Tax Court in Brief | Remisovsky v. Comm’r | Reasonable Cause Exception to Additions to Tax

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The Tax Court in Brief – August 29th – September 2nd, 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.

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Tax Litigation:  The Week of August 29th, 2022, through September 2nd, 2022

George Anton Remisovsky and Ellen Jones-Remisovsky v. Comm’r, T.C. Memo. 2022-89| August 30, 2022 | Lauber, A. | Dkt. No. 11945-20L

Short Summary: Petitioners sought a hearing in response to CDP notices issued with respect to tax reported on their late-filed 2013 tax return and additions to tax under I.R.C. §§ 6651(a)(1) and (a)(2). At the time the 2013 return was due, the husband was a practicing physician and the wife a retail manager. During the hearing, Petitioners expressed interest in a collection alternative and challenged their liability for the additions to tax based on reasonable cause. They pointed to the husband’s history of functional alcoholism and depression (corroborated by a psychiatrist’s letter), which they argued diminished his ability to comply with his financial and tax obligations. The settlement officer (SO) considered petitioners’ reasonable cause claims and applicability of the government’s “first time” penalty abatement policy but determined that petitioners did not meet the requirements for relief. She offered them an installment plan (IA) but it was rejected. Because petitioners were not eligible for penalty abatement, declined the IA and sought no other collection alternative, the SO closed the case, sustaining the collection actions. Petitioners timely petitioned. At trial, petitioners contended that alcoholism and depression are recognized as “diseases” but they offered no evidence concerning the severity of the husband’s conditions or his inability to timely file or pay at relevant times. They also failed to show that the wife was unable to do so.

Key Issues and Primary Holdings:

Should the disputed additions to tax under sections 6651(a)(1) and (2) be abated on the basis of reasonable cause?

No. Petitioners did not meet their burden of proof. The record contained no evidence that the husband’s illness, if any, incapacitated him during 2013 or 2014, during which time he continued to practice medicine. Nor did it contain evidence the wife, employed as a retail manager, was unable to discharge her tax obligations.

Did the SO abuse her discretion by failing to grant petitioners an installment agreement for 2013.

No. Petitioners failed to make a counterproposal to the SO’s rejected installment plan. As the Court observed, a settlement officer is not obligated to pursue a collection alternative where no such proposal is made. McLaine v. Commissioner, 138 T.C. 228, 243 (2012).

Key Points of Law:

Standard of Review Unless the liability of a taxpayer’s underlying liability is properly at issue, the Court reviews IRS determinations in a CDP hearing for abuse of discretion. Jones v. Commissioner, 338 F.3d 463, 466 (5th Cir. 2003); Goza v. Commissioner, 114 T.C. 176, 182 (2000). Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). If underlying liability is at issue, the standard of judicial review is de novo. Goza, 114 T.C. at 181-82.

A taxpayer’s underlying liability includes penalties and additions to tax that are part of the unpaid tax that the Commissioner seeks to collect. Dykstra v. Commissioner, T.C. Memo. 2017-156.

Additions to Tax — Reasonable Cause Exception A taxpayer can challenge his or her underlying liability, including additions to tax under sections 6651(a)(1) and (2), if the taxpayer has had no prior opportunity to dispute the underlying liability. I.R.C. § 6330(c)(2)(B); Montgomery v. Commissioner, 122 T.C. 1, 9 (2004).

A delay in filing a tax return is due to reasonable cause if the taxpayer “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” Treas. Reg. § 301.6651-1(c)(1). Financial hardship generally does not affect a person’s ability to file. IRM 20.1.1.3.3.3(1)(a) (Aug. 5, 2014).

To prove reasonable cause for failure to timely pay a tax due, the taxpayer must show that he “exercised ordinary business care and prudence in providing for payment of his tax liability and nevertheless was either unable to pay the tax or would suffer economic hardship if he paid the tax on the due date.” Hardin v. Commissioner, T.C. Memo. 2012-162 (citing Treas. Reg. § 301.6651-1(c)(1).

Petitioners bear the burden of proving “reasonable cause.” See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Where a taxpayer’s disability is raised as part of a reasonable cause defense, the Court looks to “the severity of the disability and the impact it had on the taxpayer’s life.” Jones v. Commissioner, T.C. Memo. 2006-176. For illness or incapacity to constitute reasonable cause, the taxpayer must show that he or she is “incapacitated to such a degree” that he or she could not file his or her return(s). Thomas v. Commissioner, T.C. Memo. 2005-258.

Illness or incapacity “generally does not prevent a taxpayer from filing returns where the taxpayer is able to continue his business affairs despite the illness or incapacity.” Hazel v. Commissioner, T.C. Memo. 2008-134; Watts v. Commissioner, T.C. Memo. 1999-416 (taxpayer’s “selective inability to perform his or her tax obligations, while performing his or her regular business, does not excuse failure to file.”).

Insights: This case is a useful roadmap for how to prove up “reasonable cause” based on illness or incapacity. Also, it clearly illustrates that evidence ‘rules’ — particularly in a tax case. Here, other than the husband’s self serving testimony and a letter from his psychiatrist, petitioners offered no evidence to support their reasonable cause defense. For example, Petitioners did not call the psychiatrist to opine on why the husband was able to practice law but not able to satisfy his tax obligations when the return and payment were due and the wife did not testify or produce documentation to explain why she was unable to file the return and pay the tax or engage a tax preparer to do so.