The Tax Court in Brief March 22 – March 26, 2021
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
The Week of March 22 – March 26, 2021
American Limousines, Inc. v. Comm’r
Short Summary: American Limousines, Inc. (the “Company”) owed approximately $1.2 million of unpaid employment taxes for 2009 through 2016. The Company provided the IRS with various financial information and requested an installment agreement of $2,000 per month. Alternatively, the Company requested its IRS account be placed in currently not collectible (CNC) status. The IRS determined that an installment agreement of approximately $23,000 per month was appropriate and denied the Company’s proposed installment agreement. The IRS also refused to place the Company’s IRS account in CNC status.
- Whether the IRS abused its discretion in rejecting the Company’s proposed collection alternatives to the proposed levy?
- The IRS did not abuse its discretion in proceeding with the proposed levy.
Key Points of Law:
- Section 6320 and Section 6330 provide a taxpayer the right to notice and the opportunity for an Appeals hearing before the Commissioner can collect unpaid tax by means of a lien or a levy against the taxpayer’s property. If a taxpayer requests a CDP hearing, the Appeals officer conducting the hearing must verify the requirements of any applicable law or administrative procedure have been met. 6320(c), Sec. 6330(c)(1). The taxpayer may raise at the hearing any relevant issue relating to the unpaid tax or the collection action, including challenges to the appropriateness of collection actions and offers of collection alternatives. Sec. 6330(c)(2)(A). Section 6330(d)(1) permits a taxpayer to petition the Tax Court for review of a determination under Section 6320 or 6330.
- In reviewing for abuse of discretion, the Tax Court must uphold Appeals’ determination unless it is arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Comm’r, 125 T.C. 301, 308, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). The Tax Court limits our review of Appeals’ determination to issues raised by the taxpayer. See Lunsford v. Comm’r, 117 T.C. 183, 188 (2001).
- Section 6159(a) authorizes the Secretary to enter into a written agreement allowing a taxpayer to pay tax in installments if the Secretary determines the “agreement will facilitate full or partial collection of such liability.” The decision to accept or reject an installment agreement lies within the discretion of the Commissioner. Reg. § 301.6159-1(a), (c)(1)(i). If an Appeals officer follows all statutory and administrative guidelines and provides a reasoned and balanced decision, the Tax Court will not reweigh the equities. See Rebuck v. Comm’r, T.C. Memo. 2016-3.
- The IRM provides that installment agreements “should reflect the taxpayers’ ability to pay on a monthly basis throughout the duration of agreements.” IRM pt. 188.8.131.52(4) (9/19/14). In addition, it is not an abuse of discretion for a SO to reject a proposed installment agreement when a taxpayer’s monthly income does not support the proposed payment. Hills Res. Care, Inc. v. Comm’r, T.C. Memo. 2017-98, at *14; Lipson v. Comm’r, T.C. Memo. 2012-252.
- The IRS has determined that he will remove form his active inventory accounts that are currently not collectible. See IRM pt. 184.108.40.206.14(2) (Nov. 19, 1980) (Policy Statement 5-71). As a general rule, accounts will be reported as currently not collectible when the taxpayer has no assets or income why are, by law, subject to levy. The account of a business corporation that remains in business and is current in its tax obligation but is unable to pay back taxes may be classified as currently not collectible if enforcement cannot be taken because the business has no distrainable accounts receivable or other receipts or equity in assets. IRM pt. 220.127.116.11.7(1) (8/25/14). The Tax Court has held in a number of cases that a settlement officer’s denial of CNC status is not an abuse of discretion where the taxpayer lacks sufficient income to pay its tax debt but owns assets that could be liquidated to provide funds to satisfy that debt. E.g., Clues v. Comm’r, T.C. Memo. 2015-209; Riggs v. Comm’r, T.C. Memo. 2015-98.
Insight: This decision shows the extremely deferential review the Tax Court provides to the IRS with respect to a taxpayer’s proposed collection alternative during a Collection Due Process proceeding.
Martin v. Comm’r, T.C. Memo. 2021-35
Short Summary: The IRS examined the taxpayers’ 2009 and 2010 joint income tax returns. After the exam concluded, the IRS issued a notice of deficiency determining the taxpayer had unreported income. In addition, the notice of deficiency denied certain losses from prior years, disallowed certain deductions related to taxpayer-husband’s business, and determined that penalties were appropriate.
- Whether the taxpayers had additional, unreported income; were permitted to claim certain deductions; and were liable for the late-filing penalty and the accuracy-related penalty?
- The taxpayers failed to rebut the presumption of correctness in the notice of deficiency; accordingly, the taxpayers had additional, unreported income and were entitled only to the deductions already permitted and conceded by the IRS in the notice of deficiency. In addition, the taxpayers are liable for the late-filing penalty because they failed to provide reasonable cause to excuse the penalty. However, the taxpayers are not liable for the accuracy-related penalty because the IRS failed to meet its burden of production in showing that the proper IRS manager provided written managerial approval of such penalty.
Key Points of Law:
- Generally, there is a presumption of correctness to the Commissioner’s notices of deficiency, and it is the taxpayers’ burden to prove otherwise. Welch v. Helvering, 290 U.S 111, 115 (1933). But, if a case is appealable to the Ninth Circuit, as here, the Commissioner must first show some evidence which would support an inference of the taxpayer’s involvement in the activity during the year at issue for the presumption to apply. Weimerskirch v. Comm’r, 596 F.2d 358, 361 (9th 1979), rev’g 67 T.C. 672 (1977).
- If a taxpayer does not keep adequate records of income, the IRS may reconstruct it, see 6001, 446(b), and may analyze the taxpayer’s bank deposits to do so. See Palmer v. IRS, 116 F.3d 1309, 1312 (9th Cir. 1997). A bank deposit analysis assumes that all money deposited in a taxpayer’s bank account during a given period is taxable income, and unexplained deposits are considered prima facie of income. See Tokarski v. Comm’r, 87 T.C. 74, 77 (1986). Taxpayers then have the burden to show that such deposits shouldn’t be taxed because they were inheritances, loan proceeds, transfers from another personal account, or other nontaxable transfers. Palmer, 116 F.3d at 1312.
- A cash-method taxpayer who receives a check must include the amount in income in the year in which the taxpayer receives it, even if not cashed until the following year. Kahler v. Comm’r, 18 T.C. 31, 34-35 (1952). But, for accrual basis taxpayers, income must be recognized when such income meets the all-events test. See 451(b); Treas. Reg. § 1.446-1(c)(1)(ii). Generally, all events fix a right to income on the earliest of the following: (1) the date payment is received; (2) the date payment is due; or (3) the date of performance. Harkins v. Comm’r, T.C. Memo. 2001-100.
- Section 172(a) allows a deduction for an NOL for any tax year in an amount equal to the sum of: (1) the NOL carryovers to such year; and (2) the NOL carrybacks to such year. The Code defines an NOL as the excess of deductions allowed by chapter 1 of the Code over the gross income, subject to certain modifications. See 172(c). Taxpayers may elect to forego a NOL carryback, but without a timely action they must carry NOLs back before they can carry them forward. Sec. 172(b)(2), (3). An election to waive a carryback must be made by the due date of the return for the tax year of the NOL for which the election is to be in effect. Sec. 172(b)(3).
- To substantiate an NOL, a taxpayer must meet his or her burden of establishing the existence as well as the amount that may be carried over to the years at issue. Powers v. Comm’r, T.C. Memo. 2013-134.
- Section 162(a) allows a taxpayer to deduct ordinary and necessary expenses, including legal expenses that are related to a taxpayer’s business. See Levenson & Klein, Inc. v. Comm’r, 67 T.C. 694, 720-21 (1977). Section 212 also allows individuals to deduct ordinary and necessary expenses paid or incurred for the production of income; or for the management, conservation, or maintenance of property held for the production of income. 212(1) and (2). To be deductible under either section, the expenses must not be personal and must also not be capital—capital expenditures have to be added to the basis of the capital asset and taken into account either through depreciation or in calculating any capital gain or loss when the asset is sold. Sec. 262(a), 263(a); Woodward v. Comm’r, 397 U.S. 572, 574-75 (1970).
- For legal expenses, the origin and character of the claim, rather than the taxpayer’s primary purpose in litigating the claim governs the proper characterization for federal tax purposes. Boagni v. Comm’r, 59 T.C. 708, 712 (1973). In determining the origin of any given claim, the Tax Court looks to all of the facts and circumstances, but the most important is how the litigation arose. See Gilmore, 372 U.S. at 49. For example, legal fees a taxpayer pays to defend his title to property are nondeductible capital expenditures. See Reed v. Comm’r, 55 T.C. 32, 40-41 (1970).
- Section 280A disallows deductions for the business use of a taxpayer’s home. But, there are exceptions. For example, a deduction may be claimed for certain business use of a designated portion of a taxpayer’s home so long as it is exclusively used on a regular basis: (1) as the taxpayer’s principal place of business; (2) as a place of business which is used by the taxpayer to meet with patients, clients, or customers, or (3) in connection with the taxpayer’s trade or business where the workspace is a separate structure not attached to the taxpayer’s home. 280A(c)(1). There is also an exception for any space that is used on a regular basis as a storage unit for the inventory held for use in the taxpayer’s business—but only if the taxpayer’s home is the sole fixed location of such trade or business. Id.
- The Code imposes an addition to tax when taxpayers do not file their return on time. 6651(a)(1). Taxpayers can avoid this penalty with proof that their failures were due to reasonable cause and not willful neglect. U.S. v. Boyle, 469 U.S. 241, 245 (1985).
- Section 6662(a) and (b)(2) imposes a 20% penalty when there is any substantial understatement of income tax. An understatement is substantial if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Id. Taxpayers are also liable for an accuracy-related penalty if they failed to make a reasonable attempt to comply with the provisions of the internal revenue laws. Reg. § 1.6662-3(b)(1).
- As part of the IRS’ burden of production with respect to accuracy-related penalties, the IRS must show that such penalties were personally approved in writing by the immediate supervisor of the individual making such determination. 6751(b); Graev v. Comm’r, 149 T.C. 485, 493 (2017).
Insight: Although the taxpayers in Martin lost on most issues, the taxpayers succeeded in having the accuracy-related penalty waived due to the IRS’ failure to comply with Section 6751(b). Taxpayers should continue to challenge penalties in any petition they file with the Tax Court.
Need assistance litigating in the U.S. Tax Court? Freeman Law’s tax attorneys are experienced litigators with trial-tested litigation skills and in-depth substantive tax knowledge, having collectively litigated hundreds of cases before the U.S. Tax Court. Our tax controversy lawyers have extensive experience in Tax Court matters involving partnership audits and litigation under both the TEFRA and BBA regimes, international tax penalties, foreign trusts, valuation, reasonable compensation disputes, unreported income, fraud penalties, other tax penalties, any many other matters. We draw on our experience and wealth of tax knowledge to advise and guide clients through the entire tax controversy process, building the right strategy to resolve tax controversies from day one. Schedule a consultation or call (214) 984-3000 to discuss your Tax Court concerns or questions.