Tax Court in Brief September 5 – 11, 2020

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

The Tax Court in Brief September 5 – 11, 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 September 5 – September 11, 2020

Sutherland v. Comm’r, 155 T.C. No. 6

September 8, 2020 | Lauber, J. | Dkt. No. 3634-18

Short SummaryIn 2010, Ms. Sutherland’s husband was indicted for tax crimes.  He pled guilty, and as part of his plea agreement, he was required to submit delinquent tax returns for 2005 and 2006 (among other years).  Ms. Sutherland signed the returns for 2005 and 2006.

Later, Ms. Sutherland filed an IRS Form 8857, Request for Innocent Spouse Relief, for 2005 and 2006.  The IRS reached a preliminary determination to deny her request for innocent spouse relief, and she appealed.  During the IRS Appeals process, Ms. Sutherland’s attorney determined that the Appeals Officer (AO) was not properly applying the innocent spouse factors.  Because no progress was being made, her attorney chose not to submit additional evidence on the belief that Ms. Sutherland would receive de novo review in the Tax Court.

During the Tax Court proceedings, Ms. Sutherland filed a motion to remand, arguing that the amended scope of review under Section 6015(e)(7) would disadvantage her by preventing her from introducing additional evidence outside the IRS administrative record.  The IRS opposed the motion, contending that remand is not permitted in a stand-alone innocent spouse case.

Key Issue:  Whether the amendments to Section 6015(e)(7) apply to Ms. Sutherland’s case?

Primary Holdings

Key Points of Law:

InsightThe Sutherland decision demonstrates the potential traps a taxpayer may have to go through with respect to requests for innocent spouse relief.  Because of the amendment to Section 6015(e)(7), taxpayers should ensure that they provide all helpful evidence to the IRS during the administrative review of their claim.

Fowler v. Comm’r, 155 T.C. No. 7

September 9, 2020 | Greaves, J. | Dkt. No. 12810-18

Short SummaryOn or before April 15, 2014, Mr. Fowler filed IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, extending the due date to file his 2013 IRS Form 1040, U.S. Individual Income Tax Return, until October 15, 2014.  On October 15, 2014, Mr. Fowler attempted to e-file his 2013 Form 1040.  Although the IRS received the e-filing, it issued a rejection notice for failure to provide a valid Identity Protection Personal Identification Number (IP PIN) with the e-filed return.

Thirteen days later, on October 28, 2014, Mr. Fowler mailed the 2013 Form 1040 to the IRS.  The IRS received the return on October 30, 2014.  However, because Mr. Fowler received a letter in December 2014 notifying him that the IRS had not received his 2013 return, he e-filed his 2013 Form 1040 on April 30, 2015.

On April 5, 2018, the IRS issued Mr. Fowler a notice of deficiency.  Mr. Fowler timely filed a petition with the Tax Court and raised the affirmative defense of the statute of limitations.

Key Issue:  Whether the statute of limitations for assessment expired prior to the IRS issuing the notice of deficiency to Mr. Fowler.

Primary Holding

Key Points of Law:  

InsightThe Fowler decision is a huge win for the taxpayer and may have an impact on other tax e-file cases, such as those in which the IRS asserts late-filing penalties after the rejection of timely e-filed return.

Korean-American Senior Mutual Association, Inc., T.C. Memo. 2020-129 

September 9, 2020 | Leyden, D. | Docket No. 21829-17X

Short SummaryPetitioner sought a determination from the Tax Court that Korean-American Senior Mutual Association, Inc. (“KASMA”) was operated exclusively for one or more exempt purposes as set forth in section 501(c)(3).  The Petitioner requested a declaration from the Tax Court pursuant to I.R.C. § 7428(a)(1)(A).

Key Issue:  Was KASMA was operated exclusively for one or more exempt purposes as set forth in section 501(c)(3)?

Primary Holdings

Key Points of Law:

InsightThe Korean American case illustrates the requirements for an organization to maintain tax-exempt status. Specifically, this case sets forth the operational test that the Tax Court uses to analyze whether an organization is indeed operating under an exempt purpose, and it demonstrates possible issues for tax-exempt taxpayers that engage in fee-for-service or other business activity.  The question of whether an organization has maintained tax-exempt status can be highly complex and is based on the facts and circumstances of each case.

Robert J. Belanger v. Comm’r, T.C. Memo. 2020-130

September 10, 2020 | Ashford, J. | Dkt. No. 25036-14

Short SummaryThe case involved the determination of the statute of limitation for a notice of deficiency sent in 2014, the assessment of additional income and the imposition of civil fraud penalties in a case where the taxpayer was guilty of corruptly endeavoring to obstruct and impede tax laws, by concealing his income, for the tax years 1999 and 2000.

Mr. Belanger (the “taxpayer”) founded Number One Foundations, an unincorporated business back in the 70’s dedicated to provide construction services. Since its inception and during 1999 and 2000, the taxpayer engaged substantially in work related to this enterprise, additionally, the address of the business was the same as the taxpayer’s address. The taxpayer’s son, Steven, handled some operational aspects of the business, such as bank accounts, paying payroll and maintaining business insurance.

The taxpayer did not have a specific bookkeeping system for his business but rather he used the stairs of his house to keep track of the income received from his jobs (the system involved using the lower steps for initial jobs and the upper steps for finished or paid projects). The payments received by the taxpayer usually were in check. Once the payment was received, the taxpayer cashed the checks or negotiated them for treasurer’s checks payable to him. Despite that taxpayer’s business gross receipts for 1999 and 2000 were over $1M, the taxpayer only declared income for less than $100k for each year. It must be added that the taxpayer did not provided any type of supporting documentation to his accountant.

In 2006, as a result of an investigation carried by the IRS in regard to the negotiation of treasurer’s checks by the taxpayer and the origin of the funds used to acquire such checks, the taxpayer was indicted on counts of filing false and fraudulent returns for 1999 and 2000. The indictment alleged that these returns underreported the gross receipts of the taxpayer’s business.

In 2009, the taxpayer was found guilty of corruptly endeavoring to obstruct and impede tax laws and was required to submit a complete and amended Federal income tax return for the 1999-2000 period. The amended returns only reported an increase of gross receipts attributable to the checks payable to the taxpayer. The IRS determined that the returns were inaccurate because they omitted to allocate to the taxpayer the total business’ gross receipts. The IRS sent a notice of deficiency in 2014 reflecting the allocation of the taxpayer’s unincorporated business gross receipts to the taxpayer and the imposition of section 6663(a) civil fraud penalties. The taxpayer disagreed and filed a protest, which the IRS sustained.

The Tax Court analyzed three topics: (i) whether the IRS was barred from assessing income tax deficiencies for 1999 and 2000 on the notice of deficiency issued in 2014, (ii) whether the unincorporated gross receipts should be allocated to the taxpayer and (iii) the imposition of civil fraud penalties. The Court ruled that the IRS was indeed free to determine the deficiency, that the gross receipts of the business should be allocated to the taxpayer and finally, sustained the imposition of civil fraud penalties.

Key Issues:  (i) Whether the IRS was barred from assessing income tax deficiencies for 1999 and 2000 on the notice of deficiency issued in 2014. (ii) Whether the unincorporated gross receipts should be allocated to the taxpayer. (iii) The imposition of civil fraud penalties.

Primary Holdings: The statute of limitations to assess a deficiency is not applicable in cases where the underpayment is due to fraud and the IRS may assess such deficiency beyond the general three-year rule. To impose penalties provided in section 6663(a), the IRS must prove that there is an underpayment, it must comply with the requirements of section 6751(b) and show that the that underpayment is due to fraud.

Key Points of Law:

(i) Statutory period of limitations to assess tax.

Section 6501(a) provides the three-year general rule that requires the IRS to assess a deficiency in income tax after the return was filed. Section 6213(a) requires the IRS to assess a notice of deficiency before assessing the deficiency. Hence, the IRS is allowed to issue a notice of deficiency only within three years.

However, in cases were the underpayment is due to fraud, the Court has ruled that the IRS is free to determine a deficiency without regard to the three-year period of limitations. Consequently, the Court considered that the notice of deficiency issued in 2014 was timely.

(ii) Unreported business income.

When the taxpayer does not have books or record that reflect income clearly, the IRS is allowed to reconstruct income and is allowed to use a method that reflects the full amount of income received. Such method needs only to be reasonable under the facts and circumstances.

The IRS used the “specific item method”, a Tax Court-approved method, that allows the IRS to use evidence of specific amounts of income received by the taxpayer and not reported on his return. The Court considered that because the taxpayer received checks on behalf of his unincorporated business, and he actively controlled and managed such enterprise, the checks were to be reported as part of his gross income.

(iii) Civil fraud penalties.

Section 6663(a) establishes a penalty equal to the 75% of any underpayment of tax that is due to fraud. To assess such penalty, the IRS bears the burden of proof, and must prove that there is an underpayment and that such was due to fraud. To satisfy the first requirement, the IRS must prove a likely source of the unreported income or disprove the nontaxable source so alleged. As part of this first prong of the test, the IRS must comply with the requirements of section 6751(b). To meet the second element, the IRS must show the taxpayer’s intention to conceal or evade the collection of taxes.

In the instant case, the Court ruled that the IRS had complied with section 6751(b) given the fact that the 30-day letter issued by the IRS, which constituted the initial determination of the penalties, was approved by the Revenue Agent supervisor. The taxpayer did not provide any other evidence to disprove this conclusion. Accordingly, the IRS complied with section 6751(b).

As for the two elements of the test required by section 6663(a), the Court analyzed the circumstances surrounding the case, and considered that there was a clear underreporting of business income as shown clearly by the increase of gross receipts attributable to its enterprise.

Finally, to determine whether such understatements of income were due to fraud, the Court ruled that that there was an intentional wrongdoing by the taxpayer motivated by the specific purpose of avoiding tax. To determine the existence of fraud the Court may consider various facts such as: (1) a pattern of understating income, (2) failing to maintain adequate records, (3) offering implausible or inconsistent explanations of behavior, (4) concealing income or assets, (5) dealing in cash, (6) providing incomplete or misleading information to his or her tax return preparer, (7) filing false documents, including filing false Federal income tax returns, (8) failing to file Federal income tax returns, (9) failing to cooperate with tax authorities, and (10) engaging in and attempting to conceal illegal activity.

In the particular case, the taxpayer intentionally concealed income, made payments “under the table”, failed to disclose the full extent of his business income and provided incomplete and misleading information to his accountant. Consequently, the Court determined that the taxpayer’s actions were purposeful, which were confirmed by him being found guilty of impeding tax laws.

InsightThis case states very clearly some of the implications in cases where fraudulent actions are present. The IRS authority to assess additional tax beyond the general statute of limitations and the imposition of civil penalties are severe consequences that any taxpayer should consider carefully when engaging in transactions that may encompass an element of fraud.


Tax Court Litigation Attorneys 

Need assistance litigating in the U.S. Tax Court? Freeman Law’s tax attorneys are experienced litigators with trial-tested litigation skills and in-depth substantive tax knowledge, having collectively litigated hundreds of cases before the U.S. Tax Court. Our tax controversy lawyers have extensive experience in Tax Court matters involving partnership audits and litigation under both the TEFRA and BBA regimes, international tax penalties, foreign trusts, valuation, reasonable compensation disputes, unreported income, fraud penalties, other tax penalties, any many other matters. We draw on our experience and wealth of tax knowledge to advise and guide clients through the entire tax controversy process, building the right strategy to resolve tax controversies from day one. Schedule a consultation or call (214) 984-3000 to discuss your Tax Court concerns or questions.