Monday, November 30, 2020
Over 40 years ago, Congress modified §170 to permit deductions for donations of partial interests in land when such donations advanced an important public purpose such as protecting environmentally or historically important land from development. Starting in the early 2000’s, however, developers and tax shelter promoters began exploiting conservation easements to provide huge tax deductions for donations that provided little or no conservation benefit. The problem reached the point that the IRS issued Notice 2017-10 which described certain syndicated conservation easement arrangements and listed them as tax shelter transactions. This informative Senate Finance Committee Report from August 2020 details the abuses.
But not all conservation easements are tax shelters. Kumar Rajagopalan and Susamma Kumar v. Commissioner, T.C. Memo. 2020-159 (Nov. 19, 2020) (Judge Holmes) shows how taxpayers can properly deduct the donation of a conservation easement if they have good planning, good representation, and good luck. Details below the fold.
November 30, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, November 23, 2020
Douglas H. Cutting v. Commissioner, T.C. Memo. 2020-158 (Nov. 19, 2020) (Judge Pugh), teaches a useful lesson about that puzzling concept called “tax home” as it relates to the §911 foreign earned income exclusion. Taxpayers can claim the §911 exclusion if their tax home is in a foreign country. Mr. Cutting's wasn’t, even though his personal home — the place he returned to when not flying — was Thailand, where he lived with his wife and step-daughter. A tax home, however, is not where the heart is. Details below the fold.
November 23, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, November 16, 2020
The Tax Code contains a variety of statutes designed to protect taxpayers from unreasonable and arbitrary decisions by the IRS. I think of them as quality control measures: they require supervisory approval of certain decisions, such as the decision to impose a penalty (§6751) or the decision to open a second examination (§7605(b)). One can also think of quality control as any procedure that allows a different decision-maker to enter the picture, not just a supervisor. That was the lesson last week, when the Office of Chief Counsel entered the picture and fixed a problem.
But no matter what quality controls the IRS uses, or what training it gives its employees, final decisions about either the assessment or collection of taxes are sometimes simply not defensible. Getting such decisions corrected in court costs taxpayer both time and money. Section 7430 permits such taxpayers to recover the costs they incurred to fix an unreasonable decision. In that sense, it is another quality control measure.
In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150 (Nov. 9, 2020) Judge Marvel teaches a lesson on the limits a taxpayer’s ability to recover costs under §7430. There, the Office of Appeals made an indefensible decision about the collection of the Dangs’ unpaid taxes and the IRS conceded the case in Tax Court. Nonetheless, the Dangs were not eligible to recover the costs they incurred in fixing that unreasonable CDP decision. Details below the fold.
November 16, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, November 9, 2020
My friends joke that my time as an attorney in the IRS Office of Chief Counsel was spent in the belly of the Beast. I’m not a fan of that analogy because it implies the IRS is a single entity. As regular readers of this blog (if any exist) know, I regularly argue against that view. The best way to think of the IRS---both in theory and practice---is that it is a collection of different offices (or functions) each of which has certain defined authorities. Folks, it’s a bureaucracy, not a beast.
Today’s case, Colleen Michelle Leith, Petitioner, and Oraine J. Leith, Intervenor v. Commissioner, T.C. Memo. 2020-149 (Nov. 4, 2020) (Judge Vasquez), teaches a great lesson on how getting to a different bureaucratic decision-maker can turn defeat into victory. There, the taxpayer sought spousal relief and lost in the IRS. Although the Tax Court decision is in her favor, she really won the case in the Office of Chief Counsel. Details below the fold.
November 9, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, November 2, 2020
Today’s lesson is about timing, and the concept of administrative grace. Section 165 permits taxpayers to deduct losses from theft and §165(e) provides the timing rule: the loss “shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.”
Rev. Proc. 2009-20 gives taxpayers who seek to deduct losses from certain Ponzi-type schemes some very generous safe harbors that relieve them of difficult substantiation requirements. But taxpayers seeking such shelter must navigate the specific procedural rules outlined in the Rev. Proc. One procedural rule is a bright-line timing rule about the year in which taxpayers could take the loss deduction. Taxpayers who do not use the Rev. Proc. are subject to the normal burdens of proving up the amount and timing of their theft losses.
In a consolidated case, Michael C. Giambrone et al v. Commissioner, T.C. Memo. 2020-145 (Oct. 19, 2020) (Judge Lauber), the taxpayers did not follow the Rev. Proc. 2009-20’s timing rule, but argued they should still get the relief given by the Rev. Proc. because their timing was consistent with the statutory timing requirement. Judge Lauber said no. Details below the fold.
November 2, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, October 26, 2020
Taxpayers rarely walk away from casinos richer than when they entered. The odds are not in their favor. If a slot machine pays out $1,200 or more, however, the casino will still report that win on a W-2G, even if the taxpayer loses all of it before leaving the casino. The theory is that $1,200 is income to the taxpayer and the taxpayer’s choice to use it for more gambling is no different than the taxpayer’s choice to use that $1,200 for other consumption.
The IRS recognizes that the reality is different from theory and so it permits taxpayers to net their gambling gains and gambling losses for each visit to---or session at---a casino. In the unlikely event they leave the casino a net winner, those wagering gains are gross income which must be reported. If they leave a net loser, they may be able to deduct those wagering losses against wagering gains up to the amount of wagering gains. Tax Court precedents uphold this per-session method of accounting for gambling gains and losses. In addition, plenty of precedent requires taxpayers to substantiate their wagering losses for each session.
In John M. Coleman v. Commissioner, T.C. Memo. 2020-146 (Oct. 22, 2020), Judge Lauber bucked both sets of precedents to allow the taxpayer a gambling loss deduction equal to over $350,000 of gambling wins reported on various W-2Gs. There are good reasons for why Judge Lauber did this, but the bottom line is that this taxpayer got twice lucky. It helped that he was represented pro bono by two high-powered tax attorneys from Morgan Lewis. Let's look at what we can learn from them and from this case. Details below the fold.
October 26, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, October 19, 2020
Last week, the Tax Court issued an important opinion on the §6751(b)(1) supervisory review requirements. In Jesus R. Oropeza v. Commissioner, 155 T.C. No. 9 (Oct. 13, 2020) (Judge Lauber), held that the 20% penalty under §6662(b)(6) is the same as the 40% penalty under §6662(i) and therefore the failure to secure proper approval for assertion of the former in an RAR precludes assertion of the latter in a later NOD. The latter subsection simply “enhances” the amount of §6662(b)(6) penalty and does not impose a separate penalty.
The path of the law is not linear. Doctrinal development sometimes involves two steps forward, one step backwards, and maybe even a step or two sideways. In Oropeza the Tax Court took what some may view as a step sideways, and what the government will likely view as a step backwards. The decision seems in tension with prior Tax Court opinions that treat §6662 as containing multiple penalties for supervisory approval purposes, including an opinion by the same judge about the same taxpayer! The upshot of today’s opinion is that practitioners need to read NODs very carefully. Details below the fold.
October 19, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, October 12, 2020
Today’s post is about how the Tax Court reviews decisions of the IRS Whistleblower Office (WBO). If you want to report a tax cheat, you have a variety of choices, detailed in this IRS webpage. Typically, you write a letter or submit a Form 3439-A. But if you want to also claim an award for blowing the whistle, you must submit a Form 211 with the IRS Whistleblower Office (WBO). That is because the WBO is the office in the IRS that decides whether the information you gave resulted in additional collections of tax. If it did, you get a cut. If you don’t like the amount of the award, you can ask the Tax Court to review the WBO’s decision on the amount.
When the WBO decides that you are entitled to no award, however, it could be for a variety of reasons, only some of which are reviewable by the Tax Court. In John Worthington v. Commissioner, T.C. Memo 2020-141 (Oct. 8, 2020) Judge Gustafson teaches the difference between those decisions the Tax Court will review and those it will not; it turns on the difference between the words “rejection” and “denial.” To me, this case represents a wobbly first step onto a slippery slope towards reviewing IRS audit decisions. That is not what WBO review used to cover but times, they may be a-changing! Details below the fold.
October 12, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, October 5, 2020
Tax shelters come in many forms. Some shelters are activities that have no genuine economic purpose; they exist simply to generate tax benefits. Some micro-captive insurance arrangements are a great example, as you can learn from this wonderful brief by former tax officials filed recently in a Supreme Court case (I blogged about the case here). Other shelters are activities that allow taxpayers to deduct otherwise non-deductible personal expenses.
Today’s case involves that second kind of tax shelter. Taxpayers who own vacation properties can generate deductions for maintenance, utilities, and depreciation by renting out the properties even while also using the properties for personal pleasure. Thus, the rental activity can help ameliorate the personal costs of ownership by turning otherwise personal costs into rental costs. And if the rental costs exceed the rental income, why then taxpayers have a loss and many taxpayers will try to use that loss to shelter non-rental income.
In Ronald J. Lucero and Mary L. Lucero v. Commissioner, T.C. Memo. 2020-136 (Sept. 29, 2020) Judge Pugh teaches a great lesson about the limits of using beach houses as tax shelters. The taxpayers owned a beach house in Sea Ranch, California and rented it out. They had net losses. The Court did not allow them to deduct those losses to shelter non-rental income, even though their personal use was only about one week each year. It’s a nice lesson on how the restrictions on deductions in §280A and §469 work. Details below the fold.
October 5, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, September 28, 2020
My wife has spent her COVID time organizing efforts to celebrate Earth Day next April in our fair city of Lubbock, Texas. Her efforts are paying off. She and her colleagues are now to the point where they need to operate through a tax-exempt entity. Well-meaning friends tell her “oh, it’s easy, just go fill out some forms and submit them to the IRS.” Those friends think that forming a nonprofit entity is a one-step process, done at the federal level. They do not realize that it is a two-step process: one must first form the entity under state law and then ask for tax-exemption from the IRS. Today we learn that the choice of entity formation will affect the federal tax treatment of that entity.
In Clinton Deckard v. Commissioner, 155 T.C. No. 8 (Sept. 17, 2020) (Judge Thornton), the effect of state law was to preclude the taxpayer from electing S Corporation status. There Mr. Deckard formed a nonprofit corporation under Kentucky law but soon started operating it for profit. After a couple of years of losses, he tried to elect S Corporation status for the entity so he could pass through and deduct those losses. Judge Thornton held he was bound to the corporate form he had created under Kentucky law. State law matters. Details below the fold.
September 28, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Friday, September 18, 2020
Currently before the Supreme Court is a case called CIC Services v. IRS. It involves the question of whether §7421 — Commonly called the Anti-Injunction Act (“AIA”) — prevents CIC from suing the IRS over the propriety of Notice 2016-66. That Notice declares certain micro-captive insurance arrangements as “transactions of interest.” It triggers certain reporting requirements for both CIC (as a material advisor) and CIC clients who have engaged in the arrangements described in the Notice. CIC asserts the Notice was illegally issued.
CIC (and another entity who has since dropped out) sued in federal district court, asking the court to (1) declare Notice 2016-66 invalid and (2) permanently enjoin the Service from enforcing the Notice. The district court dismissed the suit as barred by both the AIA and the Declaratory Judgment Act (DJA), 28 U.S.C. §2201(a). The AIA says that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” The DJA permits suits for declaratory judgements except for suits “with respect to Federal taxes....”
A split Sixth Circuit panel affirmed. A closely divided Sixth Circuit then denied CIC’s petition for rehearing en banc. How closely divided? Six judges thought the rehearing petition should be denied. Six dissenting judges thought it should be granted. One judge said he thought the dissenters had the better of the argument but he was going to vote to deny because of circuit precedent. He expressed the hope that the Supreme Court would take the case. And, guess what? The Supreme Court took the case.
A summary of the Parties' argument and the Tax Prof briefs comes below the fold
September 18, 2020 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure, Tax Profs | Permalink
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Monday, September 14, 2020
Perspective is important. As we regularly see in politics and protests, different groups have different points of view. In tax law, disputes between taxpayers and the IRS quite often stem from different perspectives on the law. Courts are called upon to adopt one or the other perspective in resolving the dispute.
In Robin J. Fowler v. Commissioner, 155 T.C. No. 7 (Sept. 9, 2020), Judge Greaves adopts a strongly taxpayer perspective of the law. He holds that even though the IRS rejected an e-filed return the return still triggered the 3-year limitation period on assessment. This elevates the taxpayer perspective on the importance of the limitation period over the IRS perspective on the importance of being able to process a return.
The decision may be a consequential one, both for taxpayers and the IRS. And not just because it's a fully reviewed opinion — a "we really mean it" opinion. It may be consequential because of its ripple effects. For example, will taxpayers whose e-filed returns are rejected now escape a late filing penalty if they either fail to resubmit or resubmit much later? Further, both the IRS and taxpayers will now need to figure out whether the Court’s opinion applies to all e-file rejections or just certain ones and, if so, which ones. Hello litigation.
If the IRS appeals the decision, a reviewing court may well take the IRS perspective. After all, the Supreme Court has said, more than once, that “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.” Bufferd v. Commissioner, 506 U.S. 523, 528 (1993). That perspective, however, raises its own set of problems. More on that below the fold.
September 14, 2020 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure, Tax Scholarship | Permalink
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Tuesday, September 8, 2020
Today’s lesson is about form and substance. Tax practitioners are often called upon to decide what transactional form best accomplishes a client’s substantive purpose. The power to choose the form of transactions sometimes creates a tension with the underlying economic substance when taxpayers and their advisors use form to disguise substance in the never-ending quest to gain tax benefits. Courts and the IRS regularly police transactions using various doctrines to decide when form must yield to substance (e.g. step transaction doctrine, economic benefit doctrine). When form is too much in tension with substance, substance wins. Congress has attempted to codify this idea in §7701(o).
Today's lesson illustrates where tax law permits form to triumph over substance. In Jon Dickinson and Helen Dickinson v. Commissioner, T.C. Memo. 2020-128 (Sept. 3, 2020)(Judge Greaves) the taxpayers were able to obtain the double tax benefit of donating appreciated shares of stock to charity by being very careful with the form of the donation. Congress explicitly permits the form of a transaction to govern the tax result in charitable stock donation. The tricky part of this case was that the taxpayers were donating shares of a closely held corporation. And that implicates the assignment of income doctrine, one of those substance-over-form doctrines that courts use. To see how Judge Greaves resolves the tension in favor of the taxpayer, see below the fold.
September 8, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, August 31, 2020
I cannot say it often enough: the IRS is not an entity. It’s a collection of functions that, taken together, administer the internal revenue laws written by Congress. So when someone says “the IRS did this” or “the IRS did that” they really mean that an action was taken by a discrete function, office, or employee within the organization we call the IRS.
Today we learn why taxpayers (and their representatives) need to understand how IRS functions relate to one another. The taxpayer in Duy Duc Nguyen v. Commissioner, T.C. Memo. 2020-97 (June 30, 2020) (Judge Pugh) thought he was dealing with “the IRS” but he was really dealing with two separate functions: Exam and Appeals. Because the information he supplied to Exam was not also supplied to Appeals, he was unable to contest the merits of an assessment in his CDP hearing. Details below the fold.
August 31, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, August 24, 2020
When I teach Civil Procedure, I joke that the acronym SOL is particularly appropriate for Statutes of Limitations. Students laugh. But blowing an SOL will not only cause clients to cry tears, it may well cause clients to cry “malpractice!”
Tax law is full of SOLs. We easily think of the ones that limit the IRS's ability to assess or collect. But SOLs affect taxpayers as well, notably the §6511 SOL for filing refund claims. Last week’s case of Robert William Porporato v. Commissioner, T.C. Sum. Op. 2020-24 (Aug. 18, 2020) (Judge Panuthos) teaches a lesson in vigilance: the taxpayer lost a potential $12,000 refund because of the §6511 SOL. While this taxpayer was pro-se all the way, and so had no one to blame but himself, the case is a useful lesson for practitioners: don’t let the sneaky §6511 SOL rules catch you napping. Details below the fold.
August 24, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, August 17, 2020
While §6662(a) seems to impose a single accuracy-related penalty, a recent case teaches that it actually imposes a panoply of penalties for purposes of the §6751(b) supervisory approval requirement. We learn that if the IRS is either careful or lucky, it can cure one defective §6662 penalty approval by later asserting a different §6662 penalty amount.
In Jesus R. Oropeza and Fabiola Anaya Oropeza, T.C. Memo. 2020-111 (July 21, 2020) (Judge Lauber), the IRS first proposed a 40% §6662 penalty in a pre-NOD document but failed to obey §6751(b)(1). Despite that failure, the Court upheld a later NOD’s alternative 20% §6662 penalty. Details below the fold.
August 17, 2020 in Bryan Camp, New Cases, Scholarship, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, August 10, 2020
Taxpayers who petition the Tax Court to contest $50,000 or less of a proposed deficiency can elect to have their case heard under the procedures authorized by §7463 and set out in Tax Court Rules 170-174. Cases decided under these small case procedures are called S-Cases.
The written advantages of S-Cases include a quicker trial date and a more informal trial. In Adam Jordan Winslow v. Commissioner, T.C. Summ. Op. 2020-22 (Aug. 3, 2020) (Judge Colvin), the Court allowed the taxpayer a highly dubious alimony deduction based on an argument that would probably not have succeeded in a regular case. To me, the case shows us an unwritten advantage of S-Cases: the Court may be willing to apply the law in a more relaxed fashion when presented with a sympathetic taxpayer. Details below the fold.
August 10, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, July 27, 2020
Joshua D. Blank (UC-Irvine) & Ari D. Glogower (Ohio State), Progressive Tax Procedure, 96 N.Y.U. L. Rev. ___ (2021):
Abusive tax avoidance and tax evasion by high-income taxpayers pose unique threats to the tax system. These strategies undermine the tax system’s progressive features and distort its distributional burdens. Responses to this challenge generally fall within two categories: calls to increase IRS enforcement and “activity-based rules” targeting the specific strategies that enable tax avoidance and evasion by these taxpayers. Both of these responses, however, offer incomplete solutions to the problems of high-end noncompliance.
This Article presents the case for “progressive tax procedure”— means-based adjustments to the tax procedure rules for high-income taxpayers. In contrast to the activity-based rules in current law, progressive tax procedure would tailor rules to the economic circumstances of the actors rather than their activities. For example, under this system, a high-income taxpayer would face higher tax penalty rates or longer periods where the IRS could assess tax deficiencies. Progressive tax procedure could also allow an exception for low-value tax underpayments, to avoid excessive IRS scrutiny or unduly burdensome rules for less serious offenses.
July 27, 2020 in Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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In the movie Cool Hand Luke, the consequences of an alleged failure to communicate fell on the prisoner Paul Newman. Here’s the clip. It was a meme before memes were memes. Last week, the Tax Court decided the consequences of a failure to communicate will fall on IRS.
The lesson is on the meaning of the word “opportunity” in §6330(c)(2)(B), which allows taxpayers to contest the merits of an assessed tax liability in a CDP hearing if they did not “otherwise have an opportunity to dispute such tax liability” before the assessment.
In Rickey B. Barnhill v. Commissioner, 155 T.C. No. 1 (July 21, 2020) (Judge Gustafson) the Court held that mere receipt of Letter 1153—giving the taxpayer a pre-assessment opportunity to contest a proposed Trust Fund Recovery Penalty—would not automatically prevent a taxpayer from contesting the merits of that liability in a later CDP hearing. As a result, so long as the taxpayer alleges a failure to communicate during the pre-assessment administrative hearing, the question of who was at fault for failure must be decided by trial, at which the IRS would have the burden to prove it was not at fault.
While the case will not likely become a movie, or even a gif, it is an important decision to know about. It seems to give taxpayers a potentially explosive expansion of their CDP rights.
July 27, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, July 20, 2020
I have always struggled with basis. In the 1990’s I rented out a 1-Bedroom condo. When my 1995 return was picked up for audit, a kindly revenue agent pointed out that one needs to exclude the proportionate value of land from depreciation, even for a condo. Who knew? The excess depreciation I had taken in the audited year was disallowed, resulting in increased gross income. But the agent did not make me recapture in the audit year the excess depreciation I had taken in prior years, some of which were closed. I would account for that, the agent explained, when I sold the condo. I looked up §1016 and, sure enough, one must adjust basis by the greater of depreciation allowed (actually taken) or allowable (what you shudda taken). Lesson learned.
The unhappy taxpayers in Gary Pinkston and Janice Pinkston, T.C. Memo. 2020-44 (April 13, 2020)(Judge Lauber) learned a harsher lesson: they may have to recapture over $1.1 million of prior years’ excess depreciation as gross income in the year of audit. That is because §481 sometimes forces taxpayers to recapture income in the audit year that was improperly omitted in prior years. You can find the sad details on how that works below the fold.
July 20, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, July 6, 2020
Growing up, I was taught to value intelligence. My dad even had a sign in his office like the one to the right: his read “life is hard, especially if you’re stupid.”
Being smart surely brings many advantages in life, but we learn today why it serves as a disadvantage when seeking spousal relief under §6015. Getting spousal relief is hard; it's harder if you are smart.
In John E. Rogers and Frances L. Rogers v. Commissioner, T.C. Memo. 2020-91 (June 18, 2020) (Judge Goeke), the court denied spousal relief to Mrs. Rogers because it found her too smart to qualify. It is a useful lesson as many of us prepare our own joint returns for 2019.
Details below the fold.
July 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, June 29, 2020
Congress keeps expanding the Tax Court’s subject matter jurisdiction. A recent expansion came in 2015 in the cutesy-cutesy named Fixing America’s Surface Transportation Act (FAST Act, get it?), 129 Stat. 1312. There Congress created §7345 as a revenue offset. That new section authorizes the IRS to periodically give lists of seriously delinquent taxpayers to the State Department, who is then supposed to deny their passport applications or even yank their passports. Taxpayers upset at the IRS ratting them out to the State Department can seek judicial review either in the Tax Court or in a federal district court.
Section 7345 is simple in theory but complex in execution. Last week’s case of Vivian Ruesch v. Commissioner, 154 T.C. No. 13 (June 25, 2020) (Judge Lauber) teaches that the Tax Court’s §7345 jurisdiction is like the Cheshire Cat: it can appear and disappear multiple times with respect to the same taxpayer and the same tax liabilities. Details below the fold.
June 29, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, June 22, 2020
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.
June 22, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, June 15, 2020
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.
June 15, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, June 8, 2020
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.
June 8, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Tuesday, May 26, 2020
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.
May 26, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, May 18, 2020
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.
May 18, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, May 11, 2020
A 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.
May 11, 2020 in Bryan Camp, Coronavirus, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, May 4, 2020
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.
May 4, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, April 20, 2020
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.
April 20, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, April 13, 2020
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.
April 13, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, April 6, 2020
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.
April 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Thursday, April 2, 2020
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:
- Whether the IRS may apply the recovery rebate credits (including stimulus checks) under section 6402 to reduce certain outstanding debts; and
- 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.
April 2, 2020 in Bryan Camp, Tax, Tax News, Tax Practice And Procedure | Permalink
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Monday, March 30, 2020
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.
March 30, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, March 23, 2020
Celebrities 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.
March 23, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, March 16, 2020
Taxpayer 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.
March 16, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, March 2, 2020
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.
March 2, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, February 24, 2020
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.
February 24, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, February 17, 2020
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.
February 17, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, February 10, 2020
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.
February 10, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, February 3, 2020
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.
February 3, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, January 27, 2020
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.
January 27, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, January 13, 2020
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.
January 13, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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Monday, January 6, 2020
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.
January 6, 2020 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure | Permalink
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