Tax Court in Brief January 31 – February 4, 2022

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Tax Court in Brief January 31 – February 4, 2022

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 January 31 – February 4, 2022


TBI Licensing, LLC v. Comm’r, No. 21146-15, T.C. No. 1  January 31, 2022 | Halpern 

Short Summary:  This case involves the taxability of outbound transfer of intangible assets under I.R.C. §367(d).  The Taxpayer herein argued that the transfers in question were not taxable, and the IRS urged that they were.  Ultimately, the Court found that the Taxpayer’s constructive distribution of stock that Taxpayer constructively received in exchange for its intangible property was a “disposition” within the meaning of section 367(d)(2)(A)(ii)(II), thereby requiring immediate inclusion in income.  Further, no provision of the regulations allowed the Taxpayer to avoid the recognition of gain.

Key Issues:

Facts and Primary Holdings

Key Points of Law:

InsightThe taxability of outbound transfer of intangible assets under I.R.C. §367(d) involves a complicated set of rules and regulations that must be scrutinized in detail.  Courts are likely to construe them strictly, as here, where the facts fall squarely within the provisions of the rules.

Larson v. Comm’r, T.C. Memo 2022-3 February 2, 2022 | Jones, J. | Dkt. No. 15809-11

Short Summary: Restricted stock of an S corporation that was placed into an employee stock ownership plan for the benefit of a control person of the S corporation was includable in the control person’s taxable income. The restrictions associated with the stock were not likely to be enforced such that there was no “substantial risk of forfeiture” to the beneficial owner, i.e., the control person. And, the control person, also a trustee of the ESOP, failed to perform fiduciary duties associated with the ESOP, further indicating the lack of any risk of forfeiture to the stock in question. Thus, the income of the S corporation should have passed through, pro rata, to the control person in the tax years in question.

Key Issues:

Short Answers: No, and no.

Primary Holdings:

Key Points of Law:

Estate of Washington v. Comm’r; T.C. Memo. 2022-4 February 2, 2022 Toro, J. | Dkt. No. 20410-19L

Short Summary: In this collection due process (CDP) case, the estate of Anthony K. Washington, deceased, Lenda Washington, personal representative (Estate), sought review of a determination by the Independent Office of Appeals that sustained a notice of intent to levy to collect Mr. Washington’s unpaid income tax liabilities for the tax years 2008 to 2010, 2014, and 2015 and rejected the Estate’s offers-in-compromise. The Commissioner moved for summary judgment, contending that that IRS Appeals’ determination rejecting the Estate’s offers-in-compromise was proper as a matter of law. The court granted the Commissioner’s motion.

Mr. and Mrs. Washington divorced in 2006. Mr. Washington had substantial earnings in 2008-2010 but did not timely file returns. He eventually entered an installment agreement to pay the outstanding taxes (along with additions and penalties). He died in 2015, about a year after entering the installment agreement, which terminated the agreement and left a significant tax liability for 2008-2010. Mr. Washington had substantial earnings in 2014 and 2015. He did not file a return for 2014; nor did his estate file a return for 2015.

Attempting to collect Mr. Washington’s unpaid taxes ($189,593 plus penalties and interest), the IRS mailed to the Estate a Notice LT11 Notice of Intent to Levy and Notice of Your Right to a Hearing. Ms. Washington requested a hearing (Form 12153, Request for a Collection Due Process or Equivalent Hearing), which request was referred to IRS Appeals. The Estate made an initial Offer in Compromise for $10,000. The stated basis for the offer was Doubt as to Collectability. The Centralized Offer in Compromise unit rejected that offer because it calculated the Estate’s reasonable collection potential as far exceeding its offer, based in part on the value of Mr. Washington’s 401(k) account (about $148,000). Initially, the Estate did not offer to increase its offer or propose any other collection alternative. The IRS rejected the Offer and issued a notice of determination sustaining the notice of intent to levy. Subsequently, the Estate increased its offer to $23,990, again claiming “Doubt as to Collectability.” The IRS issued a supplemental notice of determination, rejecting that increased offer and sustaining the notice of intent to levy.

Primary Holdings:

Doubt as to liability was not an issue in this case; the Estate did not challenge the tax liability.

“Neither of the Estate’s offers qualified for consideration as an offer-in-compromise based on effective tax administration. Such consideration is available only when the taxpayer is able to pay the balance in full. … [the Appeals Officer] determined that the Estate could not pay the outstanding liability in full. And the Estate conceded as much at the hearing. Accordingly, under the regulations and the IRM provisions on which the Estate relies, the Estate’s offer did not qualify for effective tax administration consideration …” Id. at 10.

Most of the court’s analysis dealt with the Estate’s “doubt as to collectability” arguments, all based on the premise that the Appeals Officer abused his discretion in rejecting the Estate’s offers because he miscalculated the Estate’s reasonable collection potential. First, the Estate claimed that Ms. Washington was a judgment lien creditor, based on the divorce decree. The court found that, while the divorce decree was undoubtedly a judgment, it did not award Ms. Washington any specific property or sum of money. Moreover, one of the larger assets the Estate relied upon for its arguments (Mr. Washington’s $100,000 life insurance policy) was excluded from the IRS’s evaluation. That is, even if the Estate were correct that Ms. Washington has priority with respect to that asset, it would not affect the IRS’s determination. The Estate’s argument that Ms. Washington was a judgment creditor also failed because there was no evidence that she had perfected her purported judgment lien.

Second, the Estate argued that Mr. Washington’s 401(k) account should not be included in its reasonable collection potential because Ms. Washington, as personal representative, had the right to designate herself rather than the Estate as the account’s beneficiary. Thus, the Estate argued, it had no interest in 401(k) proceeds unless Ms. Washington designated the Estate as beneficiary, and therefore that the United States’ tax lien could not attach to the proceeds. This argument turned on the interpretation of the couple’s Marital Settlement Agreement’s provisions dealing with the 401(k). Reviewing that agreement, the court rejected the Estate’s argument.

The Estate claimed additional errors in the IRS’s assessment of collectability but none of them (either alone or combined with others) was sufficient “to reduce the Estate’s reasonable collection potential below the amount of its revised offer-in-compromise. Therefore, even if the Estate’s assertions were correct, the mistakes would constitute harmless error and would not amount to an abuse of discretion.”

Key Points of Law

Flynn v. Comm’r, T.C. Memo 2022-5 February 3, 2022 | Urda, J. | Dkt. No. 10182-19L

Short Summary: The IRS can and shall make a tax return for a taxpayer if he or she fails to do so. If the IRS assesses a tax against a taxpayer, the taxpayer can attempt to enter into an offer-in-compromise for settlement of the tax liability. The IRS may accept the offer, and in making that determination, the IRS uses its promulgated national and local allowances. If a settlement officer’s decision to reject a taxpayer’s offer-in-compromise is based on those established allowances as compared to the taxpayer’s data, a court will likely uphold that determination.

Key Issue: Under the collection due process statute of 26 U.S.C. § 6330, did the Independent Office of Appeals abuse its discretion in rejecting an offer-in-compromise (OIC) proposed by taxpayer, Edmund Flynn, for payment of taxes, penalties, and interest assessed against him based on returns that were made and filed by the IRS after Flynn failed to file on his own?

Short Answer: No.

Primary Holding: The IRS settlement officer took into account Flynn’s monthly income and expenses and compared that data to national and local standards for allowances and collectability purposes. According to the settlement officer, Flynn’s OIC was not reasonable. Thus, that determination was not arbitrary, capricious, or without some basis in fact or law and will not be disturbed.

Standard of Review:

Key Points of Law:

Tax Court Insight: The IRS “shall” make a tax return on behalf of a taxpayer, if the taxpayer fails to do so on his or her own accord. If the IRS assesses a tax liability against a taxpayer, the IRS has established national and local allowances to help taxpayers and the IRS determine whether or not, and to what extent, the IRS may enter into a compromise of a particular tax liability. Taxpayers should carefully evaluate those standards when presenting an OIC, and if deviations from the standards are in order, the taxpayer should be prepared to justify the deviation.


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