The Tax Court in Brief – July 11th – July 15th, 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 July 11th, 2022, through July 15th, 2022
- Colbert v Commissioner, T.C. Memo. 2022-74 | July 13, 2022 |Wells, J.| Dkt. No. 8395-16.
- Knight v. Comm’r, T.C. Memo. 2022-76| July 14, 2022 | Lauber, A. | Dkt. No. 11719-20L
- Kelly v. Comm’r, No. 13353-21L, T.C. Memo 2022-73 | July 13, 2022 | Lauber |
- TBL Licensing LLC f.k.a. The Timberland Company, and Subsidiaries (A Consolidated Group), v. Comm’r, T.C. Memorandum 2022-71| July 12, 2022 | Halpern, J. | Dkt. Nos. 21146-15.
Larochelle v. Commissioner, T.C. Summary Opinion 2022-12 | July 12, 2022 | Leyden | Dkt. 10416-20S
Short Summary: The IRS found a deficiency in the Petitioners’ tax return and issued a notice of deficiency. Petitioners filed for a redetermination pursuant to IRC Section 6213(a). Ultimately, they conceded the deficiency and challenged only an accuracy-related penalty of approximately $10,000.00. To prepare their returns, Petitioners did nothing more than provide documents to their tax professional. Between their two residences, the Petitioners’ lost a Form 1099-R for a $238,000 distribution from an IRA. This income went unreported and led to a CP2000 notice to which Petitioners did not respond. After receiving a notice of deficiency, Petitioners paid the deficiency in full an requested the abatement of an accuracy-related penalty. The IRS denied the request.
Key Issues:
- The sole issue was whether the abatement should be granted, depending on whether the Petitioners had reasonable cause or acted in good faith in connection with their substantial understatement of income.
- The petitioners asserted they relied on their tax representative to prepare the return. However, the Court found their reliance failed to meet the reasonable cause standard.
Primary Holdings:
- Petitioners did not have reasonable cause for their mistaken underreporting because they:
- Did not actively participate in the return preparation process.
- Did not give the tax return preparer adequate information to prepare an accurate return.
- Did not include in the record any showing they reviewed the completed return.
- Further, the Petitioners did not act reasonably because Mr. LaRochelle was a sophisticated businessperson involved in several business partnerships and was aware of the need to keep records concerning financial receipts.
Key Points of Law
- Reliance on the professional advice of a tax return preparer does not constitute reasonable cause where the taxpayer did not furnish sufficient information to prepare an accurate income tax return. Enoch v. Commissioner, 57 T.C. 781, 802 (1972).
- Nonreceipt of tax information forms, such as a Form W–2, Wage and Tax Statement, or a Form 1099, does not excuse a taxpayer from his or her duty to report the income. See Du Poux v. Commissioner, T.C. Memo. 1994-448
- Nonreceipt of a Form 1099–R does not constitute reasonable cause to prevent the application of a section 6662(a) accuracy-related penalty. See Ashmore v. Commissioner, T.C. Memo. 2016-36; Jones v. Commissioner, T.C. Memo. 2010-112.
- Whether a taxpayer acted with reasonable cause and in good faith takes into account facts and circumstances, including the taxpayer’s knowledge, education, and experience, as well as reliance on professional advice. Thomas v. Commissioner, T.C. Memo. 2013-60, at *7; Treas. Reg. § 1.6664-4(b)(1).
Insights Taxpayers with multiple residences should implement a process to ensure they receive all important financial and tax information. Separately of tax information forms, taxpayers should keep records of their income and review their tax returns to ensure that all relevant income is reported, regardless of the hiring of a tax return preparer. Before challenging accuracy-related penalties in Court, taxpayers should seriously evaluate the probable total cost of litigation against the chances of a reasonable cause finding, given the facts and circumstances of the underreporting. If challenging a penalty based on the non-receipt of payment information such as a 1099, generally, the challenge will fail. The standard required to prove reasonable cause or good faith in an underreporting mistake is more rigorous the more sophisticated the taxpayer.
