesson From Tax Court: Selling Home Not Always Required For Installment Agreement

Tax Court (2017)For most taxpayers, losing their home to the tax collector is one of their biggest fears.  Last week’s decision in Martin D. Kirkley and Sheila G. Kirkley, T.C. Memo. 2020-57 (May 13, 2020) (Judge Colvin) teaches us that nothing in the law requires taxpayers to sell their home as a pre-condition to an installment agreement.  There, the Office of Appeals had rejected a proposed installment agreement because it thought the law required the taxpayers to first sell all their assets, including their home.  The Court remanded the case to the IRS so the Office of Appeals could apply the law correctly.  Details below the fold.

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May 18, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, May 11, 2020

Lesson From The Tax Court: Late Is Late! The Impact Of COVID-19 On Filing Petitions

Tax Court CoronavirusA recurring issue in Tax Court litigation is the timeliness of petitions.  Currently the rules are strict.  While the Tax Court has used some very creative legal reasoning over the years to find some small stretch in the statutes, it steadfastly holds to the view that it is powerless to apply basic and well-settled equitable principles to stretch the statutes any further.  Thus Tax Court judges routinely, and reluctantly, kick taxpayers out of court.

Today’s case shows both the routine and the rigidity of the Tax Court’s approach to petition timing rules.  It’s a timely lesson because the COVID-19 pandemic has huge potential to create significant litigation on this issue.  I predict there will be many late-filed petitions that, in equity and good conscience, should be heard, but will have to be dismissed unless (1) the Court changes its mind and begins to apply well-settled equitable principles to alter statutory timing requirements or (2) Congress explicitly grants the Court authority to apply timing rules using equity. 

In Bryce Kent Smith & Natosha Ann Smith v. Commissioner, Docket No. 3463-20 (Order of Dismissal)(May 7, 2020) (Judge Foley), the taxpayers filed their petition timely but filed with the IRS.  By the time it got to the Court it was three days late.  And late is late!  The Court dismissed the petition.  Details below the fold.

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May 11, 2020 in Bryan Camp, Coronavirus, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, May 4, 2020

Lesson From The Tax Court: The Eye Of The CDP Needle

Tax Court (2017)If Jesus had been a tax practitioner, he might have said “I tell you it is easier for a camel to go through the eye of a needle than for a taxpayer to contest a tax liability in a CDP hearing.”  That is the lesson we learn from two recent Tax Court decisions: (1) Jason E. Shepherd v. Commissioner, T.C. Memo. 2020-45 (Apr. 13, 2020) (Judge Guy); and Patrick’s Payroll Services, Inc. v. Commissioner, T.C. Memo. 2020-47 (Apr. 14, 2020) (Judge Urda).  Mr. Shepherd wanted the Tax Court to review the merits of a Trust Fund Recovery Penalty assessed against him.  Patrick’s Payroll Services wanted the Tax Court to review assessed employment tax liabilities.  In both cases the Tax Court refused, holding that both taxpayers had had a prior “opportunity to dispute such tax liability” within the meaning of §6330(c)(2)(B).  The Court’s idea of what constitutes a prior opportunity might surprise you at first, but makes sense once you think about it, particularly for these two types of tax liabilities.  Details below the fold.

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May 4, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, April 27, 2020

Lesson From The Tax Court: Using Legislative History To Clarify Ambiguous Text

TTax Court (2017)ax statutes are difficult to read.  Usually that is because they make precise use of complex terms of art.  But sometimes the text is hard to follow because of poor drafting.  Last week’s case of Dale W. Laue and Alicia Laue v. Commissioner, T.C. Sum. Op. 2020-14 (April 20, 2020) (Judge Panuthos) shows us the classic approach to resolving textual ambiguities: look to legislative history.  There Judge Panuthos examines a drafting ambiguity in §72(t), the statute governing qualified retirement plans and penalties for early withdrawals.  He relies on an explanation given in a committee report to resolve the ambiguity against the taxpayer.  Details below the fold.

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April 27, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, April 20, 2020

Lesson From The Tax Court: Distinguishing Child Support From Alimony

Tax Court (2017)The recent case of Timothy Clinton Biddle v. Commissioner, T.C. Memo. 2020-39 (April 6, 2020) (Judge Vasquez) teaches that payments labeled as alimony may be treated as child support even when the divorce decree has other provisions explicitly labeled as child support.  Some may think that a lesson about the difference between alimony and child support is not worth learning because Congress eliminated the §215 deduction for alimony payments in December 2017.  See §11051(a) of P.L. 115-97, 131 Stat. 2054 at 2089.  Once Congress did that, both alimony and child support payments are treated the same for income and deduction purposes: not deductible by the payor spouse and not includable by the payee spouse.

I think the lesson is still important, however, for three reasons.  First, the repeal generally does not apply to divorce or separation instruments entered into before December 31, 2018.  Thus, there are lots of potential situations where this exact issue may yet arise.  Second, the lesson may be important for ongoing §152(d)(1)(C) issues, where taxpayers need to figure out who meets the support test to claim someone as a qualifying relative.  Third, this is a lesson about the limits of state court decrees to shape the federal tax consequences of divorce.  That is always a lesson worth remembering.  Details, as usual, below the fold.

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April 20, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, April 13, 2020

Lesson From The Tax Court: Penalty Approval Form Invalid When Penalty Not Properly Identified

Tax Court (2017)To the uninitiated, §6662 seems to impose a single accuracy-related penalty that varies in amount depending on just how badly the taxpayer screwed up.  For example, here’s the Wikipedia description: “This penalty of 20% or 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, transfer pricing adjustments, or negligence or disregard of rules or regulations.”  Note the singular “this penalty.” 

Today’s post will initiate you.  In Roderick M. Campbell and C. Sandra Campbell v. Commissioner, T.C. Memo. 2020-41 (April 7, 2020) (Judge Ashford) an IRS Supervisor’s approval of a accuracy-related penalty was insufficient to comply with §6751 because the approval form did not specify whether the approval was for the 20% or 40% penalty amount.  Despite the technical win here, however, this may not be a strong case for taxpayers.  Details below the fold.

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April 13, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, April 6, 2020

Lesson From The Tax Court: The Long And Short Of CDP

Tax Court (2017)I call it Collection Delay Process for a reason.  Two recent cases are bookend lessons on the speed of CDP.  These two cases suggest that the fastest CDP resolution one can reasonably expect is 2 years, but one can push that to 7-8 years depending on the complexity of the case and persistence of the taxpayer. 

First, Do S. Wong v. Commissioner, T.C. Memo 2020-32 (March 5, 2020) (Judge Lauber) is one of the shorter CDP timelines I’ve seen, with a correspondingly short opinion of 12 pages.  There, the taxpayer was able to stop active collection for about 2 years.

Second, Ronald M. Goldberg v. Commissioner, T.C. Memo 2020-38 (April 2, 2020) (Judge Morrison) is one of the longer CDP timelines I’ve seen, with a correspondingly long opinion of 163 pages.  There, the taxpayer was able to stop active collection for 7.5 years.

What each of these taxpayers gained in delay, however, is somewhat offset by the simultaneous extension of the collection limitations period.  As a result Mr. Wong's 2013 liability and Mr. Goldberg's much older 2004 liability are both now likely collectible through 2029.  The IRS may continue with enforced collection for both but one taxpayer will owe more in penalties and interest because of the longer delay.  Next week we will consider a lesson that Goldberg teaches on interest (unless a more interesting lesson comes up).  Today, however, I just present these cases to illustrate what practitioners might expect in the CDP process.

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April 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Thursday, April 2, 2020

Primer On How To Navigate The Recovery Rebate This Time

Two new posts from the eminent Carl Smith explain how the current rebate refund provisions differ from two past versions, and highlight what issues to anticipate with IRS administration of the provisions. 

"So, How Will the "Recovery Rebate" Refunds Work This Time? Part I:"

Section 6428 operates as a refundable credit – just like the earned income tax credit or the additional child tax credit.  Section 6428(b).  ... Because it has been awhile since this recovery rebate credit has been in the law (and because I litigated on behalf of taxpayers the only district court and appellate court opinions addressing the 2008 version of section 6428; see Sarmiento v. United States, 812 F. Supp. 2d 137 (E.D.N.Y. 2011), aff’d in part and rev’d in part, 678 F.3d 147 (2d Cir. 2012), and Maniolos v. United States, 741 F. Supp. 2d 555 (S.D.N.Y. 2010), aff’d per order, 469 Fed. Appx. 56(2d Cir. 2012)), I thought it would be useful for me to give a practical primer on how the new recovery rebate is written, how it was administered last time, and how I think it will be administered this time – because I anticipate the IRS will make administrative choices in 2020 similar to those that the IRS made in 2008....

"So, How will the "Recovery Rebate" Refunds Work This Time? Part II:"

This post is to discuss two issues under the prior versions of section 6428 that led to litigation and how those issues have or have not been addressed by the current legislation.  The two issues are:

  1. Whether the IRS may apply the recovery rebate credits (including stimulus checks) under section 6402 to reduce certain outstanding debts; and
  2. Which taxable year is the stimulus check “for” for purposes of bankruptcy?

The answer to the first question is decidedly “no”, with one exception.

The answer to the second question is still open – at least outside the Second Circuit.

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April 2, 2020 in Bryan Camp, Tax, Tax News, Tax Practice And Procedure | Permalink | Comments (0)

Monday, March 30, 2020

Lesson From The Tax Court: One Plus One Equals One

Tax Court (2017)Author’s Note: Like so many others I am now working from home and climbing various learning curves, some steeper than others.  So please accept my apologies if today’s post contains more errors than normal.  Hopefully they will just be errors of the fingers and not of the brain.  

The case of Sean McNamee v. Commissioner, T.C. Memo. 2020-37 (Mar. 18, 2020) (Judge Lauber) teaches us that taxpayers have only one opportunity to challenge a tax liability in a Collection Due Process (CDP) hearing, even though the Tax Code provides for up to two CDP hearings for any given tax liability.  In today's case the IRS erroneously refused to let Mr. McNamee challenge a tax liability in his first CDP hearing.  He did not obtain Tax Court review of that decision.  Instead, he re-challenged the liability in a second, later, CDP hearing involving the same underlying liability.  Mistake.  The Court held that even though the IRS screwed up the first time, the taxpayer’s failure to obtain judicial review of the first hearing precluded him from challenging the underlying liability in the second.  The lesson here centers on a tricky quirk in the CDP rules.  Details below the fold.   

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March 30, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, March 23, 2020

Lesson From The Tax Court: Last Known Address Rules And The Rule Of Law

Dog 2Celebrities are often hard to contact.  “Call my agent” is their standard line.  When do that on their tax returns, they should know that the last known address rules apply to celebrities the same as to regular folk.  That is the lesson in Duane Lee Chapman and Alice E. Smith, Deceased v. Commissioner, T.C. Memo. 2019-110 (Aug. 29, 2019) (Judge Ashford).  There, the taxpayers—famous from the TV reality show Dog the Bounty Hunter—put their agents’ address on their tax returns.  It cost them the opportunity to contest tax liabilities in Tax Court.

The case also shows us another meaning of the term Rule of Law.  That is why I am presenting this case today, as a follow-up on last week’s lesson.  Details below the fold. 

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March 23, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, March 16, 2020

Lesson From The Tax Court: The Two Postmark Rule And The Rule Of Law

Tax Court Logo 2Taxpayer petitions must still be filed in hard copy.  So you still need to understand the §7502 mailbox rules and the case of Sara M. Thomas and David A. Thomas v. Commissioner, T.C. Memo. 2020-33 (Mar. 11, 2020) (Judge Vasquez) teaches us a useful lesson.  There, taxpayers mailed their petition on March 5, 2018, the last day of the 90 day period.  When received by the Tax Court the envelope had two postmarks, one from a private postage meter that read “March 5” and one from the USPS that read “March 6.”  Relying on the applicable regulation, the Court said it was the USPS postmark that counted and dismissed the case for being filed late.

At one level this case is a straightforward lesson about the mailbox rules.  But it also illustrates one meaning of the phrase “Rule of Law.”  You would not think Tax Court opinions would deal with legal philosophy.  But they sometimes so.  Details below the fold.

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March 16, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, March 9, 2020

Lesson From The Tax Court: New Contract Turns Deductible Travel Into Non-Deductible Commute

Tax Court (2017)The case of Deborah Louise Biegalski v. Commissioner, T.C. Summ. Op. 2019-35 (Dec. 3, 2019)(Judge Colvin) teaches a useful lesson in the difference between deductible business travel and non-deductible commuting for taxpayers who work as independent contractors.  The wrinkle in this case was that the taxpayer’s travel was done per two different contracts for different types of work and for two discrete periods, each less than one year.  She thought that made her travel deductible.  The Tax Court disagreed.  Details below the fold.

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March 9, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, March 2, 2020

Lesson From The Tax Court: Taxpayer Cannot Cure Reporting Error During Audit

Tax Court (2017)The IRS is understandably skeptical of taxpayers who claim charitable deductions for conservation easements.  Opportunities for fakery abound, including valuation fakery, as explained in this nice post by Peter J. Reilly.  To help combat that kind of fakery, Congress has authorized the Treasury to adopt strict reporting requirements.  Today’s case shows just how strict they are.

In Oakhill Woods v. Commissioner, T.C. Memo. 2020-24 (Feb. 13, 2020) (Judge Lauber), the taxpayers made a conservation easement but their return omitted information required by regulation.  That proved fatal.  The IRS disallowed the deduction because of that omission, even though taxpayers offered the information during audit.  Judge Lauber agreed with the IRS that the taxpayers could not cure the omission during audit.  The taxpayers then tried to argue that the regulation was invalid.  Judge Lauber said “don’t be stupid” (but more politely).  It’s a nice lesson on the power of the IRS to impose reporting obligations and a cautionary tale to taxpayers on the danger of trying to game the reporting requirements with a needle in a haystack approach.

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March 2, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, February 24, 2020

Lesson From The Tax Court: What Is 'New Matter' That Shifts Burden Of Proof To IRS?

Tax Court (2017)Tax Court Rule 142 provides that “the burden of proof” in a Tax Court case is generally on the taxpayer.  Among the exceptions is the “new matter” exception.  When the IRS introduces a “new matter” it bears the burden of proof.  In Alvin E. Keels, Sr. v. Commissioner, T.C. Memo. 2020-25 (Feb. 19, 2020) (Judge Colvin) the NOD disallowed certain deductions for lack of substantiation.  After trial the IRS said that taxpayer's error was misapplication of §409A.  The Tax Court said that was a new theory and, hence, a new matter.  Because the IRS had not introduced any evidence to show how the taxpayer had misapplied §409A, the Court handed the taxpayer a sweet, sweet victory.  I read the case as a lesson in how broadly the Tax Court will construe the new matter exception.  The result was that while both the taxpayer and the IRS messed up, it was the IRS error that proved fatal thanks to the burden of proof shift in Rule 142.  I question the result here.  All of that comes below the fold. 

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February 24, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, February 17, 2020

Lesson From The Tax Court: IRS Automated Matching Program Not An 'Examination'

Tax Court (2017)Taxpayers think there is an audit lottery.  Tax professionals know better.  True, there is an audit lottery in the sense that only a very, very small percentage of returns are subject to human scrutiny.  But what most taxpayers overlook is that the IRS relies heavily on machines to process returns and, in that process, uses myriad automated programs to review all returns.  The truth is that every single return filed is subject to some level of review by the IRS.   One well known program is the Automated Underreporting program (AUR).  It matches information returns against taxpayer returns to catch under-reporting of income.

Last week’s case of Richard Essner v. Commissioner, T.C. Memo. 2020-23 (Feb. 12, 2020) (Judge Marvel) teaches a lesson about what happens when machine and human review of the same tax return overlap.  There, the IRS issued an NOD based on an AUR review while the same tax year was, at the same time, under human review.  The taxpayer argued that this duplicative review violated the §7605(b) restrictions on unnecessary or duplicative examinations.  Judge Marvel sympathized but hewed to a long line of precedent holding that AUR review does not trigger the §7605(b) restrictions.  Details below the fold.

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February 17, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, February 10, 2020

Lesson From The Tax Court: Drafting Error Costs Client $16 Million Deduction

Tax Court (2017)Tax statutes and tax regulations mostly use words to talk about numbers.  One of the basic lessons I must teach students is how to read numerical formulas that are expressed in words.  The importance of that lesson was recently reinforced by Railroad Holdings, LLC, Railroad Land Manager, LLC, Tax Matters Partner v. Commissioner, T.C. Memo. 2020-22 (Feb. 5, 2020) (Judge Gustafson).  There, the drafters of a conservation easement deed failed to properly incorporate the regulation’s proportionality requirement, a requirement that expresses a mathematical concept in words.  The resulting drafting error was so bad that not even tax litigators could twist the deed’s language to fit the requirement.  That cost the taxpayer a $16 million charitable deduction.  Details below the fold.

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February 10, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (4)

Monday, February 3, 2020

Lesson From The Tax Court: The Common Law Mailbox Rule Lives!

Tax Court (2017)The United States Postal Service (USPS) is a very large, complex organization, as detailed in this webpage.  It delivers some 146 billion pieces of mail a year.  It has a reputation for reliability.  The reputation is so strong that Congress actually made it the foundation of §7502’s statutory mailbox rule.  You know the rule: timely mailing is timely filing.

In Michael J. Seely and Nancy B. Seely v. Commissioner, T.C. Memo. 2020-6 (Jan.y 13, 2020) (Judge Vasquez) the Post Office apparently failed to put a postmark on an envelope containing the taxpayer's Tax Court petition.  The petition was received late but the Tax Court allowed the taxpayer the benefit of the timely-mailing rule, even though the statute requires a postmark and the regulations assume one.  This case shows us how the common law mailbox rule still lives and breathes in the statutory and regulatory gaps.  Details below the fold.

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February 3, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (2)

Monday, January 27, 2020

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

Tax Court (2017)Sometimes we get so used to norms of practice that we forget the legal text governing that practice.  Last week the Tax Court taught that text is still important.  In David J. Chadwick v. Commissioner, 154 T.C. No 5. (Jan. 21, 2020) (Judge Lauber), the Court held that the IRS must comply with §6751(b)’s supervisory approval requirements before assessing the §6672 Trust Fund Recovery Penalty.  That is because the text of §6751(b) says those requirements apply to any “penalty” and the text of §6672 permits the IRS to assess a “penalty.”

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

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January 27, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (3)

Monday, January 13, 2020

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

Tax Court (2017)Section 6751 is a poorly written statute that has caused no end of headaches for taxpayers, the IRS and the Tax Court.  It requires supervisory approval of tax penalties at some point before those penalties are assessed.  But that statute does not say at what point.  Last week a surprisingly divided Tax Court created a relatively bright line for taxpayers and the IRS to know by when the IRS must conform to the supervisory approval requirements.  The Tax Court did so by giving the statute a practical rather than hyper-textual construction.  The cases are: (1) Belair Woods, LLC, et al v. Commissioner, 154 T.C. No. 1 (Jan. 6, 2020) (Judge Lauber writing for a majority of nine); (2) Tribune Media Company v. Commissioner, T.C. Memo 2020-2 (Jan. 6, 2020) (Judge Buch).  Details below the fold.

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January 13, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (2)

Monday, January 6, 2020

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

Tax Court (2017)Section 7430(a) permits a court to award “reasonable administrative costs” and “reasonable litigation costs” (the largest being attorneys fees) to a taxpayer who is a “prevailing party” in a dispute with the IRS.  In Mark C. Klopfenstein v. Commissioner, T.C. Memo 2019-156 (Dec. 9, 2019) (Judge Lauber), Exam assessed a $1.6 million §6707 penalty against the taxpayer.  Mr. Klopfenstein eventually secured a closing agreement from Appeals that reduced the penalty to just under $170,000.  The IRS abated the assessment to that amount.  Mr. Klopfenstein then asked for “reasonable administrative costs” under §7430.  The Tax Court said no, because Mr. Klopfenstein was not a “prevailing party.”  You will find out why below the fold.

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January 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Monday, December 9, 2019

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

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

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

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December 9, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Monday, December 2, 2019

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

Tax Court (2017)Everyone, myself included, tends to refer to “the” IRS as if it is a sentient being.  We all know, however, that there is no such being.  Rather, the IRS is composed of many employees grouped together in different offices that perform different functions with various degrees of elan or despair.  It is the connections and coordination between these offices that make up “the” IRS.

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

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December 2, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, November 25, 2019

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

Tax Court (2017)Many Tax Court cases teach lessons about Collection Due Process (CDP).  The case of Norman Hinerfeld v. Commissioner, T.C. Memo. 2019-47 (May 2, 2019) (Judge Halpern), teaches a nice lesson about how the Tax Court reviews IRS CDP decisions.  It illustrates the difference between the concepts of “scope” of review and “standard” of review.  And it introduces readers to the wacky world of tax administrative law which, must to the consternation of those academics who like their law neat and tidy, is anything but neat and tidy.  More below the fold.

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November 25, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (3)

Monday, November 18, 2019

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

Tax Court (2017)You can't bring a Qui Tam action against a tax cheat.  You can blow the whistle, but it's not the same.

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

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

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

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November 18, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, November 11, 2019

Lesson From The Tax Court: One Year At A Time

Tax Court Logo 2I do not teach much tax accounting in my basic tax class.  I do, however, teach the general rule in §441(a) that each tax year stands alone.  Last week’s case of Roger G. Maki and Lilane J. Gervais v. Commissioner, T.C. Summary Op. 2019-34 (Nov. 4, 2019) (Judge Gerber), illustrates that general rule.  In Maki, the taxpayers won a §162 deduction for Mr. Maki’s travel away from home.  What makes this case fun is that these are the same retired taxpayers I blogged about last year in “Where Is A Retiree’s Tax Home.”  In both cases they won the issue, albeit for a smaller amount than they had claimed.  The lesson here is that a win in the first case did not guarantee the win in the next.  Details below the fold.

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November 11, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, November 4, 2019

Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD

Tax Court (2017)Jurisdiction is just a fancy word for “power.”  In a speech later published as The Path of The Law, the sainted Justice Holmes said: “in societies like ours the command of the public force is entrusted to the judges in certain cases, and the whole power of the state will be put forth, if necessary, to carry out their judgments and decrees.”  To Holmes, and others, courts are an instrumentality of government power.  The Tax Court is one such court.

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

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

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

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November 4, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, October 21, 2019

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

Happy 100thAuthor's Note:  This is my 10oth Lesson published on TaxProfBlog.  I continue to be very grateful to Paul for this opportunity.  I have learned loads from the cases and I enjoy sharing what I learn. 

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

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

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October 21, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (6)

Monday, October 14, 2019

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

Tax Court (2017)In several Lessons From The Tax Court (here, here, and here) we have seen how the concept of a tax home is important for deciding when §162 allows a deduction for the expenses of travel away from home.  The lessons teach that a tax home is where one must live to earn a living.  One’s personal choice of abode may or may not be one’s tax home.  That is the law for §162 purposes.  For §911 purposes, however, Congress has made the taxpayer’s personal choice of abode part of the definition of tax home.  That definition is what tripped up the taxpayers in Joseph S. Bellwood And Jacqueline E. Bellwood v. Commissioner, T.C. Memo 2019-135 (October 7, 2019)(Judge Gustafson) and in James M. Cambria v. Commissioner, T. C. Summary Opinion 2019-28 (September 30, 2019)(Judge Nega).  Details below the fold.

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October 14, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, October 7, 2019

Lesson From The Tax Court: Payments v. Deposits

Tax Court (2017)The only thing worse than overpaying ones tax liabilities is not realizing one has overpaid until it is too late to get the overpayment refunded.  Section 6511 requires taxpayers to ask the IRS for refunds of overpayments within the later of: (1) three years after the relevant return was filed; or (2) two years after the relevant payment was made.  If no return was filed, then the two year period applies.

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

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

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October 7, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, September 30, 2019

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

Tax Court (2017)I often call CDP “Collection Delay Process.”  That is not pure snark.  Part of the purpose of CDP is to pause collection long enough to give taxpayers adequate time to present information to a human IRS employee and explain why the IRS should not be collecting from them.  What constitutes adequate time turns on the plausibility of the taxpayer’s story.  That is today’s lesson.  

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

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

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

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September 30, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, September 23, 2019

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

Tax Court (2017)I have blogged before about the myth that our system of taxation is one of “self-assessment.”   Our system is better described as one of self-reporting.  It depends on taxpayers properly reporting their items of income and deductions.  The IRS can do the rest. 

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

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

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

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September 23, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (1)

Monday, September 16, 2019

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

Tax Court (2017)Tax collectors have an tough and lonely job.  I know.  I collected taxes for Arlington County, Virginia shortly after law school.  And when I was in IRS Office of Chief Counsel, my clients were Revenue Officers (ROs), the IRS employees whose dolorous job is to collect unpaid taxes. 

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

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

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September 16, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax News, Tax Practice And Procedure | Permalink | Comments (1)

Monday, August 19, 2019

Lesson From The Tax Court: A Lesson Of Interest

Tax Court (2017)Politicians love to brag about the voluntary nature of the U.S. tax system.  Back in 1862, the first Commissioner of Internal Revenue, George Boutwell, reported glowingly that, “sustained by the patriotic sentiments of the people, it is a matter for congratulation that the taxes assessed have, with few unimportant exceptions, been paid with cheerfulness...”  Those with boots on the ground had a different view: “Human nature must greatly change, before we shall find that patriotism is more universal than selfishness,” wrote the tax assessor Charles Emerson in 1867.

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

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

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August 19, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (3)

Monday, August 12, 2019

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

Tax Court (2017)Every year I lecture on the time value of money.  Part of the lecture compares a normal taxed savings account funded with after-tax dollars to a tax-free retirement account funded with pre-tax dollars.  At the end of my assumed 40-year investment period the difference astonishes the students and drives home my main point about the time value of money.

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

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

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August 12, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (4)

Monday, August 5, 2019

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

Tax Court (2017)I find it useful to think of tax administration as comprising two overarching functions: (1) determining tax liabilities and (2) collecting tax liabilities.  The IRS Office of Appeals (“Appeals”) supports both functions by mediating disputes between taxpayers and either the IRS exam function or collection function.  In Aldo Fonticiella v. Commissioner, T.C. Memo. 2019-74 (June 13, 2019), Judge Gerber teaches us that even though Appeals has a different (and wider) set of powers that often allow it to settle disputes without litigation, it still functions as an integral part of the IRS, no matter how many times Congress puts “Independent” in its title.

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

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

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August 5, 2019 in Bryan Camp, IRS News, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (0)

Monday, July 22, 2019

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

Tax Court (2017)Divorce brings all kinds of consequences.  Today’s lesson is about one of the tax consequences.  In last week's case of Brigette Ogden v. Commissioner, T.C. Memo. 2019-88  (July 15, 2019) (Judge Halpern), the divorced taxpayer sought to be relieved of her obligation to pay tax reported on two prior joint returns.  She sought relief based in part on a claim of spousal abuse and a claim that a state court’s divorce decree absolved her of responsibility.  Judge Halpern’s opinion teaches lessons about: (1) the relationship of spousal abuse to spousal relief in §6015, (2) the relationship of state courts to federal tax law, and (3) the relationship of sub-regulatory IRS guidance---here a Revenue Procedure---to Tax Court review of an IRS decision about spousal relief.  Details below the fold.  It's all about relationships.

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July 22, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (2)

Monday, July 8, 2019

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

Tax Court (2017)It takes money to make money.  Generally Congress allows taxpayers to deduct the money it takes from the money they make.  That’s the idea in §162.  But §162’s deceptively simple language----allowing a deduction for all “the ordinary and necessary expenses paid or incurred in carrying on a trade or business”---has gaps, to be filled by other statutes.  For example, §§183 and 212 apply the §162 idea to activities that are not a “trade or business” but still produce income and have associated costs.  And then there is that pesky timing issue: which costs are “expenses” that should be deducted in the current year and which costs should only allowed to be deducted over a longer period of time?  Sections 168(k) and 179 allow taxpayers to accelerate deductions of certain capital costs that otherwise would not qualify as “expenses” under §162’s simple language.

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

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July 8, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink | Comments (4)

Monday, July 1, 2019

Lesson From The Tax Court: Yachts Are Pigs

.Tax Court (2017)You can put lipstick on a pig, but it’s still a pig.  According to Wikipedia, that is a late 20th century update to an older expression "A hog in armour is still but a hog.”  Both convey the same idea: superficial alterations do not change the essence of a thing.   

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

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

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July 1, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Monday, June 24, 2019

Lesson From The Tax Court: Ipse Dixit Cannot Fix It

Tax Court (2017)Mitchel Skolnick and Leslie Skolnick, et al. v. Commissioner, T.C. Memo. 2019-64 (June 3, 2019) (Judge Lauber) teaches an important lesson about the proper use of expert witnesses.  In Skolnick, the Tax Court rejected the taxpayer’s expert witness valuation of of 153 horses at two points in time 7 years apart because the expert did not adequately disclose the facts and methodology used to value each horse.  Judge Lauber held that the taxpayer could not fix the value of the horses through expert’s ipse dixit.

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

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

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June 24, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Monday, June 17, 2019

Lesson From The Tax Court: Your Brand Is Your Business

Tax Court Logo 2Self-promotion is as American as P.T. Barnum.  So is wanting to avoid tax.  In K. Slaughter v. Commissioner, T.C. Memo. 2019-65 (June 4, 2019), Judge Wells teaches a lesson that all YouTube influencers and their return preparers need to learn: it is difficult to avoid self-employment tax on earnings from self-promotion.  Ms. Slaughter argued that her “brand” was an intangible asset separate from her business of writing crime novels, and so earnings attributed to her brand were not self-employment income.  The Court rejected her attempt to assign part of her earnings to what amounted to her investment in herself.  Her brand was itself her business.  Hey, at least she avoided penalties because her tax position was her accountants’ idea.  However, that leaves the accountants potentially vulnerable to penalties under §6694.  Details below the fold.   

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June 17, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (6)

Monday, June 10, 2019

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

Tax Court (2017)Today’s lesson is about dogs and tails. Tax practitioners often work hard to get their clients into some kind of Offer In Compromise (OIC) or Installment Agreement (IA) with the IRS. Those are the dogs. But a successful IA or OIC involves more than just making timely payments on the deals. It involves an ongoing commitment to properly file returns and pay taxes for up to five years. That’s the long tail. And, to mix metaphors, that long tail can come back to bite a taxpayer who falls out of compliance. That’s the lesson we learn from two recent opinions: (1) Edward F. Sadjadi and Cynthia M. Sadjadi, T.C. Memo. 2019-58 (May 29, 2019) (Judge Cohen) (IRS can collect original liability against taxpayers who fully paid their OIC); (2) Kevin Scott Millen v. Commissioner, T.C. Memo. 2019-60 (May 30, 2019) (Judge Lauber) (taxpayer had his IA terminated even though he never missed a payment).

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June 10, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Monday, June 3, 2019

Lesson From The Tax Court: Another Pyrrhic CDP Win

Tax Court (2017)Last week, I discussed the case of Mr. Kearse, whose three lawyers secured him a CDP win some five years after filing a Tax Court petition.  They got the win because of an IRS screw-up.  They did not get the underlying assessment invalidated.  They did not get a merits determination of the underlying liability.  They did not kill future collection.  They got delay.  I questioned what value that whole process added for either Mr. Kearse or taxpayers in general.  

This week I discuss the case of Linda J. Romano-Murphy v. Commissioner, 152 T.C. No. 16 (May 21, 2019) (Judge Morrison).  Ms. Romano-Murphy, representing herself, secured a CDP win some 10 years after she first filed her Tax Court petition.  She got the win because of an IRS screw up.  Unlike Mr. Kearse's team she got the underlying assessment invalidated.   Once again, however, I question whether this win created value for either this taxpayer or taxpayers generally.

The case took 10 years because Ms. Romano-Murphy initially lost her Tax Court case on the merits of her liability.  She appealed to the 11th Circuit in 2013 on a procedural issue.  Three years later that court rendered its opinion that the IRS had screwed up by not following a new rule that the 11th Circuit discovered buried in an implication in the statutory language of §6672, a rule no one else had spotted during the 20 years the statute had been in operation.

The new rule is a procedural one: when the IRS proposes to assess a Trust Fund Recovery Penalty (TFRP) under Section 6672 and the taxpayer timely asks for a hearing with the Office of Appeals, then the IRS may not assess the liability until after Appeals performs its review and issues a document that reflects its final determination. 

The 11th Circuit sent the case back to the Tax Court to decide whether the IRS screw-up was harmless error.  In a 87-page opinion, the Tax Court said the IRS error was not harmless and held that the assessment was void.  It reversed the Appeals CDP determination since the IRS cannot collect a void assessment.

You may think this is great result for Ms. Romano-Murphy.  She got the assessment invalidated!  I wish I shared that happy outlook.  Alas!  I think the result is really just a win of delayed assessment and later collection.  And I cannot see how the 10-year delay benefits either the taxpayer or tax administration.  Details below the fold.

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June 3, 2019 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink | Comments (0)