The Tax Court in Brief June 29 – July 3, 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.
The Week of June 29 – July 3, 2020
- Duy Duc Nguyen v. Comm’r, T.C. Memo. 2020-97 | June 30, 2020 | Pugh, J. | Dkt. No. 6602-17L
- Bethune v. Comm’r, T.C. Memo. 2020-96 June 30, 2020 | Gustafson, J. | Dkt. No. 10198-17
- Dennis v. Comm’r, T.C. Memo. 2020-98 | July 1, 2020 | STJ Panuthos, P. | Dkt. No. 398-18L
- Minemyer v. Comm’r, T.C. Memo. 2020-99 | July 1, 2020 | Kerrigan, K. | Dkt. No. 22182-10
Duy Duc Nguyen v. Comm’r, T.C. Memo. 2020-97
Short Summary: The taxpayer untimely filed Forms 1040, U.S. Individual Income Tax Return, for his 2006, 2007, and 2008 tax years. Thereafter, the IRS sent the taxpayer a notice of deficiency to the address he listed on his returns. In addition to deficiencies, the notice of deficiency asserted accuracy-related penalties. The taxpayer failed to timely file a petition with the U.S. Tax Court.
Then, the IRS filed a notice of federal tax lien for the tax liabilities. The taxpayer timely filed a request for a Collection Due Process (CDP) hearing. In his CDP hearing request, the taxpayer requested a “withdrawal” of the notice of federal tax lien and added the following explanation: “I do not owe tax. Please find an explanation below & extra page.”
The IRS Settlement Officer (SO) sent the taxpayer a letter and scheduled the CDP hearing for February 1, 2017. She also requested the taxpayer submit any additional information he had to support his request for lien withdrawal.
The taxpayer never provided the SO with additional information. Rather, on the date of the CDP hearing, the taxpayer informed the SO that he had filed amended returns and requested additional time for audit reconsideration. However, the SO determined that the notice of federal tax lien should be sustained because it was the least intrusive collection method and none of the conditions for withdrawal were present under Section 6323(j). She later issued the taxpayer a Notice of Determination, and the taxpayer timely filed a petition with the Tax Court.
Key Issue: Whether (1) the taxpayer may challenge his underlying tax liabilities consisting of the income tax and Section 6662(a) accuracy-related penalty the IRS assessed for each year; (2) the taxpayer owes any of the underlying tax liabilities (if he may challenge them); and (3) the SO abused her discretion in sustaining the notice of federal tax lien filing.
- Although the taxpayer did not receive the notice of deficiency, he did not properly challenge his underlying liabilities during the CDP hearing. Accordingly, the taxpayer may not now challenge the tax liabilities or penalties. Moreover, the SO did not abuse her discretion in sustaining the notice of a federal tax lien.
Key Points of Law:
- If underlying tax liabilities are properly at issue, the Tax Court reviews any determination regarding those liabilities de novo; the Court reviews all other administrative matters for abuse of discretion. Davis v. Comm’r, 115 T.C. 35, 39 (2000); Sego v. Comm’r, 114 T.C. 604, 610 (2000); Goza v. Comm’r, 114 T.C. 176, 181-182 (2000). The phrase “underlying tax liabilities” includes the tax deficiency, any penalties and additions to tax, and statutory interest. Katz v. Comm’r, 115 T.C. 329, 338-41 (2000).
- Abuse of discretion exists when a determination is “arbitrary, capricious, or without sound basis in fact or law.” Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d 469 F.3d 27 (1st Cir. 2006).
- In the Ninth Circuit, to which this case is appealable, the court in Keller v. Comm’r, 568 F.3d 710, 718 (9th 2009), held that review of an administrative determination is limited to the administrative record. See also Golsen v. Comm’r, 54 T.C. 742, 757 (1970). For these purposes, the administrative record includes not the only material that the settlement officer reviewed but also material that was available for review. Emery Celli Cuti Brinckerhoff & Abady, P.C. v. Comm’r, T.C. Memo. 2018-55.
- Under a de novo standard of review, the Tax Court may go beyond the administrative record to consider all of the relevant evidence introduced at trial. Jordan v. Comm’r, 134 T.C. 1, 9 (2010).
- A taxpayer may raise challenges to his underlying tax liabilities at an administrative hearing if he did not receive any statutory notice of deficiency or otherwise have an opportunity to dispute his tax liabilities. Section 6330(c)(2)(B). If a notice of deficiency is properly mailed to the taxpayer at his last known address, the notice may be valid even if the taxpayer did not receive it. United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984). Thus, as part of the SO’s determination, she must verify that a valid notice of deficiency was issued to the taxpayer at his last known address. Section 6330(c)(1).
- Even if the notice was properly mailed, the taxpayer may be able to challenge the underlying tax liabilities if he can establish that no notice was received. Hoyle v. Comm’r, 131 T.C. at 199; Sego v. Comm’r, 114 T.C. at 609.
- The Tax Court may consider a taxpayer’s challenge to his underlying tax liabilities in a collection case only if he properly raised the liabilities at an administrative hearing. Giamelli v. Comm’r, 129 T.C. 107, 114-16 (2007). An issue is not properly raised at the administrative hearing if the taxpayer fails to request consideration of the issue or if he requests consideration but fails to present any evidence after being given a reasonable opportunity to do so. Thompson v. Comm’r, 140 T.C. 173, 178 (2013); see also Millen v. Comm’r, T.C. Memo. 2019-60 (holding that the taxpayers did not properly challenge their underlying tax liabilities when they failed to submit amended tax returns during a CDP hearing stating what they believed their tax liabilities to be).
- The grant of audit reconsideration is discretionary and any audit is conducted outside the CDP process. Durda v. Comm’r, T.C. Memo. 2017-89. An IRS Appeals officer does not abuse his discretion by declining to delay determinations to await the uncertain outcome of a taxpayer’s eleventh-hour request for audit reconsideration. Jones v. Comm’r, T.C. Memo. 2007-142.
- Amended returns by themselves are not evidence supporting a claim; they are merely a statement of the claim. Roberts v. Comm’r, 62 T.C. 834, 837 (1974).
- Section 6321 imposes a lien in favor of the United States on all property and property rights of a taxpayer liable for tax after a demand for the payment of the tax has been made and the taxpayer fails to pay. The lien arises when the assessment is made. 6322. However, the IRS files an NFTL to preserve priority and put other creditors on notice. Section 6323. Section 6320 requires the Secretary to send written notice to the taxpayer of the filing of the NFTL and of the taxpayer’s right to request an administrative collection due process hearing on the matter.
- A SO can rely on computerized transcripts to satisfy the verification requirements of Section 6320 and 6330 but only if the taxpayer has not shown some irregularity in the assessment procedures that would raise questions about the validity of the assessments or the information contained in the transcripts. See Kubon v. Comm’r, T.C. Memo. 2011-41.
- The SO must also consider the issues raised by the taxpayer and whether the proposed collection action balances the Government’s need for the efficient collection of taxes with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary. Section 6330(c)(3); Sego v. Comm’r, 114 T.C. at 609. The taxpayer bears the burden of proving these items. Sego, 114 T.C. at 610.
- Because lien withdrawal is a collection alternative, see Reg. § 301.6320-1(e)(3), Q&A-E6, a taxpayer is required to provide the SO with relevant information for her to consider in determining whether the lien should be withdrawn, see Roudakov v. Comm’r, T.C. Memo. 2017-121. A taxpayer’s failure to present the settlement officer with any evidence regarding his entitlement to the withdrawal of the NFTL means he did not properly raise the issue at the administrative hearing. LG Kendrick, LLC v. Comm’r, 146 T.C. at 39.
- An SO is not required to give a taxpayer additional time to submit documents or additional amended returns when the adequate time had been provided before the hearing. See Glossop v. Comm’r, T.C. Memo. 2013-208.
Insight: The Nguyen case stands for the position that amended returns, without additional evidence, do not carry any weight in proving that a tax liability that has been already assessed by the IRS should be reduced. Moreover, this case serves as a cautionary tale to taxpayers who fail to provide the SO with requested information prior to the closing of the CDP case and the issuance of a Notice of Determination.
Bethune v. Comm’r, T.C. Memo. 2020-96
Petitioner was the noncustodial parent of two children. The custodial parent was their father, C. Petitioner, and C each filed a timely 2014 Federal income tax return claiming the two children as dependents. No Form 8332, “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent”, was attached to Petitioner’s return. In July 2015 Petitioner and C jointly proposed a family court order that stated that the children “will continue to be claimed by Mother/plaintiff (as prior to 2014 tax year)”, and each signed a statement that the statements in the proposed order “are true and accurate”.
The IRS examined Petitioner’s 2014 return. Petitioner provided C’s written statement, but the IRS nonetheless proposed disallowance of the dependency exemption deductions, child tax credit, and head-of-household (“HOH”) filing status. The IRS agent suggested that Petitioner obtain a Form 8332 signed by C for 2014. C signed the form, and Petitioner produced it to the IRS. However, C did not file an amended return disclaiming his previous claim of the children as dependents.
Key Issues: Whether the Petitioner is entitled to (1) a dependency exemption deduction for two of her children under section 151(c), (2) a child tax credit for those children under section 24(a), and (3) head-of-household (“HOH”) filing status under section 2(b)(1).
- Because Petitioner did not attach to her return any Form 8332 or equivalent release, she is not entitled under I.R.C. sec. 152(e)(2)(A) to claim the dependency exemption deduction or the child tax credit.
- Petitioner is not entitled to the HOH filing status under I.R.C. sec. 2(b)(1).
Key Points of Law:
- A taxpayer must satisfy the specific requirements for any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
- For the year at issue, an individual is allowed a deduction for an exemption for “each individual who is a dependent (as defined in section 152) of the taxpayer for the taxable year.” Sec. 151(c).
- Section 152(a) defines the term “dependent” to include “a qualifying child”.
- Generally, a “qualifying child” must: (1) bear a specified relationship to the taxpayer (e.g., be a child of the taxpayer), (2) have the same principal place of abode as the taxpayer for more than one-half of such taxable year, (3) meet certain age requirements, (4) not have provided over one- half of such individual’s support for the taxable year at issue, and (5) not have filed a joint return for that year. Sec. 152(c)(1).
- In the case of divorced parents, special rules determine which parent may claim a dependency exemption deduction for a child. See sec. 152(e).
- Pursuant to section 152(e), when certain criteria are met, a child may be treated as a qualifying child of the noncustodial parent (here, Ms. Bethune) rather than of the custodial parent (Mr. Kirby). Sec. 152(e)(1); 26 C.F.R. sec. 1.152-4, Income Tax Regs. Those criteria require —
- the “child receives over one-half of the child’s support during the calendar year from the child’s parents * * * who are divorced * * * under a decree of divorce”, sec. 152(e)(1)(A);
- such child was “in the custody of 1 or both of the child’s parents for more than one-half of the calendar year”, sec. 152(e)(1)(B);
- “the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year”, sec. 152(e)(2)(A); and
- “the noncustodial parent attaches such written declaration to the noncustodial parent’s return” for the appropriate taxable year, sec. 152(e)(2)(B).
- The IRS’s prescribed means for the noncustodial parent to make this declaration is Form 8332, on which the relevant statement is “I agree not to claim”. A noncustodial parent may rely on an alternative document, provided that it “conform[s] to the substance” of Form 8332. 26 C.F.R. sec. 1.152- 4(e)(1)(ii).
- A taxpayer is entitled to a child tax credit for “each qualifying child”, as defined in section 152, who has not reached the age of 17 and for whom the taxpayer is allowed a dependency exemption deduction under section 151.
- Section 1 of the Code provides different tax rates for different taxpayers, and section 1(b) provides relatively favorable rates for a “head of a household (as defined in section 2(b))”. Section 2(b) in turn defines “head of a household”, and one of the criteria for that status is that the taxpayer “maintains as his home a household which constitutes for more than one-half of such taxable year the principal place of abode, as a member of such household, of * * * (i) a qualifying child of the individual (as defined in section 152(c), determined without regard to section 152(e))”. Sec. 2(b)(1)(A)(i).
- Under section 152(c)(1)(B), a “qualifying child” must-have “the same principal place of abode as the taxpayer for more than one-half of such taxable year”; and by providing that the child’s status is determined “without regard to section 152(e) [“Special Rule for Divorced Parents, Etc.”]”, section 2(b) provides that a noncustodial parent cannot meet the “principal place of abode” requirement by obtaining a declaration from the custodial parent. Rather, HOH status depends on having a qualifying child actually sharing the taxpayer’s place of abode for more than one-half of the year.
Insight: Divorce and taxes can create traps for the unwary. Good tax planning in an essential aspect of separations and divorces.
Dennis v. Comm’r, T.C. Memo. 2020-98
Short Summary: Petitioner filed a motion for reasonable litigation or administrative costs pursuant to IRC §7430 following a collection due process hearing. The Tax Court held that Petitioner was not entitled to either litigation costs or administrative costs.
Key Issue: Can pro se taxpayers recover reasonable litigation or administrative costs for a collection due process hearing regarding the filing of a notice of a Federal tax lien?
- Collection actions are not considered administrative proceedings unless the underlying tax liability is at issue.
- Pro se taxpayers are not entitled to reasonable attorney costs.
Key Points of Law:
- IRC §7430(a) provides for the award of reasonable costs incurred in an administrative or court proceeding against the United States brought in connection with the determination, collection, or refund of any tax, interest, or penalty pursuant to the Internal Revenue Code
- To recover costs, taxpayers must establish that (1) they are the prevailing party, (2) they did not unreasonably protract the proceedings, (3) the amount of the costs requested is reasonable, and (4) they exhausted the administrative remedies available. See IRC§ 7430(b) and (c). These requirements are conjunctive, and the failure to satisfy any one of them will preclude an award of costs. See Minahan v. Commissioner, 88 T.C. 492, 497 (1987).
- A taxpayer requesting reasonable litigation or administrative costs has the burden of proving that they have satisfied each requirement of IRC §7430.
- Reasonable administrative costs are the reasonable and necessary costs incurred by a taxpayer in connection with an administrative proceeding. See 26 CFR §301.7430-4(a).
- An administrative proceeding does not include a proceeding in connection with a collection action unless the underlying tax liability is at issue. See 26 CFR §301.7430-3(a)(4), (b); see also Worthan v. Commissioner, T.C. Memo. 2012-263; Dalton v. Commissioner, T.C. Memo. 2011-136, 2011 Tax Ct. Memo LEXIS 135, at *20-*21, rev’d on other grounds, 682 F.3d. 149 (1st Cir. 2012).
- Under IRC §7430, pro se taxpayers may not be awarded an amount reflecting the value of their personal time in handling litigation, even though fees taxpayers pay to attorneys to handle litigation would be recoverable. See Dunaway v. Commissioner, 124 T.C. 80, 83 (2005). This includes a pro se taxpayer who was an attorney. See Frisch v. Commissioner, 87 T.C. 838, 845-846 (1986).
Insight: The Dennis case illustrates when a collection due process hearing will be considered an administrative proceeding when attempting to recover administrative costs. Further, it reinforces the Tax Court’s holding that pro se taxpayers are not entitled to litigation costs.
Minemyer v. Comm’r, T.C. Memo. 2020-99
Short Summary: Petitioner contested the IRS’ imposition of the fraud penalty under IRC §6663(a) for his 2001 personal income taxes. The Tax Court held that the IRS had not met its burden of production for the determination of the IRC §6663(a) fraud penalty, and therefore the Petitioner was not liable for the fraud penalty for 2001.
Key Issue: Whether the IRS had met its burden of production for the determination of the IRC §663(a) fraud penalty.
- The initial determination of the IRC §663(a) fraud penalty must be approved in writing by the immediate supervisor of the individual making the determination before the penalty determination is communicated to the taxpayer.
Key Points of Law:
- IRC §6751(b)(1) states 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 or such higher-level official as the Secretary may designate.” The Tax Court has interpreted IRC §6751(b)(1) to require approval before the penalty determination is communicated to the taxpayer. See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 84, 89 (2019).
- The initial determination of the penalty occurs no later than when those 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 with Appeals. See Clay v. Commissioner, 152 T.C. 223, 249 (2019). The initial determination of the penalty assessment is embodied in the document by which the Examination Division formally notifies the taxpayer in writing, that it has completed its work and made an unequivocal decision to assert penalties. See Belair Woods, LLC Commissioner, 154 T.C. 333, 333 (slip op. at 24-25)(Jan. 6, 2020).
- The IRS has the burden of production under IRC §7491(c) with respect to IRC §6663 fraud penalty includes introducing sufficient evidence to establish compliance with the supervisory approval requirement of IRC §6751(b)(1).
- The Tax Court has held that the IRS’ introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry its initial burden of production under IRC §7491(c) to show that it complied with the procedural requirement of IRC §6751(b)(1). See Frost v. Commissioner, 154 T.C. 333, 333 (slip op. at 21-22)(Jan. 7, 2020).
Insight: The Hewitt case illustrates the need of a taxpayer or his or her representative to investigate and determine if the IRS has followed its procedural requirements under IRC §6751(b)(1) when it imposes the fraud penalty. There is the possibility that the IRS has not, and the penalty can be removed.
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