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
- Nimmo v. Comm’r, T.C. Memo. 2020-72 | June 1, 2020 | Lauber, A. | Dkt. No. 7441-19L
- Estate of Bolles v. Comm’r, T.C. Memo. 2020-71 | June 1, 2020 | Goeke J. | Dkt. No. 4803-15
- Sage v. Comm’r, 154 T.C. No. 12 | June2, 2020 | Udra, P. | Dkt. No. 3372-16
- McCarthy v. Comm’r, T.C. Memo. 2020-74 | June 3, 2020 | Thornton, J. | Dkt. No. 5911-18
- Brannan Sand & Gravel Co., LLC, v. Comm’r, T.C. Memo. 2020-76 | June 4, 2020 | Cohen, J. | Dkt. No. 27474-16
- Waszczuk v. Comm’r, T.C. Memo. 2020-75 | June 4, 2020 | Goeke, J. | Dkt. No. 23105-18W
- Koh v. Comm’r, T.C. Memo. 2020-77 | June 4, 2020 | Greaves, J. | Dkt. No. 9033-19
Kroner v. Comm’r, T.C. Memo. 2020-73
June 1, 2020 | Marvel P. L. | Dkt. No. 23983-14
Short Summary: Petitioner 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.
- The transfers made to the taxpayer were not excludable from gross income pursuant to section 102 The taxpayer did not provide credible evidence of the donor’s disinterested generosity.
- The IRS did abide by section 6751(b). Thus, the accuracy-related penalty was improperly assessed and not owed by the taxpayer. In applying section 6751(b), the Tax Court examines the content of an IRS letter to determine when an initial determination to assess a penalty is made. If a letter provides the taxpayer with a right to file a protest with the Appeals Office, then an initial determination has been made for the purpose of applying section 6751(b).
Key Points of Law:
- Generally, the Commissioner’s determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving otherwise. But a taxpayer that produces credible evidence with respect to any factual issue relevant to the tax liability the burden of proof on that factual issue shifts to the Commissioner.
- Gross income does not include the value of property acquired by gift. A gift is defined as a transfer to the taxpayer resulting from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.
- The most important consideration in ascertaining whether a gift has been made is the intention of the donor. But a court must make an objective inquiry into whether what is characterized as a gift in fact meets the definition of a gift.
- There is a difference between a “common law gift” and a gift under section 102. A section 102 gift is more narrowly defined and requires a detached and disinterested generosity. For example, if a donee has rendered services to a donor, the payment for the services is not a gift even if the transferor had no legal compulsion to pay the remuneration.
- The Tax Court is the trier of fact, and may credit evidence in full, in part, or not at all.
- In determining the applicability of section 102, the court’s findings “must be based ultimately on the application of the fact-finding tribunal’s experience with the mainsprings of human conduct to the totality of the facts of each case.”Commissioner v. Duberstein, 363 U.S. 278, 289 (1960).
- The Commissioner bears the burden of production with respect to the taxpayer’s liability for a section 6662(a) penalty. Once the Commissioner meets this burden, the taxpayer must present persuasive evidence that the Commissioner’s determination is incorrect.
- Section 6751(b)(1) provides that, subject to certain exceptions, no penalty 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 or such higher level official as the Secretary may designate.
Insight: The 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 Summary: In 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.
- The settlement officer did not abuse her discretion when declining to consider collection alternatives for a taxpayer who failed to file all required returns and to make required estimated payments.
Key Points of Law:
- The Tax Court reviews the settlement officer’s determination in a collection action.
- In determining whether a settlement officer abused her discretion, the Tax Court will consider whether she: (1) properly verified that the requirements of applicable law or administrative procedure were met; (2) considered any relevant issues a taxpayer raised, and (3) considered whether any proposed collection action balances the need for efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.
- A taxpayer at a collection due process hearing may propose a collection alternative, such as an offer-in-compromise or an installment agreement, but the settlement officer is not obligated to make one for the taxpayer in the event the taxpayer does not propose one.
- A settlement officer is not required to wait indefinitely for a taxpayer to submit requested documents.
- In order to enter into an installment agreement, a taxpayer must be in compliance with current taxes.
Insight: The 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 Summary: Petitioner 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.
- Certain advances to the son were not loans because the evidence demonstrated that the son’s financial situation and employment history did not warrant a conclusion that the decedent truly expected repayment. But advances made to the son while his financial situation was more favorable were loans because the decedent could expect repayment based on the son’s improved financial condition.
Key Points of Law:
- Generally, a court applies the following nine factors to determine if an advance is a gift or a loan: (1) there was a promissory note or other evidence of indebtedness, (2) interest was charged, (3) there was security or collateral, (4) there was a fixed maturity date, (5) a demand for repayment was made, (6) actual repayment was made, (7) the transferee had the ability to repay, (8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and (9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.
- The nine factors above, however, are not exclusive.
- With respect to situations involving loans to family members, an actual expectation of repayment and an intent to enforce the debt are critical to sustaining the tax characterization of the transaction as a loan.
Insight: The 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 Summary: Petitioner 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?
- The proceeds from the disposition of the parcels of land in the liquidating trusts were applied to discharge certain liabilities of the Petitioner and as such the Petitioner was the owner of the liquidating trusts after the time of the transfer and during the years of disposition, pursuant to the grantor trust provisions.
- As the Petitioner owned the liquidating trusts beyond the year that the Petitioner transferred the parcels of land, there was not a bona fide disposition of the parcels, and the Petitioner could not deduct losses on the transfer of the parcels in the year of transfer.
Key Points of Law:
- A trust grantor is treated as the owner of any portion of a trust whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be distributed to him or his spouse. 677(a)(1).
- If a trust grantor is deemed is deemed the owner of the trust, then the trust is not treated as a separate taxable entity for federal income tax purposes.
- The grantor of a trust is treated as an owner where, inter alia, trust income is used to discharge the legal obligation of the grantor.
- A liquidating trust will be taxed as a grantor trust with the creditors treated as the grantors and deemed owners when the debtor transfers its assets to the creditors in exchange for relief from indebtedness to them, and the creditors then transfers those assets to a trust for the purposes of liquidation.
- A taxpayer who unilaterally transfers assets to a trust without the involvement of the beneficiaries will not qualify as a liquidating trust and be simply treated as a grantor trust with the grantor as the owner.
Insight: The 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.
- Whether the taxpayer is entitled to deductions for qualified residence interest with respect to the real properties?
- Whether the taxpayer is liable for an accuracy-related penalty under section 6662
- The taxpayer is not entitled to the claimed Schedule A mortgage interest deduction with respect to either property.
- The IRS, however, failed to meet his burden of production with respect to the accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax.
Key Points of Law:
- The IRS’s determinations in a notice of deficiency are presumed correct, and the taxpayer generally bears the burden of proving that the determinations are incorrect.
- Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any claimed deductions.
- The taxpayer bears the burden of substantiating the amount and purpose of each expense claimed as a deduction.
- Section 163(h) prohibits an individual taxpayer from claiming a deduction for personal interest paid or accrued during the taxable year. As an exception to this rule, a deduction is generally allowable for “qualified residence interest,” which includes “acquisition indebtedness” with respect to any qualified residence of the taxpayer. Sec. 163(h)(2)(D), (3)(A)(i). Acquisition indebtedness is defined as debt that is used to acquire, construct, or substantially improve a “qualified residence” and that is secured by that residence.
- For this purpose, a “qualified residence” means:
- (I) the principal residence (within the meaning of section 121) of the taxpayer, and
- (II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)). 163(h)(4)(A)(i).
- Neither the Code nor the regulations fix the time or manner by which a taxpayer makes a selection of the “1 other residence” under section 163(h)(4)(A)(i)(II). Accordingly, making the selection in litigation is acceptable.
- Under section 163(h)(4)(A)(i)(I) “principal residence” has the same meaning as under section 121. Section 121 does not define the term “principal residence” but, subject to various limitations, allows for the exclusion of gain on the sale or exchange of property “owned and used by the taxpayer as the taxpayer’s principal residence.”
- Whether a taxpayer uses a property as his principal residence for purposes of section 121 depends upon all the facts and circumstances. Sec. 1.121-1(b)(1), Income Tax Regs. If a taxpayer alternates residency between two properties, “the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer’s principal residence.”
- The mere fact that a taxpayer rents out a property after moving out does not necessarily mean that the property has ceased to be the taxpayer’s principal residence.
- In addition to the taxpayer’s use of the property, relevant factors in determining a taxpayer’s principal residence include, but are not limited to: (1) the taxpayer’s place of employment; (2) the principal place of abode of the taxpayer’s family members; (3) the address listed on the taxpayer’s Federal and State tax returns, driver’s license, automobile registration, and voter registration card; (4) the taxpayer’s mailing address for bills and correspondence; (5) the location of the taxpayer’s banks; and (6) the location of religious organizations and recreational clubs with which the taxpayer is affiliated. Sec. 1.121-1(b)(2), Income Tax Regs.
- Pursuant to section 280A(d)(1) a dwelling unit is used as a residence if the taxpayer uses it for “personal purposes” for more than the greater of 14 days or 10% of the number of days during the taxable year that the unit is rented at a fair rental value.
- A cash basis taxpayer, such as petitioner, cannot deduct an expense incurred unless he paid it during the taxable year in cash or its equivalent.
- “[A] stated obligation to pay a fixed sum of money may be disregarded as having no value where the facts show that the parties did not contemplate that the obligation would be met.”
- The giving of a note or other evidence of indebtedness which may be legally enforceable is not in itself conclusive of the existence of a bona fide debt.
- “[U]ntil a cash basis taxpayer suffers an economic detriment, i.e., an actual depletion of his property, he has not made a payment which will give rise to an expense deduction.”
- Under section 7491(c), respondent bears the burden of production with respect to any accuracy-related penalty under section 6662(a). This burden of production includes the burden of producing evidence establishing that “the initial determination of such assessment * * * [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 Tax Court has held that the “initial determination” for section 6751 purposes occurs no later than when “proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals.”
- “Although the title of section 6662 refers to a (singular) ‘penalty’, section 6662 imposes various distinct penalties, each subpart of which must be separately approved for purposes of section 6751(b)(1).”
- For this purpose, a “qualified residence” means:
Insight: Taxpayers 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 Summary: Brannan 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.
- Brannan Sand is not entitled to a charitable contribution deduction because: (1) Flanagan was not a qualified appraiser; (2) Flanagan’s purported appraisal is not qualified regardless of Flanagan’s qualifications; (3) Brannan Sand did not strictly comply with the requirements to file a complete Form 8283; and (4) Brannan Sand did not substantially comply with those requirements.
Key Points of Law:
- The taxpayer has the burden of proving that it satisfies all requirements for a deduction claimed. INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 434, 440 (1934).
- The most important fact regarding a charitable contribution of property is the fair market value of the property at the time of the contribution. Reg. § 1.170A-1(c)(1).
- The Tax Court cannot consider opinions, even of a qualified appraiser, that are not received in evidence as proof of fair market value. See Van Der Aa Invs., Inc. v. Comm’r, 125 T.C. 1, 6-7 (2005) (indicating that an appraisal report would be inadmissible as evidence of fair market value if the author did not testify and make himself available for cross-examination); Evans v. Comm’r, T.C. Memo. 2010-207.
- If a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must obtain a qualified appraisal of such property and attach to the return such information regarding such property and such appraisal as the Secretary may require. R.C. § 170(f)(11)(c). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” The IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Comm’r, T.C. Memo. 2000-38. Failure to comply with this requirement generally precludes a deduction. See I.R.C. § 170(a)(1).
- In Oakhill Woods, LLC v. Comm’r, T.C. Memo. 2020-24 and Belair Woods, LLC v. Comm’r, T.C. Memo. 2018-159, partial summary judgment was granted in favor of the Commissioner because of a single omission from the Form 8283 appraisal summary, that is, the donor’s basis in the property.
- Reg. § 1.170A-13(c)(3)(ii) requires a qualified appraisal to include the following information: (1) a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed; (2) in the case of tangible property, the physical condition of the property; (3) the date (or expected date) of contribution to the donee; (4) the terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property contributed; (5) the name, address, and identifying number of the qualified appraiser; (6) the qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education, and membership, if any, in professional appraisal associations; (7) a statement that the appraisal was prepared for income tax purposes; (8) the date (or dates) on which the property was appraised; (9) the appraised fair market value of the property on the date (or expected date) of contribution; (10) the method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and (11) the specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.
- The Tax Court has held that no deduction is allowed for noncash charitable contributions greater than $5,000 unless the requirements of a qualified appraisal are met. See Hewitt v. Comm’r, 109 T.C. 258, 265-266 (1997), aff’d without published opinion, 166 F.3d 332 (4th 1998).
- Reg. § 1.170A-13(c)(5)(i)(A) and (B) state that a qualified appraiser is someone who either holds himself or herself out to the public as an appraiser or performs appraisals regularly, and because of the appraiser’s qualifications as described in the appraisal, the appraiser is qualified to make appraisals of the type of property valued.
- Expert opinions that disregard relevant facts affecting valuation are rejected. See Boltar, LLC v. Comm’r, 136 T.C. 326, 335 (2011).
- The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a Code provision. Durden v. Comm’r, T.C. Memo. 2012-140. Substantial compliance may be shown where the taxpayer “provided most of the information required” or made omissions “solely through inadvertence.” Hewitt v. Comm’r, 109 T.C. 258, 265 n. 10 (1997), aff’d without published opinion, 166 F.3d 332 (4th 1998). But in order to substantially comply, the taxpayer must satisfy all reporting requirements that “relate” to the substance or essence of the statute.” Bond, 100 T.C. at 41.
Insight: Of 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 Summary: Petitioner 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?
- On the basis of the record, the court found that the WBO did not abuse its discretion in rejecting petitioner’s claim.
- The IRS did not initiate an administrative action against the targets and did not collect proceeds, the two requirements for a whistleblower award. Accordingly, petitioner is not entitled to an award.
- The administrative record establishes that the WBO did not abuse its discretion when it rejected petitioner’s whistleblower claim in the 2018 rejection letter as it relates to either the 2016 or 2018 Form. The court therefore granted the IRS’s motion for summary judgment.
Key Points of Law:
- It is appropriate to construe the Tax Court’s whistleblower jurisdiction broadly. The caselaw establishes that the WBO may issue multiple appealable determinations with respect to a single whistleblower claim that confer jurisdiction to this Court.
- Section 7623(b)(4) grants to the Court jurisdiction to review the WBO’s award determinations: “Any determination regarding an award * * * may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).”
- The Court of Appeals for the D.C. Circuit held that the 30-day filing period in section 7623(b)(4) is not jurisdictional and is subject to equitable tolling.
- Section 7623(b)(1) provides for mandatory whistleblower awards of a percentage of the proceeds collected where the IRS proceeds with an administrative or judicial action and collects proceeds from the target taxpayer as a result of the whistleblower information.
- The Tax Court has jurisdiction to review for abuse of discretion the WBO’s determination to reject a claim on the basis of its failure to meet certain basic criteria without referring the claim to an IRS operating division for further review.
- The Tax Court does not have jurisdiction to review the IRS’ decision not to proceed with an administrative action against a target or authority to direct the IRS to commence an administrative or judicial action.
- If the IRS does not proceed with an administrative or judicial action, there can be no whistleblower award.
- The WBO has authority to perform an initial evaluation of a whistleblower claim to determine whether it meets minimum threshold criteria for an award and may summarily reject a claim if it does not.
Insight: The 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 Summary: The 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).
- IRS Chief Counsel may make an initial determination for purposes of I.R.C. § 6751(b)(1) in an Answer and therefore the taxpayer’s motion for partial judgment on the pleadings is denied.
Key Points of Law:
- Although the Tax Court’s Rules do not specifically provide for motions for partial judgment on the pleadings, the Tax Court has exercised its discretion to allow a party to do so. Nis Family Tr. v. Comm’r, 115 T.C. 523, 539 (2000); Brock v. Comm’r, 92 T.C. 1127, 1133 (1989).
- The granting of a motion for judgment on the pleadings is proper only where the pleadings do not raise a genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Abrams v. Comm’r, 82 T.C. 403, 408 (1984); Anthony v. Comm’r, 66 T.C. 367 (1976), aff’d without published opinion, 566 F.2d 1168 (3d Cir. 1977).
- R.C. § 6751(b)(1) provides that the “initial determination” of a penalty assessment must receive supervisory approval.
- The authority of the Chief Counsel (or his delegate) to assert additional penalties in an answer arises from his role as the IRS’ representative in the Tax Court. R.C. § 7803(b), I.R.C. § 7452. It is well established that the Commissioner may assert penalties in an answer. I.R.C. § 6214(a); Chai v. Comm’r, 851 F.3d 190, 221 (2d Cir. 2017); Graev v. Comm’r, 149 T.C. 485 (2017). Thus, it follows that his representative in this Court also has this authority. Roth v. Comm’r, T.C. Memo. 2017-248; Graev v. Comm’r, 149 T.C. at 491-492, 498; Estate of Jung v. Comm’r, 101 T.C. 412, 448 (1993).
Insight: The 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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