The Tax Court in Brief August 29 – September 4, 2020

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The Tax Court in Brief August 29 – September 4, 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.

Tax Litigation: The Week of August 29 – September 4, 2020


Savedoff v. Comm’r, T.C. Memo. 2020-125

August 31, 2020 | Urda P. | Dkt. No. 4346-18L

 Short SummaryIn a collection due process case, the Petitioner seek review of the IRS’s Office of Appeal’s decision to uphold the filing of a notice of federal tax lien (“NFTL”) with respect to unpaid federal income tax liabilities for years 2013 and 2014, as well as associated interest and additions to tax.  Petitioner contends that she did not receive proper service of the NFTL and the Office of Appeals abused its discretion in its determination.  The IRS moved for summary judgment and the Tax Court granted the motion.

Key Issue:  Was the NFTL properly served on the Petitioner and did the Office of Appeals abuse it discretion by not withdrawing the NFTL once Petitioner had entered into an installment agreement.

Primary Holdings

Key Points of Law:

InsightThis case highlights the need for taxpayers to provide the IRS with their current address, especially in instances where the taxpayer is involved in settlement negotiations with the IRS.  The case also illustrates that the IRS is not required to withdraw a NFTL in every instance where it enters into a settlement agreement with a taxpayer.


Daichman v. Comm’r, T.C. Memo. 2020-126 

August 31, 2020 | Paris, J. | Dkt. No. 14368-15

Short SummaryDuring 2009, the taxpayers transferred personal assets of cash and marketable securities to a wholly owned S corporation, which in turn immediately transferred those assets to a family limited partnership.  Weeks later, the taxpayers dissolved the S corporation and received the partnership interest as a liquidating distribution.  Due to the liquidation, the taxpayers claimed a nonpassive loss deduction on Schedule E, Supplemental Income and Loss.

Key Issues:  Whether the taxpayers are entitled to a short-term capital loss deduction of $2,099,090 in connection with the dissolution of the S corporation, and whether the taxpayers are liable for an accuracy-related penalty.

Primary Holdings

Key Points of Law:

InsightThe Daichman decision shows that although taxpayers may comply with a strict interpretation of the Internal Revenue Code and its rules and regulations, tax benefits may nevertheless be denied under the economic substance doctrine.


Douglas M. Thompson and Lisa Mae Thompson v. Comm’r, 155 T.C. No. 5.

August 31, 2020 | Greaves, J. | Dkt. No. 6613-13

Short SummaryThe case involves the analysis of two of the requirements provided by section 6751(b): first, the concept of “initial determination”, secondly, the “supervisory approval” requirement provided by section 6751(b)(1). Finally, the Court analyzes whether the rule of lenity applies because of the ambiguity of the statute as for the timing of the supervisory approval.

Mr. Thompson and Mrs. Thompson (the “taxpayers”) were engaged in a Distressed Asset Trust (DAT) transaction in 2005. The IRS assigned a Revenue Agent (the “agent”) to examine the respective tax returns of the taxpayers for several years, including 2005.

In 2007, the agent sent a first letter to the taxpayers offering them the opportunity to resolve their tax liabilities in accordance with the terms of Announcement 2005-80 (an IRS program aimed to offer settlements to taxpayers engaged in listed transactions with accuracy-penalties below the statutory rates). Such letter did not identify a specific tax year nor provided an underpayment amount. The taxpayers declined the offer.

In 2009, the agent mailed a second letter to the taxpayers, offering them the opportunity to settle the DAT transaction. This letter specified that the taxpayers would have to pay accuracy-related penalties in an amount of the underpayment attributable to the DAT transaction. However, the letter did not identify the tax period, nor provided an underpayment amount, and only stated that if not accepted, the IRS would complete the examination. The taxpayers declined this second offer.

Later in 2009, the agent concluded the examination and determined that the taxpayers owed tax and penalties for tax years 2003-2007. On December of that year, the agent’s immediate supervisor signed the penalty memorandum, approving the agent’s determinations. The notice of deficiency was sent to the taxpayers on 2012.

The taxpayers filed a petition in Tax Court and argued that: (i) the penalty approval requirement of section 6751(b)(1) was not met here, (ii) that there was not a meaningful review by the acting immediate supervisor and (iii) given the ambiguity of section 6751(b)(1) as for when the statutory approval was required the Court should apply the rule of lenity and consequently, interpret the rule in the taxpayer’s favor.

The Tax Court rejected the taxpayers’ arguments and concluded that the approval requirement was met here because the offers made by the agent in 2007 and 2009 do not constitute an “initial determination” within the meaning of section 6751(b). Additionally, the Court concluded that the signature of the immediate supervisor meets the approval requirement. Finally, the Court determined that the rule of lenity does not apply here.

Key Issues:  Under section 6751(b), do the offers made by the agent in 2007 and 2009 constitute an initial determination? The approval requirement as provided by 6751(b)(1) is satisfied by the supervisor’s signature or requires a depth analysis? Is the rule of lenity applicable when interpreting section 6751(b)?

Primary Holdings: An initial determination within the context of 6751(b) is one that determines that a taxpayer is liable for penalties for a specific amount, and that is subject to review by Appeals or the Tax Court. Letters that do not meet these characteristics do not fall within the spectrum of section 6751(b). The approval requirement as provided by the section in analysis, is met by the signature of the immediate supervisor, and no meaningful review is required. Finally, the rule of lenity is not triggered when determining the timing of the supervisory approval requirement.

Key Points of Law:

InsightSection 6751(b) is one of the most used procedural defenses in the tax controversy area. However, the construction of such section by the Courts have greatly reduced its possible application and unless the IRS flagrantly omits this statutory requirement in examinations, this defense may be not applicable. This case continues the line of cases that have narrowed the application of this section and provides insight on the relative low standard that section 6751(b) imposes on the IRS.


Dickinson v. Commissioner, T.C. Memo. 2020-128

September 3, 2020 | Greaves, T. | Docket No. 9526-19

Short SummaryPetitioners sought a determination from the Tax Court that their donation of company shares to Fidelity Investments Charitable Gift Fund (a 501(c)(3)) were deductible charitable donations.

Key Issue:  Whether a taxpayer’s donation of company shares, where he served as an officer, to a 501(c)(3) that then redeemed such shares for cash is a deductible charitable donation?

Primary Holdings

Key Points of Law:

InsightThe Dickinson case illustrates how the Tax Court analyzes charitable deductions based on the donation of company stock.  Specifically, the case demonstrates application of the Humacid Co. two-prong test to determine the substance of the transaction.


Franklin v. Commissioner, T.C. Memo. 2020-127

September 3, 2020 | Nega, J. | Docket No. 3855-18

Short SummaryPetitioner sought a determination from the Tax Court that his deductions for meal, entertainment, and travel expenses; his deduction for business losses relating to certain loans and business properties was proper; and that he was not liable for the accuracy-related filing and late-filing addition to tax.

Key Issues:  (1) Whether meal and entertainment expenses and travel expenses are deductible as claimed on petitioner’s Form 1040, U.S. Individual Income Tax Return, and Schedule C, Profit or Loss From Business; (2) whether petitioner is entitled to deduct business losses relating to certain loans and business properties; and (3) whether petitioner is liable for the accuracy-related penalty and the late-filing addition to tax.

Primary Holdings

Key Points of Law:

InsightThe Franklin case illustrates the importance of keeping extensive records of meals, entertainment, and travel expenses—particularly records demonstrating the business purpose of such expenses.  It further demonstrates how the Tax Court analyzes business loss deductions and reasonable cause penalty abatement requests.

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