The Tax Court in Brief June 22 – 26, 2020

The Tax Court in Brief – June 22nd – 26th, 2020 

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.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

The Week of June 22 – 26, 2020

• Lloyd v. Comm’r, T.C. Memo. 2020-92 | June 22, 2020 | Halpern, J. | Dkt. No. 12309-17
• Plateau Holdings, LLC, Waterfall Development Manager, LLC, TMP v. Comm’r, T.C. Memo. 2020-93
• Lumpkin One Five Six, LLC v. Comm’r, T.C. Memo. 2020-94
• Vivian Ruesch v. Comm’r, 154 T.C. No. 13 | June 25, 2020 | Lauber, J. | Dkt. No. 6188-19P

Lloyd v. Comm’r, T.C. Memo. 2020-92 

June 22, 2020 | Halpern, J. | Dkt. No. 12309-17

• Opinion

Short Summary:   From 2005 through 2010, Mr. Lloyd operated several religious-focused websites and internet-based radio stations (collectively, Christian Media Network).  Christian Media Network sold religious products, such as DVDs, books, Bibles, health and survival products, and videos.  In addition, Christian Media Network charged subscribers for DVDs of videos or for hard copies of written materials.  Mr. Lloyd did not file any income tax returns for 2005 through 2010 reporting the income from Christian Media Network.

The IRS summonsed Mr. Lloyd’s bank records and determined he had sales related to his operations of Christian Media Network for the 2005 through 2010.  On the basis of those records, the IRS prepared a substitute-for-return (SFR) for each of those years proposing assessments of income tax against Mr. Lloyd.  In addition, the IRS imposed the failure-to-file penalty, or alternatively, the penalty for fraudulent failure to file.  At trial, the IRS conceded the fraudulent failure to file penalty.

During trial, Mr. Lloyd argued that he is not subject to income tax because the income tax laws are “null and void.” Alternatively, Mr. Lloyd argued that he was not subject to income tax because he was functioning as a church and subject to a religious exemption.

Key Issue:  Whether Mr. Lloyd is:  (1) subject to income tax on proceeds he received from Christian Media Network sales; (2) liable for self-employment tax; and (3) liable for the failure-to-file and pay penalties under Section 6651(a).  In addition, on the Court’s own motion, whether Mr. Lloyd is subject to Section 6673 penalties for frivolous or baseless positions.

Primary Holdings: 

• Lloyd is subject to tax on the sales from Christian Media Network because his arguments that: (1) the income tax is null and void is devoid of merit; and (2) his “functioning as a church” exempts him from tax is also meritless.  Similarly, Mr. Lloyd is subject to self-employment tax because:  (1) he carried on an internet business; and (2) alternatively, he failed to provide evidence that he was an ordained or licensed minister or that he submitted a Form 4361, Application for Exemption from Self-Employment Tax for Use by Minsters, Members of Religious Orders and Christian Science Practitioners.    Moreover, Mr. Lloyd is subject to penalties for failure-to-timely file and pay returns for the years at issue because he has presented no evidence of reasonable cause and a lack of willful neglect.  Finally, Mr. Lloyd is subject to a Section 6673 penalty of $2,500 for the positions he argued during the Tax Court proceedings.

Key Points of Law:

• Section 1(c) imposes a tax on the taxable income of individuals, and individuals receiving gross income in excess of certain minimum amounts are required to file income tax returns. Section 6012(a)(1); Treas. Reg. § 1.6012-1(a).
• Section 61(a) defines gross income as “all income from whatever source derived,” which includes business income, Section 61(a)(2), and “gains derived from dealings in property,” Section 61(a)(3).
• The term “gross income” is construed broadly and extends to all accessions to wealth over which the taxpayer has complete dominion. Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).  As the Supreme Court explained, a gain “constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.”  Rutkin v. U.S., 343 U.S. 130, 137 (1952).  “A taxpayer has dominion and control when the taxpayer is free to use the funds at will.”  Gardner v. Comm’r, T.C. Memo. 2013-67, aff’d, 845 F.3d 971 (9^th 2017).
• Gross income is reduced to taxable income by the subtraction of allowable deductions. See Section 63(a).
• When a taxpayer fails to maintain or produce adequate records, the Commissioner may reconstruct his income by using any reasonable means. See, e.g., Petzoldt v. Comm’r, 92 T.C. 661, 693 (1989); Worth v. Comm’r, T.C. Memo. 2014-232, aff’d, 666 F. App’x 692 (9^th 2016).  The specific-item method is a direct method of income reconstruction, which reconstructs income from evidence of specific receipts received by a taxpayer and not reflected on the taxpayer’s return.  See Estate of Beck v. Comm’r, 56 T.C. 297, 353, 361 (1971).
• In merchandising business, gross income means total sales less the cost of goods sold. Reg. § 1.61-3(a); Treas. Reg. § 1.162-1(a).
• Ministers may be entitled to exclude the rental value of a parsonage from gross income, Section 107, but they are taxable on the income they earn from ministering, White v. Comm’r, T.C. Memo. 1981-147.
• Section 6651(a)(1) imposes an addition to tax for failure to timely file a tax return. The addition equals 5% of the amount required to be shown as tax on the delinquent return for each month or fraction thereof during which the return remains delinquent, up to a maximum addition of 25% for returns of more than four months delinquent.  6651(a)(1).  The addition to tax does not apply if the failure to timely file is due to reasonable cause and not to willful neglect.  Id.
• Section 6651(a)(2) imposes an addition to tax for failure to timely pay the amount of tax shown on a return, unless the taxpayer establishes that the failure was due to reasonable cause and not willful neglect. The addition is calculated as 0.5% of the amount shown as tax on the return but not paid, with an additional 0.5% for each month or fraction thereof during which the failure to pay continues, up to a maximum of 25%.
• When a tax return has not been filed, the Section 6651(a)(2) addition to tax may not be imposed unless the Commissioner has prepared an SFR that meets the requirements of Section 6020(b). Wheeler v. Comm’r, 127 T.C. 200, 208-209 (2006), aff’d, 521 F.3d 1289 (10^th 2008).  An SFR meets the requirements of Section 6020(b) if it is subscribed, purports to be a return, and shows sufficient information from which to compute the taxpayer’s tax liability.  See, e.g., Gleason v. Comm’r, T.C. Memo. 2011-154.
• Section 1401 imposes a tax on self-employment income of every individual. Self-employment income is defined as “the net earnings from self-employment derived by an individual . . . during any taxable year.”  Section 1402(b).  The term “net earnings from self-employment” is defined as “the gross income derived by an individual from any trade or business carried on by such individual, less the deductions . . . which are attributable to such trade or business.”  Section 1402(a).  Individuals whose net earnings from self-employment equal or exceed $400 during the tax year are required to report such income.  Section 6017.  Self-employment tax is assessed and collected as part of the income tax, must be included in computing any income tax deficiency or overpayment for the applicable tax period, and must be taken into account for estimated tax purposes.  Section 1401; see also Reg. § 1.1401-1(a).
• Section 1402(c)(4) provides that the term “trade or business” does not include “the performance of service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry” if an exemption under Section 1402(e) is effective for the minister. Wingo v. Comm’r, 89 T.C. 922, 929 (1987).  If an individual who is a qualified minister does not file the application for exemption within the prescribed time, the individual is subject to self-employment tax.  Section 1402(e).
• Section 6673(a)(1) provides a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or the taxpayer’s position in the proceeding is frivolous or groundless. “A taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.”  Goff v. Comm’r, 135 T.C. 231, 237 (2010).  “The purpose of Section 6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate.”  Takaba v. Comm’r, 119 T.C. 285, 295 (2002).  The Tax Court may, on its own initiative, impose the penalty.  g., Hamilton v. Comm’r, T.C. Memo. 2009-271.

Insight:  This is the second week in a row that the Tax Court had to resolve a “tax protestor” argument.  As Lloyd shows, the Tax Court generally has little patience with taxpayers who make arguments that have been found baseless and meritless.

Plateau Holdings, LLC, Waterfall Development Manager, LLC, TMP v. Comm’r, T.C. Memo. 2020-93 

June 23, 2020 | Lauber, J. | Dkt. No. 12519-16

• Opinion

Short Summary:  Plateau Holdings, LLC (Plateau), a partnership for federal tax purposes, donated conservation easements related to two parcels of real property in Tennessee to Foothills Land Conservancy (Conservancy), a tax-exempt organization.  However, eight days before Plateau made this donation, an investor acquired, in an arm’s length transaction, a 98.99% indirect ownership interest in Plateau for less than $6 million.  On its 2012 federal income tax return (Form 1065), Plateau claimed a roughly $25.5 million charitable contribution deduction for the donation.

After audit, the IRS issued Plateau’s TMP a notice of final partnership administrative adjustment (FPAA) that disallowed the charitable contribution for donation of real property and determined a 40% gross valuation misstatement penalty under Section 6662(e) and (h).

Key Issue:  Whether Plateau:  (1) may claim a charitable contribution deduction for the conservation easements; and (2) is liable for the gross valuation misstatement penalty.

Primary Holdings: 

• Because the easement deeds fail to satisfy the “protected in perpetuity” requirement (i.e., the Conservancy is not absolutely entitled to a proportionate share of proceeds in the event of a sale following extinguishment of the deed), Plateau is not entitled to a charitable contribution deduction. In addition, because Plateau substantially overvalued the donation of property rights to Conservancy, Plateau is liable for the gross valuation misstatement penalty.

Key Points of Law:

• Section 170(a)(1) allows a deduction for any charitable contribution made within the tax year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property when the gift is made.  Reg. § 1.170A-1(c)(1).
• The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Section 170(f)(3)(A).  But there is an exception to this rule for a “qualified conservation contribution.”  Section 170(f)(3)(B)(iii).  Tis exception applies where:  (1) the taxpayer makes a contribution of “qualified real property interest,” (2) the donee is a “qualified organization,” and (3) the contribution is “exclusively for conservation purposes.”  Section 170(h)(1).  Generally, a deduction is allowable for easements if the conservation purpose if “protected in perpetuity.”  Section 170(h)(5)(A).
• The rules governing judicial extinguishment appear in Treas. Reg. § 1.170A-14(g)(6).  They provide that the donor must agree, when making the gift, that the easement gives rise to a property right in the donee having an FMV “that is at least equal to the proportion value that the . . . [easement] at the time of the gift, bears to the value of the property as a whole at that time.”  In the event of a sale following judicial extinguishment of the easement, the donee “must be entitled to a portion of the proceeds at least equal to that proportionate value.”    “In effect, the ‘perpetuity’ requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee ‘exclusively for conservation purposes.’” Coal Prop. Holdings, 153 T.C. at 136.  The requirements of this regulation “are strictly construed.”  Carroll v. Comm’r, 146 T.C. 196, 212 (2016).
• The Code imposes a 40% penalty in the case of any “gross valuation misstatement.” Section 6662(e), (h)(1).  A misstatement is “gross” if the value of property claimed on a return is 200% or more of the correct amount.  Section 6662(e)(1)(A), (h)(2)(A)(i).  In the case of a partnership such as Plateau, “[t]he determination of whether there is a substantial or gross valuation misstatement . . . is made at the entity level.”  Reg. § 1.6662-5(h)(1).
• Generally, an accuracy-related penalty under Section 6662 is not imposed if the taxpayer demonstrates “reasonable cause” and shows that he “acted in good faith with respect to . . . [the underpayment].” Section 6664(c)(1).  However, this defense is not available “[i]n the case of any underpayment attributable to a . . . gross valuation over statement . . . with respect to charitable deduction property.”  Section 6664(c)(3).
• The deduction allowable for a gift of property is generally equal to the FMV of the property when the gift is made. Reg. § 1.170A-1(c)(1).  The regulations define FMV as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”  Id.  Determining the FMV of contributed property entails a factual inquiry.  See Estate of DeBie v. Comm’r, 56 T.C. 876, 894 (1971).
• The Tax Court evaluates an expert’s opinion in light of his qualifications and the evidence in the record. See Parker v. Comm’r, 86 T.C. 547, 561 (1986).  When experts offer differing estimates of FMV, the Tax Court weighs those estimates by examining (among other things) the factors they considered in reaching their conclusions.  See Casey v. Commissioner, 38 T.C. 357, 381 (1962).
• The Tax Court is not bound by an expert opinion that it finds contrary to its judgment. Moreover, the Tax Court may accept an expert’s opinion in its entirety, or may be selective as to the portions it finds reliable.  See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938).  The Tax Court may also determine FMV on the basis of its own examination of the record evidence.  Silverman v. Comm’r, 538 F.2d 927, 933 (2d Cir. 1976).
• If there is a substantial record of sales of easements comparable to the donated easement, the FMV of the donated easement is generally determined by reference to those sales prices. Reg. § 1.170A-14(h)(3)(i).  In the absence of such evidence the FMV of the donated easement “is equal to the difference between the . . . [FMV] of the property it encumbers before the granting of the restriction and the . . . [FMV] of the encumbered property after the granting of the restriction.”  Id.

Insight:  The IRS has targeted syndicated contribution easements such as the one in Plateau.  However, on June 25, 2020, the IRS offered a settlement for those taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions.  See IR-2020-130 (June 25, 2020).  The settlement, if accepted by the taxpayer, would require a concession of the income tax benefits the taxpayer received from the charitable contribution deduction.  In addition, the following requirements would have to be met:  (1) all partners must agree to settle and the partnership must pay the full amount of tax, penalties and interest before settlement; (2) partners may deduct the cost of acquiring their partnership interests and pay a reduced penalty of 10% to 20% depending on the ratio of the deduction claimed to partnership investment; and (3) partners who provided services in connection with any syndicated conservation easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with no deduction for costs.  Taxpayers eligible for this offer will be notified by letter.

Lumpkin HC, LLC v. Comm’r, T.C. Memo. 2020-95 

June 23, 2020 | Kerrigan, J. | Dkt. No. 192-18

• Opinion

Short Summary: 

Lumpkin HC, LLC (Lumpkin HC) conveyed a deed of easement on most of the property to the Atlantic Coast Conservancy, Inc. (ACC), a Georgia nonprofit corporation. ACC was a “qualified organization” for purposes of section 170(h)(3). Lumpkin HC claimed an $8,242,000 charitable contribution deduction for its contribution of the conservation easement to ACC on its 2012 Form 1065, U.S. Return of Partnership Income. Lumpkin HC attached Form 8283, Noncash Charitable Contributions, to its partnership return and stated that its adjusted tax basis in the property at the time of donation was $458,502.

The IRS issued a notice of final partnership administrative adjustment (FPAA) for tax year 2012 to Hurricane Creek Partners, LLC, as tax matters partner for Lumpkin HC.  In the FPAA, respondent disallowed a $8,242,000 deduction for a noncash charitable contribution and asserted a gross valuation misstatement penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to section 6662(h).

Key Issues:

• Does the extinguishment clause in Lumpkin HC’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.
• Does the deed’s inclusion of a right to designate an acceptable development-area homesite violates section 170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs.
• Is the Treasury’s proceeds regulation based on a permissible construction of the statute?

Primary Holdings: 

• The deed granting the conservation easement reduces the donee’s share of the proceeds in the event of extinguishment by the value of improvements (if any) made by the donor. Accordingly, petitioner has not satisfied the perpetuity requirement of section 170(h)(5)(A).
• Since the deed reduces the donee’s share of the proceeds by reducing the FMV of the unencumbered property at the time of sale by any increase in value attributable to post-easement improvements before applying the proportionate distribution percentages, the conservation purpose is not protected in perpetuity.
• The construction of section 170(h)(5) as set forth in section 1.170A-14(g)(6), Income Tax Regs., is valid under Chevron. The proceeds regulation’s “proportionate value” approach is not “arbitrary, capricious, or manifestly contrary to the statute” as examined under the two-part inquiry.

Key Points of Law:

• Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income Tax Regs.
• The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property”. Sec. 170(f)(3)(A). However, there is an exception to this rule for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii). This exception applies to a “qualified conservation contribution”, which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. Sec. 170(h)(1).
• To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. (the “proceeds regulation”), the deed must guarantee that the donee will receive “a proportionate share of extinguishment proceeds”.
• When considering whether a regulation is arbitrary and capricious, the Tax Court generally employs the two-part inquiry established by Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). The first part is to inquire “whether Congress has directly spoken to the precise question at issue.” Id. at 842. If the intent of Congress is clear, there is no further inquiry.
• Where the statute is silent, the court must give deference to the interpretation embodied in the agency’s regulation unless it is “arbitrary, capricious, or manifestly contrary to the statute.”

Insight:  Lumpkin serves as yet another Tax Court case holding taxpayers to the letter of the law in the context of charitable deductions for conservation easement contributions.  The case also illustrates the so-called Chevron doctrine—the two-step process through which courts analyze the validity of administrative regulations.  That doctrine tends to be deferential to the federal agency.

Lumpkin One Five Six, LLC v. Comm’r, T.C. Memo. 2020-94 

June 23, 2020 | Kerrigan, J. | Dkt. No. 191-18

• Opinion

Short Summary: 

Lumpkin One Five Six, LLC (Lumpkin) conveyed a deed of easement to the Atlantic Coast Conservancy, Inc. (ACC), a Georgia nonprofit corporation. ACC was a “qualified organization” for purposes of section 170(h)(3).

Lumpkin claimed a $2,483,000 charitable contribution deduction for its contribution of the conservation easement to ACC on its 2012 Form 1065. Lumpkin attached to its partnership return Form 8283, Noncash Charitable Contributions, which included a supplemental statement that listed the appraised fair market value (FMV) of the unencumbered property as $2,711,000.

The IRS issued a notice of final partnership administrative adjustment (FPAA) for tax year 2012 to 156 Partners, LLC, as tax matters partner for Lumpkin. In the FPAA respondent disallowed a $2,483,000 deduction for a noncash charitable contribution and asserted a gross valuation misstatement penalty pursuant to section 6662(h)

The IRS contends that the extinguishment clause in Lumpkin’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. It further contends that the deed’s inclusion of a right to designate an acceptable development-area homesite violates section 170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs.

Key Issues:

• Does the extinguishment clause in Lumpkin HC’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.
• Does the deed’s inclusion of a right to designate an acceptable development-area homesite violates section 170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs.
• Is the Treasury’s proceeds regulation based on a permissible construction of the statute?

Primary Holdings: 

• The deed granting the conservation easement reduces the donee’s share of the proceeds in the event of extinguishment by the value of improvements (if any) made by the donor. Accordingly, petitioner has not satisfied the perpetuity requirement of section 170(h)(5)(A).
• The Court upholds the validity of the proceeds regulation and finds that the construction of section 170(h)(5) as set forth in section 1.170A-14(g)(6), Income Tax Regs., is valid under Chevron. the proceeds regulation’s “proportionate value” approach is not “arbitrary, capricious, or manifestly contrary to the statute” as examined under the two-part inquiry.

Key Points of Law:

• Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income Tax Regs.
• The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property”. Sec. 170(f)(3)(A). However, there is an exception to this rule for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii). This exception applies to a “qualified conservation contribution” which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. Sec. 170(h)(1).
• Section 170(h)(5)(A) provides that a contribution will not be treated as being made exclusively for conservation purposes “unless the conservation purpose is protected in perpetuity.” The accompanying regulation recognizes that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * can make impossible or impractical the continued use of the property for conservation purposes”. Sec. 1.170A-14(g)(6)(i), Income Tax Regs. In these circumstances the conservation purpose can be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and the easement deed ensures that the charitable donee, following the sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Id. This results in the “perpetuity” requirement being satisfied because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes”.
• To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. (proceeds regulation), the deed must guarantee that the donee will receive “a proportionate share of extinguishment proceeds”.

Insight:  Lumpkin One Five Six, LLC essentially presents a carbon copy of the issues raised in Lumpkin above. 

Vivian Ruesch v. Comm’r, 154 T.C. No. 13 

June 25, 2020 | Lauber, J. | Dkt. No. 6188-19P

• Opinion

Short Summary:  The IRS assessed penalties of $160,000 against the petitioner under I.R.C. section 6038.  The IRS certified her liability for those penalties to the Secretary of State as a “seriously delinquent tax debt” within the meaning of I.R.C. sec. 7345(b). The taxpayer filed a petition seeking three forms of relief: (1) redetermination of the penalties assessed against her, which she contends were illegally assessed; (2) a determination that the Commissioner erred in certifying her as a person having a seriously delinquent tax debt; and (3) a determination that the Commissioner erred in failing to reverse the certification.

The IRS subsequently discovered that the taxpayer had timely requested a collection due process hearing with respect to the I.R.C. sec. 6038 penalties. That request suspended collection of her tax debt so that it was no longer “seriously delinquent.” See I.R.C. sec. 7345(b)(2)(B)(i). The IRS accordingly reversed its certification as erroneous and so notified the Secretary of State.

The IRS then filed a motion to dismiss for lack of jurisdiction insofar as the taxpayer sought to challenge in this case her underlying liability for the penalties. Because the certification that the taxpayer disputed has been reversed, the IRS filed a separate motion to dismiss on the ground of mootness.

Key Issue: Whether the Tax Court is authorized to predetermine the penalties assessed under section 6038 or to determine that the IRS erred in certifying the petitioner as a person having a seriously delinquent tax debt within the meaning of I.R.C. sec. 7345(b).

Primary Holdings: 

• The Tax Court does not have jurisdiction, under I.R.C. sec. 7345 or otherwise, to consider in this case petitioner’s challenge to her underlying liability for the penalties.
• The Tax Court has jurisdiction to review the taxpayer’s challenge to the IRS’s certification of her liabilities as “seriously delinquent.” See I.R.C. sec. 7345(e). However, because the IRS has reversed that certification as erroneous and so notified the Secretary of State, the taxpayer’s challenge in that respect is moot.
• Because there remains no live controversy between the taxpayer and the IRS over which the court has jurisdiction, this case is moot.
• The section 6038 penalties assessed against petitioner are imposed by subtitle F, chapter 61, and thus lie outside the court’s deficiency jurisdiction.
• Neither section 7345 nor any other Code provision grants the Tax Court jurisdiction to consider, at this time and in this case, the petitioner’s contention that the section 6038 penalties were “illegally assessed.” However, petitioner may have a prepayment forum in the Tax Court for contesting those penalties upon her receipt of a notice of determination following completion of her CDP proceeding.
• Because petitioner has received all of the relief that she requested and that the court could grant, the court is unable to afford her any further relief with respect to her passport claims. As to those claims this case is therefore moot.

Key Points of Law:

• Although the Tax Court is an Article I court, the “case or controversy” requirement under Article III applies to the exercise of its judicial power.
• A case becomes moot when “the court can provide no effective remedy because a party has already ‘obtained all the relief that [it has] sought.’”
• Section 7345(e) limits the court’s jurisdiction to determining whether the Commissioner erred in certifying (or in failing to reverse a certification) that a tax- payer owes a “seriously delinquent tax debt” as defined in section 7345(b).
• Section 7345, enacted in 2015, is captioned “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” Section 7345(a) provides that, if the IRS certifies that a taxpayer has “a seriously delinquent tax debt,” that certification shall be transmitted “to the Secretary of State for action with respect to denial, revocation, or limitation of the taxpayer’s passport.” The IRS is responsible for notifying the taxpayer contemporaneously with the making of such certification. Sec. 7345(d).
• A “seriously delinquent tax debt” is a Federal tax liability that has been assessed, exceeds $50,000 (adjusted for inflation), is unpaid and legally enforceable, and with respect to which a lien notice has been filed or levy made. Sec. 7345(b)(1), (f). However, a seriously delinquent tax debt excludes “a debt with respect to which collection is suspended * * * because a due process hearing under section 6330 is requested or pending.” Id. subsec. (b)(2)(B)(i).
• If a certification “is found to be erroneous or if the debt with respect to such certification * * * ceases to be a seriously delinquent tax debt by reason of subsection (b)(2),” the IRS must reverse its certification and notify the Secretary of State and the taxpayer. Id. subsecs. (c)(1), (d). “In the case of a certification found to be erroneous, such notification shall be made as soon as practicable after such finding.” Id. subsec. (c)(2)(D).
• A taxpayer aggrieved by such action may petition this Court “to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” Sec. 7345(e)(1). If this Court “determines that such certification was erroneous, then the [C]ourt may order the Secretary to notify the Secretary of State that such certification was erroneous.” Sec. 7345(e)(2).
• After the IRS mails a taxpayer a timely notice of deficiency, this Court has jurisdiction to redetermine deficiencies in income, estate, and gift taxes “imposed by subtitle A or B” and deficiencies in certain excise taxes imposed by “chapter 41, 42, 43, or 44.” Secs. 6212(a), 6213(a).
• In CDP cases, the Tax Court has jurisdiction to consider a taxpayer’s challenge “to the existence or amount of the underlying tax liability * * * if the person did not re- ceive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute [it].” Sec. 6330(c)(2)(B), (d)(1). But our jurisdiction to consider such a challenge is conditioned on the IRS’ issuance of a notice of determination following completion of a CDP hearing and the taxpayer’s timely petition in response to that notice.

Insight: The case demonstrates the jurisdictional limitations of Tax Court review, as well as the nuanced statutory grants of review with respect to IRS determinations under Section 7345, which was enacted in 2015 and is captioned “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.”

For other Tax Court in Brief posts, see some of our prior posts:

• The Tax Court in Brief for the Week of June 15-19
• The Tax Court in Brief for the Week of June 8-12
• The Tax Court in Brief for the Week of June 1-7
• The Tax Court in Brief for the Week of May 25-29
• The Tax Court in Brief for the Week of May 18-22

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