The Tax Court in Brief – January 9 – 15th 2022
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.
Tax Litigation: The Week of January 9, 2022, through January 15, 2022
- Elbasha v. Comm’r, T.C. Memo. 2022-1| January 12, 2022 | Wells, J. | Dkt. No. 25192-13
- Long Branch Land, LLC v. Comm’r, T.C. Memo. 2022-2| January 13, 2022 | Lauber, J. | Dkt. No. 7288-19
Elbasha v. Comm’r, T.C. Memo. 2022-1
Short Summary: Taxpayer Elbasha, an ER doctor in rural Georgia, challenged the disallowance of most of his Schedule C deductions for two years. At trial, the IRS moved to increase the deficiencies based on a change in the status of his filing.
- Has the IRS met its burden of proof in raising new matters with respect to Elbasha’s filing status for 2008 and 2009?
- Has Elbasha substantiated his Schedule C expenses for 2008 and 2009?
- Is Elbasha liable for accuracy-related penalties for 2008 and 2009?
- Because the IRS raised a different filing status after the notice of deficiency was issued, the IRS bears the burden of proof on these matters. With respect to 2008, the IRS met its burden of proof because the evidence showed that Elbasha was married at the end of 2008, and he is not entitled to single filing status merely because his wife lives abroad. With respect to 2009, the IRS has not met its burden of proof because the evidence showed that although Elbasha was marred at the end of 2009, his wife lived abroad, which permits head-of-household filing status.
- Because Elbasha failed to show that he met the specific requirements to claim the Schedule C expenses for 2008 and 2009, the IRS’s disallowance of the expenses as deductions was sustained in full.
- Because Elbasha did not raise the penalty issue in his petition, the penalties are deemed conceded. In any event, even if Elbasha had properly raised the penalties issue in his petition, Elbasha has not shown reasonable cause.
Key Points of Law:
- The Commissioner’s determination of a deficiency is entitled to a presumption of correctness. Income tax deductions are a matter of legislative grace, and it is the burden of the taxpayer to clearly show the right to any claimed deduction. In certain circumstances, if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the proper tax liability, section 7491(a)(1) shifts the burden of proof to the Commissioner. Rule 142(a)(2). On the other hand, if the Commissioner raises a new matter, he has the burden of proof as to that matter. Rule 142(a). The Commissioner raises a “new matter” when he goes beyond the scope of the original deficiency determination. Id. at *3 (citations omitted).
- The test to determine a taxpayer’s marital status is set out in section 7703. Sec. 1(a)(1). The determination of whether an individual is married should be made at the close of the taxable year unless that individual’s spouse dies during that year. Sec. 7703(a)(1). A person is not considered married at the close of the taxable year if he either (a) is separated from a spouse under a decree of divorce or separate maintenance agreement, or (b) furnishes over half of the costs of maintaining a household that does not include the spouse but does include a certain child or children. Id. at 3.
- A person may file as a head of household only if the individual is not married at the close of the taxable year. Sec. 2(b)(1). For purposes of the head of household filing status, a taxpayer is not considered married at the close of the taxable year if that person’s spouse is a nonresident alien. Sec. 2(b)(2)(B).
- Section 162(a) allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Whether an expense is deductible is a question of fact to be decided on the basis of all relevant facts and circumstances. No deduction is allowed for personal, living, or family expenses.
- Taxpayers must maintain records sufficient to show how they determined their tax liability. Sec. 6001. A mere chart of expenses is not enough to substantiate a claimed deduction.
- If a taxpayer has proven that he paid an expense but is unable to prove the exact amount, the Court may apply the Cohan doctrine and estimate the deductible expense. See Cohan v. Commissioner, 39 F.2d 540 , 543-544 (2d Cir. 1930). “In applying the Cohan doctrine the Court bears heavily against the taxpayer whose difficulty in substantiating his deductions is of his own making. The Tax Court generally will not estimate a deductible expense, however, unless the taxpayer presents sufficient evidence to provide some basis upon which an estimate may be made.” Id. at *4 (citations and modifications omitted).
- Cohan estimate is not an option for section 274 expenses. Section 274(d) provides stricter guidelines for some types of deductions. “Under section 274, a deduction is generally disallowed for travel, meals and entertainment, gift, and listed property expenses unless the taxpayer can prove by adequate records or sufficient evidence corroborating: (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift. Sec. 274(d).” Id. at *4-5 (citations and modification omitted). These deductions will be disallowed in full unless the taxpayer meets all four elements. “While a contemporaneous log may not be required to meet these elements, the taxpayer should put forth corroborative evidence used to support a taxpayer’s reconstruction of the expenditure which must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record. In the absence of adequate records, a taxpayer may provide detailed testimony (oral or written) as to each element. Even an otherwise deductible expense may be denied without sufficient substantiation. Id. at *5 (citations and modifications omitted).
- Taxpayers may deduct home office expenses relating to a portion of the home that is used exclusively and regularly: (a) as the principal place of business for any trade or business of the taxpayer; (b) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business; or (c) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business. Sec. 280A(a), (c)(1).
- Merely having a return preparer does not shield the taxpayer from an applicable penalty. Reliance on a tax adviser may constitute reasonable cause, however, if (a) the adviser is competent, (b) the taxpayer provided requisite information to the adviser, and (c) the taxpayer relied on the adviser in good faith.” Id. at 11-12 (citations omitted).
Insight: This opinion provides a useful application of the different burdens of proof in different contexts and underscores the importance of good record-keeping (and, failing that, the need to be prepared to provide some corroborating evidence in support of claimed deductions). At every step of the court’s analysis (from filing status, through disallowed deductions, to penalties), the taxpayer could have improved his results with better records and corroborating evidence.
Long Branch Land, LLC v. Comm’r, T.C. Memo. 2022-2
Short Summary: The IRS disallowed a charitable contribution deduction claimed by Long Branch Land, LLC, related to a conservation easement. The IRS also determined that accuracy-related penalties were appropriate. After the taxpayer filed a petition challenging the IRS’s determinations in the Tax Court, the taxpayer moved for partial summary judgment on the issue of whether the IRS complied with Section 6751(b).
Key Issues: Whether the IRS complied with the written managerial approval requirement of Section 6751(b)?
Primary Holdings: The IRS complied with Section 6751(b) because: (1) there is no evidence that the immediate supervisor lacked authority to make the penalty determination at all relevant times; and (2) the presumption of regularity supports the actions of the IRS officer in this case.
Key Points of Law:
- The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FLP Grp., Inc. & Subs. v. Comm’r, 116 T.C. 73, 74 (2001). The Tax Court may grant summary judgment regarding an issue if there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b).
- Section 6751(b) provides that no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination. In a TEFRA case such as this, supervisory approval generally must be obtained before the FPAA is issued to the partnership. See Palmolive Bldg. Inv’rs, LLC v. Comm’r, 152 T.C. 75, 83 (2019). If supervisory approval was obtained by that date, the partnership must establish that the approval was untimely, e., “that there was a formal communication of the penalty before the proferred approval” was secured. See Frost v. Comm’r, 154 T.C. 23, 35 (2020).
- “The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties.” Pietanza v. Comm’r, 92 T.C. 729, 739 (1989), aff’d, 935 F.2d 1282 (3d Cir. 1991). Indeed, “it is the settled general rule that all necessary prerequisites to the validity of an official action are presumed to have been complied with.” Lewis v. U.S., 279 U.S. 63, 73 (1929).
- Although the Internal Revenue Code does not define the term “immediate supervisor,” the Tax Court has held that such term means “the person who supervises the agent’s substantive work on an examination.” Sand Inv. Co., LLC v. Comm’r, 157 T.C. ___ (Nov. 23, 2021).
Insights: The decision in Long Branch Land demonstrates that in many instances, the taxpayer must rebut the IRS’s “presumption of regularity,” i.e., that government agencies and employees are presumed to discharge their official duties, in the absence of clear evidence to the contrary. In some instances, as in this case, that presumption may carry the day.
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, and 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.