The Tax Court in Brief June 15 – 19, 2020

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The Tax Court in Brief June 15 – 19, 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 15 – 19, 2020

Schwager v. Comm’r, T.C. Memo. 2020-83 

June 15, 2020 | Urda, J. | Dkt. No. 17954-18L

Short SummaryIn response to a proposed levy, Mr. Schwager filed a request for a Collection Due Process (CDP) hearing.  In his CDP hearing request, he raised tax protestor arguments, including the ultra vires doctrine, delegation of authority, and the Paperwork Reduction Act.  Later, during the hearing, Mr. Schwager insisted that he was not a “taxable person” under the Code, that the Office of Appeals had no jurisdiction over him, and that he could support these positions with discovery and reference to “Positive Laws.”  The Settlement Officer closed Mr. Schwager’s case and issued a Notice of Determination concluding the proposed levy action was appropriate.  After Mr. Schwager filed his petition with the Tax Court, IRS Chief Counsel moved for summary judgment.

Key Issue:  Whether the Settlement Officer abused her discretion in concluding that the proposed levy action was appropriate.

Primary Holdings

Key Points of Law:

InsightRegrettably, there are still a few taxpayers that continue to make frivolous arguments similar to Mr. Schwager’s.  The Schwager decision stands for the position that the Tax Court will swiftly dispose of such arguments via summary judgment procedures and may, in certain instances, impose a civil penalty.

Sellers v. Comm’r, T.C. Memo. 2020-84 

June 15, 2020 | Buch, J. | Dkt. No. 5742-18

Short SummaryFor the years at issue, Mr. Sellers, a CPA, filed individual and business tax returns with the IRS.  On his individual returns and on the returns of one of his corporations, Mr. Sellers deducted nonpassive losses attributable to two passthrough entities:  King’s Dominion Investments, LLC (King’s Dominion), a partnership, and SS Marine, LLC, also a partnership.  After auditing the returns, the IRS recharacterized the losses as passive and disallowed many of his deductions, including a self-employed health insurance expense deduction.  The IRS also asserted accuracy-related penalties.

Key Issue:  Whether: (1) Mr. Sellers and his corporation had sufficient bases in the passthrough entities to deduct the reported losses; (2) Mr. Sellers materially participated in SS Marine; and (3) Mr. Sellers may deduct his self-employed health insurance expenses.  In addition, whether Mr. Sellers is liable for the accuracy-related penalty under Section 6662.

Primary Holdings

Key Points of Law:

InsightThe Sellers decision shows the importance of taxpayers maintaining sufficient books and records to substantiate items claimed on their return.  This is particularly so where a taxpayer does not engage in a business full-time and may need to show material participation in the activity.

Bidzimou v. Comm’r, T.C. Memo. 2020-85

June 15, 2020 | Paris, J. | Dkt. Nos. 16250-17, 10104-18

Short SummaryMr. Bidzimou (the taxpayer) and Ms. Bidzimou were married and had one child, BB.  However, they divorced in 2013, and pursuant to those divorce proceedings, Ms. Bidzimou was made the custodial parent with Mr. Bidzimou retaining certain “parenting time.”  The divorce court also ordered Mr. Bidzimou to pay child support and health insurance for BB, and gave him the “right to claim the child on all income tax filings.”

In addition, Mr. Bidzimou attended Butler County Community College (BCCC) at least half time and had expenses related to tuition and other education expenses.  Part of Mr. Bidzimou’s tuition and education expenses were paid pursuant to Federal Pell Grants and Federal direct student loans.

For 2015 and 2016, Mr. Bidzimou timely filed federal income tax returns.  On both returns, he claimed a dependency exemption deduction with respect to BB, head of household filing status, an additional child tax credit, and an earned income tax credit.  In addition, for 2015, he claimed the American opportunity credit and for 2016, he claimed the child tax credit.  However, he did not file with either return a Form 8832, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or equivalent declaration signed by the custodial parent.

Key Issue:  Whether Mr. Bidzimou is entitled to:  (1) dependency exemption deductions under Section 151(a) and (c) for 2015 and 2016; (2) head of household filing status under Section 1(b) and 2(b) for 2015 and 2016; (3) a child tax credit or an additional child tax credit under Section 24(a) and (d), respectively, for 2015 and 2016; and (4) earned income tax credits under Section 32(a) for 2015 and 2016.  In addition, whether Mr. Bidzimou paid qualifying tuition and related expenses over and above a Federal Pell grant award, and if so, in what year he paid those expenses.

Primary Holdings

Key Points of Law:

InsightThe Tax Cuts and Jobs Act suspended the deduction for personal and dependency exemptions for tax years 2018 through 2025.  However, the ability to claim a dependent for these years may still permit a taxpayer to be eligible for other tax benefits, such as the child tax credit, additional child tax credit, earned income credit, and head of household filing status.  As shown in Bidzimou, the taxpayer may be required to meet certain requirements and jump through certain hoops to qualify.

Moukhitdinov v. Comm’r, T.C. Memo. 2020-86 

June 16, 2020 | Colvin, J. | Dkt. No. 20240-18

Short SummaryThe taxpayers are married and filed a joint income tax return for 2013.  The IRS issued a notice of deficiency but inadvertently added “946” to the end of the taxpayers’ proper zip code:  10017-3522.  Later, when the taxpayers failed to respond, the IRS issued a collection notice with the same erroneous zip code.  However, the taxpayers responded to the collection notice.  Almost 20 months after the notice of deficiency deadline, the taxpayers petitioned the Tax Court.

Key Issue:  Whether the Tax Court has jurisdiction over the petition filed by the taxpayers.

Primary Holdings

Key Points of Law:

InsightForms 3877, Firm Mailing Book for Accountable Mail, are used by the U.S. Postal Service to internally track mail.  In this case, the IRS introduced into evidence two Forms 3877, dated November 1, 2016, which included a list of items being sent by the “IRS Detroit Computing Center.”  Generally, the IRS will use these forms and testimony of a U.S. Postal employee to try to prove that a notice of deficiency was mailed on a certain date if the taxpayer disagrees.

Abrego v. Comm’r, T.C. Memo. 2020-87 

June 16, 2020 | Copeland, J. | Dkt. No. 23713-17

Short SummaryDuring 2015, Mr. Abrego was a driver and, in his spare time, ran a small business preparing tax returns, mostly for friends and family members.  Mrs. Abrego was a housekeeper.  Although Mr. Abrego was eligible for Medicare during 2015, the Abregos nevertheless purchased private health insurance because they expected to receive the premium assistance tax credit (PTC) under the Patient Protection and Affordable Care Act (ACA).  The health plan the Abregos enrolled in required them to pay monthly premiums of $1,029.01.

Under the ACA, the U.S. Department of Treasury offset the cost of the Abregos’ plan premiums by making monthly advance PTC payments to the plan on the Abregos’ behalf.  Thus, Treasury paid the plan 10 monthly installments of $921 for a total of $9,210 during 2015.  During those 10 months, the Abregos paid the difference, or $108.01 per month.

The Abregos filed their 2015 tax return on January 24, 2017.  They did not request an extension of time to file because they expected to receive a refund.  On their return, the Abregos left blank Line 69, Net Premium Tax Credit.  The Abregos also failed to attach to their return Form 8962, Premium Tax Credit, which is used to reconcile the amount of the advanced PTC a taxpayer receives with the amount of the PTC to which the taxpayer is ultimately entitled.

The IRS issued the Abregos a notice of deficiency determining that the Abregos:  (1) received advanced PTC payments of $9,210, but (2) were not entitled to any PTC for 2015, and (3) were responsible for repaying the excess of advanced PTC paid on their behalf for 2015, $9,210, over the PTC to which they were entitled, zero.  Moreover, the IRS determined that the Abregos were ineligible for the PTC because their income exceeded 400% of the federal poverty line for a family of two in California, where they resided.

Key Issue:  Whether the Abregos:  (1) received excess advance payments of the premium assistance tax credit (commonly known as the premium tax credit or PTC) allowed under section 1412 of the ACA, which in turn increased their tax due by the amount of the excess, subject to the limitations set forth in Section 36B(f)(2)(B); and (2) are liable for the addition to tax under Section 6651(a)(1) for filing their 2015 tax return late.

Primary Holdings

Key Points of Law:

Insight The Abregos case shows the difficulty of determining with specificity, at least in some cases, whether a taxpayer qualifies for the advanced PTC and PTC.  In addition, it stands for the position that it may difficult to support a reasonable cause defense for abatement or waiver of penalties where the taxpayer anticipated a refund but that belief later turns out to be untrue.

Santos v. Comm’r, T.C. Memo. 2020-88 

June 17, 2020 | Ashford, T. | Dkt. No. 27693-14

Short SummaryPetitioner challenged the IRS’ determination that Petitioner had misclassified her workers as independent contractors when they should have been classified as employees.  Because of the misclassification by Petitioner, the IRS determined that Petitioner was liable for unpaid federal employment taxes.  The Tax Court ruled in favor of the Petitioner.

Key Issue:  The sole issue at trial was whether Petitioner’s workers should be classified as employees or independent contractors.

Primary Holdings

Key Points of Law:

InsightThe Santos case demonstrates the need for employers to correctly classify the workers that it has.  Further, it illustrates the need to issue 1099-MISC to workers who have been classified as independent contractors.

 Hewitt v. Comm’r, T.C. Memo. 2020-63

June 17, 2020 | Goeke, J. | Dkt. No. 11728-17

Short SummaryPetitioners claimed a charitable contribution for an easement donation on their 2012 Form 1040 and carried over portions of the contribution for 2013 and 2014.  The IRS did not challenge the deduction for 2012 but disallowed the deduction for 2013 and 2014.  The IRS determined IRC § 6662(e) and (h) 40% accuracy-related penalties for gross valuation misstatements and IRC § 6662(a) and (b)(1) and (2) 20% accuracy-related penalties.  The Tax Court found that the Petitioners were not entitled to carryover the charitable deduction for the donation of the conservation easement, but Petitioner was not liable for the assessed penalties.

Key Issue:  Whether the deed of conservation easement granted by the Petitioners protects the conservation purposes of the contribution in perpetuity as required by IRC §170(h)(5)?

Primary Holdings

Key Points of Law:

InsightThe Hewitt case illustrates the importance of strict adherence to the to the Tax Code when drafting deeds for conservation easements.  Further, it reinforces the need for taxpayers to properly assess their tax liability and employ competent professional tax advisors if a taxpayer is unsure.

Cosio v. Comm’r, T.C. Memo. 2020-90

June 18, 2020 | Vasquez J. | Dkt. No. 23623-17L 

Short SummaryPetitioner sought review, pursuant to I.R.C. § 6330(d)(1), of the IRS determination to proceed with collection of his unpaid Federal income tax liabilities for 2012 and 2015.  The IRS filed a motion for summary judgment alleging that the Appeals Officer did not abuse her discretion because she provided the petitioner with a reasonable opportunity to present evidence with respect to tax year 2015.  The Tax Court held that a genuine question of material fact existed, and the motion for summary judgment was denied.

Key Issue:  Whether an issue of fact existed as to the Appeals Officer abusing her discretion by failing to provide petitioner a reasonable opportunity to present evidence with respect to tax year 2015.

Primary Holdings

Key Points of Law:

InsightThe Cosio case illustrates the use of § 6330 and any subsequent review of an Appeals Officer’s notice of determination with respect to an IRS collection action.  The case provides an overview for the process, but it also demonstrates the importance of ensuring, as a practitioner, that all facts that may bear on the Appeals Officer’s determination or discretion are entered into the Appeals Officer’s record in order to challenge a notice of determination in Tax Court.  This includes keeping highly specific records of any correspondence with the Appeals Officer.

Rogers, et. al. v. Comm’r, T.C. Memo. 2020-91 

June 18, 2020 | Goeke J. | Dkt. No. 29356-14, 15112-16, 2564-18.

Short SummaryPetitioner sought review of an IRS determination that she was not entitled to Innocent Spouse Relief.

Key Issue:  Whether the taxpayer was entitled to innocent spouse relief pursuant to I.R.C.  6015(b), (f) where the petitioner was an attorney and her husband was a tax attorney with a history of aggressive tax positions.

Primary Holdings

Key Points of Law:

InsightThe Rogers case illustrates how the Tax Court analyzes claims for innocent spouse relief pursuant to Section 6015. But of particular note, the Tax Court can place a heavy emphasis on the requesting spouse’s “knowledge of the erroneous items on the joint income tax returns” in making a determination—particularly where the taxpayer is sophisticated in his or her own right.


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