The Tax Court in Brief June 1-7, 2021

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The Tax Court in Brief June 1-7, 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.

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 1 – 7, 2020

Kroner v. Comm’r, T.C. Memo. 2020-73

June 1, 2020 | Marvel P. L. | Dkt. No. 23983-14

Short SummaryPetitioner sought review of the IRS determination that (1) transfers of funds to Petitioner during the years at issue did not constitute gifts that are excludable from gross income under section 102, and (2) the Petitioner is liable for accuracy-related penalties pursuant to section 6662.

Key Issue:  Whether the transfers made from a previous business partner to the taxpayer and taxpayer’s offshore trusts constituted gifts under section 102, and whether the IRS properly assessed the penalty under section 6662 when it delivered Letter 915 before Letter 950, and the penalty approval pursuant to section 6751(b) was made on the date between the delivery dates of the two letters.

Primary Holdings

Key Points of Law:

InsightThe Kroner case illustrates the importance of presenting credible testimony and evidence in cases involving gifts under section 102.  Specifically, the case demonstrates the importance of third-party testimony and credible documentary evidence to demonstrate the donor’s disinterested generosity.  Documentary evidence provided by an interested individual may not be enough to support the characterization of a transfer as a gift.  Further, this case illustrates that the Tax Court is interpreting section 6751(b) to bar assessment of penalties when a letter provides the right to file a protest with the Appeals Office.


Nimmo v. Comm’r, T.C. Memo. 2020-72 

June 1, 2020 | Lauber, A. | Dkt. No. 7441-19L

Short SummaryIn a collection due process case, the Petitioner sought review of the IRS determination to sustain collection actions against the Petitioner’s 2014 – 2017 tax years.  The Tax Court granted summary judgment against the Petitioner.

Key Issue:  The Tax Court’s review of an IRS administrative determination in a collection due process case will focus on potential “abuse of discretion” by the IRS when there is no dispute as to the taxpayer’s underlying tax liability.

Primary Holdings

Key Points of Law:

InsightThe Nimmo case illustrates the need for a taxpayer to submit the requested information and documentation to a settlement officer during a collection due process hearing.  Further, this case illustrates the need of a taxpayer in a collection due process hearing to affirmatively request a collection alternative.  This case also demonstrates the need for a taxpayer to be in compliance with all current tax obligations before attempting to enter into an installment agreement.


Estate of Bolles v. Comm’r, T.C. Memo. 2020-71 

June 1, 2020 | Goeke J. | Dkt. No. 4803-15

Short SummaryPetitioner sought a determination that advances from the decedent to her son were loans.

Key Issue:  Whether advances made by the decedent to her son were loans despite the lack of any loan agreements or attempts to force repayment.

Primary Holdings

Key Points of Law:

InsightThe Estate of Bolles case illustrates how courts will scrutinize advances to family members more deeply than in other scenarios.  Specifically, this case demonstrates that the Tax Court will only characterize advances to a family member as loans if there is an actual expectation of repayment and an intent to enforce the debt based upon the facts and circumstances.  In essence, the Tax Court can look to the financial condition of the family member receiving the advances to determine the “donor’s” expectation of repayment, and can bifurcate the characterization of the advances if the family member’s financial condition changes over time.


Sage v. Comm’r, 154 T.C. No. 12 

June 2, 2020 | Udra, P. | Dkt. No. 3372-16

Short SummaryPetitioner transferred parcels of land into liquidating trusts for the benefit of the mortgage holders of the parcels.  In years subsequent to the Petitioner’s transfer of the parcels, the liquidating trusts disposed of the parcels.  The Petitioner classified his transfer of the parcels as a loss, which gave him a net operating loss for the year.  The Petitioner carried that net operating loss deduction back and also forward.  The IRS disallowed the loss on the transfer of the parcel and also adjusted Petitioner’s tax returns for the years in which he used the net operating loss deduction.  The Tax Court found in favor of the IRS, ruling that the transfer of the parcels to the liquidating trusts was not effective as Petitioner remained the owner of the trusts, and upholding the disallowing of the loss deduction.

Key Issues:  Whether the Petitioner’s transfer of parcels of land into liquidating trusts for the benefit of the parcels’ mortgage holders transferred ownership of the parcels to the beneficiaries of the trust within the meaning of the “grantor” trust provisions?

Primary Holdings

Key Points of Law:

InsightThe Sage case illustrates the importance and necessity of involving creditors, and seeking their approval, before the creation of a liquidating trust.  As shown in the Tax Court’s ruling, if the debtor unilaterally creates a liquidating trust, the effect is that a grantor trust has been created with debtor as the owner of the trust for federal tax purposes.


McCarthy v. Comm’r, T.C. Memo. 2020-74 

June 3, 2020 | Thornton, J. | Dkt. No. 5911-18

Short Summary The IRS issued a notice of deficiency to the taxpayer, determining additional tax was owed and proposing an accuracy-related penalty.

The taxpayer, a certified public accountant (C.P.A.) and M.B.A., testified that in 2010 he purchased from a friend (Rogers) a 32.5% interest in the “Hermosa Beach” property, which he financed through an interest-bearing loan from the friend.  During 2015, however, he made no cash payments with respect to the purported loan and made no monetary contributions for taxes, insurance, or maintenance of the property.

On Schedule A, Itemized Deductions, the taxpayer, a cash basis taxpayer, reported total mortgage interest paid of $48,514, which was the sum of: (1) $18,712 as reported on Forms 1098, Mortgage Interest Statement, with respect to a rental property and (2) $29,802, described on the Schedule A with respect to the Hermosa Beach property as having been paid to “[FRIEND].”

The IRS disallowed the taxpayer’s Schedule A itemized deduction of $48,514 for mortgage interest paid, and treated $18,712 of the reported mortgage interest paid (the portion that petitioner reported as paid in connection with a rental property) as properly reported on Schedule E rather than on Schedule A.

The IRS, however, disallowed in its entirety the $29,802 mortgage interest reported as paid to “RODGERS [the FRIEND],” which gave rise to the primary dispute.

Key Issue:

Primary Holdings

Key Points of Law:

InsightTaxpayers must strictly comply with the applicable statutory requirements in order to deduct interest.  But so must the IRS when it comes to asserting most penalties.  That is, the IRS must demonstrate that “the initial determination of * * * [of the penalty was] personally approved (in writing) by the immediate supervisor of the individual making such determination” as required by section 6751(b)(1), unless a statutory exception applies.”  The IRS’s failure to satisfy this statutory requirement may give rise to a penalty defense.


Brannan Sand & Gravel Co., LLC, v. Comm’r, T.C. Memo. 2020-76

June 4, 2020 | Cohen, J. | Dkt. No. 27474-16

Short SummaryBrannan Sand & Gravel Co., LLC (Brannan Sand) mined sand and gravel deposits on property it owns.  As part of its mining process on the property, it mined cell deposits in a manner to permit construction of water storage reservoirs.  It later contributed to Silver Peaks Metropolitan District No. 1 (District), a subdivision of the State of Colorado, an undivided interest equivalent to 20% of the water storage easement it held on the property.  According to the Agreement, the District would be entitled to use the space in, over, across, on, and under the property for water storage.

Brannan Sand filed a Form 1065, U.S. Return of Partnership Income, for 2010.  It attached a Form 8283, Noncash Charitable Contributions, to the Form 1065.  However, the Form 8283 included two “Page 2” pages and did not have a “Page 1.”  In addition, the second “Page 2” had a handwritten note to “see attached appraisal.”  On the Form 8283, Brannan Sand reported that the “donor’s cost of adjusted basis” was “None” and that $200,000 was the appraised fair market value of the charitable contribution.  Attached to the Form 8283 was a letter dated August 30, 2011, signed by an individual (Flanagan) who was “not a licensed real estate appraisal.” Brannan Sand claimed a $200,000 charitable contribution deduction.

Key Issue:  Whether Brannan Sand substantiated a $200,000 charitable contribution claimed for donation of certain water storage rights.

Primary Holdings

Key Points of Law:

InsightOf note in the Brannan Sand case was that the parties submitted the case fully stipulated to the Court under Tax Court Rule 122.  Although this can save the taxpayer some expense of litigation, the submission of a case fully stipulated does not relieve the taxpayer of the burden of proof or the effect of a failure to meet such burden.  See T.C. Rule 122(b).  Moreover, under the Tax Court Rules, a failure to produce evidence in support of an issue of fact as to which the party has the burden of proof may be grounds for determination of that issue against that party.  T.C. Rule 149(b).  Because taxpayers generally bear the burden of proof, they should be careful in submitting cases fully stipulated.


Waszczuk v. Comm’r, T.C. Memo. 2020-75

June 4, 2020 | Goeke, J. | Dkt. No. 23105-18W

Short SummaryPetitioner filed Form 211, Application for Award for Original Information, which the IRS Whistleblower Office (WBO) received on March 23, 2016 (the “2016 Form”), alleging that his former employer, a section 501(c)(3) exempt organization, failed to report unrelated business income and to pay tax of $50 million over 10 years.  The taxpayer/whistleblower alleged that the organization conspired with two State-chartered agencies and numerous State government officials in its income-producing activity.

On August 3, 2018, after nearly two years with no communication from the WBO, petitioner mailed to the WBO a second Form 211 (the “2018 Form”).

Petitioner intended the 2018 Form to be an update of the 2016 Form rather than a new whistleblower claim. He checked the box on the 2018 Form marked supplemental submission and identified the 2016 Form as the one supplemented.

The WBO sent petitioner a letter titled “Final Decision Letter Under Section 7623(a),” dated August 7, 2018, stating that it considered the 2016 Form and rejected the whistleblower claim “because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

The Taxpayer did not file a petition with respect to this rejection within the 30-day filing period.

The WBO sent petitioner a subsequent letter titled “Final Decision Letter Under Section 7623(a),” dated October 23, 2018, stating that it rejected the claim filed on the 2018 Form because the “information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

On November 21, 2018, petitioner/taxpayer filed a pro se petition and attached the 2018 rejection letter.

The IRS filed a motion for summary judgment.

Key Issue:  Whether the IRS Whistleblower Office abused its discretion in rejecting petitioner’s whistleblower claims?

Primary Holdings

Key Points of Law:

InsightThe case demonstrates that IRS whistleblowers have a broad basis for jurisdiction in Tax Court to challenge the denial of a whistleblower case.  At the same time, however, it demonstrates that whistleblowers are generally not entitled to an award unless the IRS’s denial constitutes an abuse of discretion and, in any event, that no award may be available if the IRS has not initiated an administrative action against the target or collected proceeds.


Koh v. Comm’r, T.C. Memo. 2020-77 
June 4, 2020 | Greaves, J. | Dkt. No. 9033-19

Short SummaryThe taxpayer sought judgment on the pleadings with respect to penalties first asserted by IRS Chief Counsel in the Answer to the Petition.

Key Issue:  Whether IRS Chief Counsel complied with the procedural requirements of I.R.C. § 6751(b)(1).

Primary Holdings

Key Points of Law:  

InsightThe Koh decision shows that although IRS Exam may not assert penalties in the notice of deficiency, IRS Chief Counsel can assert penalties in the Answer.  Accordingly, taxpayers should weigh carefully whether it is advisable under their set of facts to file a petition in the Tax Court.


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