Freeman Law | The Tax Court in Brief

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Freeman Law | The Tax Court in Brief

The Tax Court in Brief

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 August 1 – August 7, 2020

Reflectxion Resources, Inc. v. Comm’r, T.C. Memo. 2020-114 | August 3, 2020 | Gustafson, J. | Dkt. No. 12017-16

Short SummaryThe case involves the analysis and discussion of the Tax Court’s jurisdiction over cases where the employer did not properly classify its workers as employees and seeks relief under section 530.

Reflectxion Resources, Inc. (the “taxpayer”), a medical staffing agency, hired travel therapists for one of its clients, Gevity. Under a services agreement, the taxpayer provided such staff to Gevity for 11 quarters. During the 11 quarters, it was Gevity who acted as employer of the staff and filed the respective employment tax returns. After such period and for the following 5 quarters, it was the taxpayer who filed employment tax returns. During all 16 quarters, the travel therapists were reimbursed travel expenses. Such reimbursements were never reported as wages for employment tax in all 16 quarters.

The IRS determined that for the 16 quarters, the reimbursements were subject to employment taxes. Taxpayer argued that for the first 11 quarters, Gevity was the statutory employer and consequently, it sought relief under section 530, which provides relief in instances where a common law employer has reasonably believed that the employee’s wages are exempt from payroll taxes. The IRS took the position that section 530 relief did not applied.

Focusing on the applicability of section 530, the Tax Court focused its analysis on whether it had jurisdiction over the dispute, considering the application of section 530 argued by the taxpayer. The taxpayer contended that the Court only had jurisdiction over the first 11 quarters, because under section 7436 of the Code, the Court has jurisdiction over any case in which there is a “dispute” about the application of section 530. The Court agreed with the taxpayer and rejected the argument of the IRS that it had jurisdiction over the full 16 quarters.

Key Issues:  Does the application of section 530 constitutes an actual controversy for purposes of section 7436(a) and consequently, does it fall within the jurisdiction of the Tax Court.

Primary Holdings: The Tax Court has jurisdiction over disputes involving employment taxes as provided by section 7436(a). If there is an actual controversy that involves a determination in connection with an audit as part of an examination, the Tax Court has jurisdiction. To question the applicability of section 530 to a particular dispute constitutes an actual controversy for purposes of section 7436(a) which triggers the Tax Court’s jurisdiction. However, a unilateral determination made by the IRS that the taxpayer does not contend, does not constitute an “actual controversy”, consequently the Tax Court does not have jurisdiction over such dispute.

Key Points of Law:

Section 7436(a) provides that the Tax Court has jurisdiction over disputes involving employment taxes that (i) are in connection with an audit, (ii) there is an actual controversy that (iii) involves a determination made as part of an examination. If all these standards are met, the Tax Court has jurisdiction to hear the case.

In cases concerning the applicability of section 530, there is an actual controversy when the employer has not treated the worker as an employee. If the employer meets the three elements provided by section 530, then relief can be applied. The elements of section 530 are:

  • The employer did not treat an individual as an employee.
  • The employer filed tax returns “on a basis consistent with the taxpayer’s treatment of such individual as not being an employee” and,
  • The employer must have reasonable basis for not treating such individual as employee.

In the instant case, there is an actual controversy under section 7436(a) only for the first 11 quarters because there is a question whether the taxpayer is entitled to relief under section 530. Because the IRS’ determination is made as part of an examination, all the elements provided by section 7436(a) are met, and thereby, the Tax Court has jurisdiction.

For the remaining quarters, the Tax Court does not have jurisdiction because the taxpayer did treat its medical therapists as employees, consequently, there is no contention to the IRS argument that the taxpayer was the employer of such individuals. Accordingly, there is no “actual controversy” for purposes of section 7436(a), which translates in the Tax Court having no jurisdiction.

InsightThis case confirms the line of cases that support the Tax Court’s jurisdiction over disputes involving employment taxes. The three standards provided by section 7436(a) are relevant to establish such jurisdiction in these types of cases. Moreover, taxpayers should be aware of the language used by the IRS when denying applicability of section 530, because it could lead to a controversy that could not fall within the Tax Court’s jurisdiction.


Red Oak Estates, LLC v. Commissioner, T.C. Memo. 2020-116 | August 4, 2020 | Kerrigan, J. | Dkt. No. 13659-17L

Short SummaryThe IRS moved for partial summary judgment, which was ultimately granted by the court.

The IRS issued a notice of final partnership administrative adjustment (FPAA) for tax year 2009 to Effingham Managers, LLC, as the tax matters partner for Red Oak Estates, LLC (Red Oak). In the FPAA respondent disallowed a $4,110,500 deduction for a noncash charitable contribution for the donation of a conservation easement and asserted in the FPAA a gross valuation misstatement penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to section 6662(a).

On December 31, 2009, Red Oak granted a conservation easement of approximately 150.02 acres of the property to the Georgia Land Trust, Inc., by deed recorded in Effingham County. Red Oak claimed a $4,343,000 charitable deduction for its contribution of the conservation easement on its 2009 Form 1065, U.S. Return of Partnership Income. It attached Form 8283, Noncash Charitable Contributions, to its partnership return and included an attachment stating that the appraised fair market value (FMV) of the unencumbered property was $4,651,000 and the net value of the contribution was $4,343,000.

The deed addressed the possibility that circumstances might arise in the future to render the purpose of the conservation easement impossible to accomplish, such as condemnation or certain judicial proceedings.  Paragraphs 17 and 18 of the deed provided that if the conservation easement is terminated or extinguished by judicial proceedings or condemnation, “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph below.”

Paragraph 19 of the deed, referred to as the proceeds paragraph, provides that the conservation easement grants a real property interest immediately vested in the grantee. The proceeds paragraph stated in pertinent part:

[T]he parties stipulate to have a current fair market value determined by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement. The value of this Conservation Easement at the time of this conveyance, and the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement, shall be determined according to that certain Property Appraisal Report, on file at the office of the Grantee, prepared on behalf of Grantor to establish the value of the gift of this Conservation Easement. The values at the time of this Conservation Easement shall be those values used to calculate the deduction for federal income tax purposes pursuant to § 170(h) of the Code.

The IRS contends that the deed violates the proceeds regulation because it provides that the portion of proceeds required to be allocated to the donee in the event of an extinguishment shall be reduced by the value of improvements to the land made by Red Oak after the grant of the easement.

Key Issues:

  • Whether the charitable contribution deductions related to conservation easements should be recognized.
  • Whether the extinguishment clause in Red Oak’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.

Primary Holdings

  • The Court granted the IRS’s Motion for Summary Judgment, holding, that the deed failed to satisfy the “protected in perpetuity” requirement.
  • Substantial compliance is not a defense available to a taxpayer in this context; instead, strict compliance is necessary.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation . . . can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied be- cause the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. (proceeds regulation), the deed must guarantee that the donee will receive “a proportionate share of extinguishment proceeds”.
  • Deductions are a matter of legislative grace, and a taxpayer must prove its entitlement to the deductions it claims. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To be entitled to a deduction for the donation of a conservation easement, the donor must ensure that the donation “gives rise to a property right, immediately vested in the donee organization,” to receive a proportionate share of the proceeds of any post-extinguishment sale. Sec. 1.170A- 14(g)(6)(ii), Income Tax Regs.
  • A donor must show strict, and not substantial, compliance with the perpetuity requirements of the regulation.

Insight: The IRS has continued an attack on conservation easement deductions.  While the IRS typically attacks several aspects of conservation easement deductions, the case above is an example of a string of cases from the Tax Court that have sided with the IRS on technical grounds relating to the requirements under Treasury Regulations with respect to the deed granting the conservation easement.  Expect to see continued pressure and legal challenges from the IRS in this area.


Cottonwood Place, LLC v. Commissioner, T.C. Memo. 2020-115 | August 4, 2020 | Kerrigan, J. | Dkt. No. 14076-17

Short Summary: The IRS moved for partial summary judgment, which was ultimately granted by the court.

The IRS issued a notice of final partnership administrative adjustment (FPAA) for tax year 2009 to Hugh F. Smisson III, as tax matters partner for Cottonwood Place, LLC (Cottonwood). In the FPAA respondent disallowed a $4,592,000 deduction for a noncash charitable contribution and asserted a gross valuation misstatement penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to section 6662(a).

On December 31, 2009, Cottonwood granted a conservation easement of 135.56 acres of the property to the Georgia Land Trust, Inc., by deed recorded in Effingham County. The deed includes provisions for the distribution of proceeds in the event of extinguishment or condemnation. If the easement is terminated or extinguished by judicial proceedings or condemnation, “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph below.” If the easement is taken, in whole or part, by the exercise of eminent domain, the Grantee shall be entitled to compensation in accordance with applicable law and the proceeds paragraph included in the deed.

Paragraph 19 of the deed, referred to as the proceeds paragraph, provides that the conservation easement grants a real property interest immediately vested in the grantee. The proceeds paragraph states in pertinent part:

As required under Treas. Reg. § 1.170A-14(g)(6)(ii), the parties stipulate to have a current fair market value determined by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement. The value of this Conservation Easement at the time of this conveyance, and the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement, shall be determined according to that certain Property Appraisal Report, on file at the office of the Grantee, prepared on behalf of Grantor to establish the value of the gift of this Conservation Easement. The values at the time of this Conservation Easement shall be those values used to calculate the deduction for federal income tax purposes pursuant to § 170(h) of the Code.

Key Issues:

  • Whether the charitable contribution deductions related to conservation easements should be recognized.
  • Whether the extinguishment clause in Red Oak’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.

Primary Holdings

  • The Court granted the IRS’s Motion for Summary Judgment, holding, that Belair’s deed fails to satisfy the “protected in perpetuity” requirement.
  • Substantial compliance is not a defense available to a taxpayer in this context; instead, strict compliance is necessary.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation . . . can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied be- cause the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. (proceeds regulation), the deed must guarantee that the donee will receive “a proportionate share of extinguishment proceeds”.
  • Deductions are a matter of legislative grace, and a taxpayer must prove its entitlement to the deductions it claims. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To be entitled to a deduction for the donation of a conservation easement, the donor must ensure that the donation “gives rise to a property right, immediately vested in the donee organization,” to receive a proportionate share of the proceeds of any post-extinguishment sale. Sec. 1.170A- 14(g)(6)(ii), Income Tax Regs.
  • A donor must show strict, and not substantial, compliance with the perpetuity requirements of the regulation. 

Insight: The IRS has continued an attack on conservation easement deductions.  While the IRS typically attacks several aspects of conservation easement deductions, the case above is an example of a string of cases from the Tax Court that have sided with the IRS on technical grounds relating to the requirements under Treasury Regulations with respect to the deed granting the conservation easement.  Expect to see continued pressure and legal challenges from the IRS in this area.


Schroeder v. Comm’r, T.C. Memo. 2020-117 | August 5, 2020 | Lauber, A. | Dkt. No. 27344-16

 Short SummaryPetitioners are a divorced couple, who agreed in a marital settlement agreement that the ex-wife and her attorney would receive cash payments in lieu of her share in a limited liability company the ex-husband had an in-direct interest in during the marriage.  The limited liability was treated as a partnership for federal tax purposes.  After the divorce was finalized and after the ex-husband had begun making payments to the ex-wife, the ex-husband sold his interest in the limited liability company and claimed an increase in the basis of his interest in the company based on the payments made to the ex-wife.  The IRS disagreed, arguing that the payments to the ex-wife could not generate additional basis in the limited liability company.  The Tax Court found in favor of the IRS.

Key Issue:  Can a taxpayer’s basis in a limited liability company be increased by making payments to an ex-spouse in lieu of her share in a limited liability company?

Primary Holdings

  • The Internal Revenue Code provides limited methods by which a partner’s basis in a partnership can be increased.

Key Points of Law:

  • IRC § 705(a)(1) provides that a partner’s initial basis in a partnership is increased by the sum of the partner’s distributive share of “(A) taxable income of the partnership as determined under IRC § 703(a), (B) income of the partnership exempt from tax under this title, and (C) the excess of the deductions for depletion over the basis of the property subject to depletion.”
  • IRC §§ 722 and 752(a) also provide that the basis of a partner’s interest in a partnership may by increased by any subsequent contribution of property, including money, to the partnership and by a partner’s assumption of partnership liabilities.
  • Spousal payments made pursuant to a property settlement are not tax-deductible. See Rood v. Commissioner, T.C. Memo.  2012-122, 103T.C.M. (CCH) 1668, 1670.
  • IRC § 215(a) provides that alimony or separate maintenance payments are deductible in the year paid.

InsightThe Schroeder case highlights the importance of looking at the tax implications of the distribution of marital assets upon divorce.  Further, it stresses the need to carefully consider how such distributions are to be classified, as there are serious tax implications.  It also shows that it is advisable to consult tax expert to review any such proposed distributions before they are approved by the court or executed.


Stevens v. Comm’r, T.C. Memo. 2020-118 | August 6, 2020 | Halpern, J. | Dkt. Nos. 29815-13, 9539-15

Short SummaryThe IRS determined deficiencies for the taxpayers’ 2006, 2008, 2009, and 2010 tax years.  In addition, the IRS asserted additions to tax under Section 6651(a)(1) and accuracy-related penalties under Section 6662(a) for 2006, 2008, and 2010.  Moreover, because the taxpayers had not filed returns for 2005, 2007, 2011, and 2012, the IRS issued separate notices of deficiency to each taxpayer and also determined additions to tax under Section 6651(a)(1) and (2) and estimated additions to tax under Section 6654 for 2011 and 2012.

After the notices of deficiency were issued, the taxpayers submitted to the IRS signed and unsigned returns reflecting losses from TEFRA partnerships which effectively offset the deficiencies.  Prior to trial, the IRS moved to dismiss for lack of jurisdiction so much of each case as it related to partnership items, which was granted by the Tax Court.  Thereafter, the IRS provided recomputed deficiencies reflecting the dismissal of partnership items.  The taxpayers provided no evidence at trial challenging the adjustments underlying the deficiencies.

Key Issue:  To what extent can the Tax Court uphold the IRS’ recomputed deficiencies in light of the taxpayers’ claimed partnership loss deductions?

Primary Holdings

  • (1) For the 2005 tax year, there is no issue for the Tax Court to decide because: (i) the IRS concedes there is no deficiency for such year; and (ii) the Tax Court granted the IRS’ motion for summary judgment in that the Tax Court lacks jurisdiction to order a refund or credit of any overpayment with respect to the 2005 tax year. (2) For the 2006 tax year, the IRS’ deficiency determination is upheld because:  (i) the partnerships at issue were “small partnerships” under Section 6231(a)(1)(B)(i); (ii) the “oversheltered” return rules under Section 6234 do not apply and therefore the Tax Court has jurisdiction to redetermine the deficiency determined by the IRS; and (iii) the taxpayers failed to substantiate the losses they reported from the partnerships. (3) For the 2007 and 2009 through 2012 tax years, the taxpayers have no deficiencies because:  (i) Section 6234 does not apply to these years; (ii) the notices of deficiency are valid under Dees v. Comm’r, 148 T.C. 1 (2017); (iii) the taxpayers’ filing of a petition in response to the notices of deficiency give the Tax Court jurisdiction to redetermine the deficiencies for such year; and (iv) the IRS’ adjustments to the taxpayers’ nonpartnership income for each year are offset by losses the taxpayers’ claim from partnerships the adjustment of which require partnership-level proceedings.  (4) For the 2008 tax year:  (i) the notice of deficiency for such year is treated as a notice of adjustment under Section 6234(a); (ii) the petition the taxpayers filed is treated as a petition for redetermination of adjustments to nonpartnership items under Section 6234(c); (iii) the taxpayers have not provided grounds for challenging the IRS’ determination of their capital gain from nonpartnership sources for 2008 or disallowance of their deduction for their loss from a partnership or their net farm rental loss for that year; and (iv) the Tax Court will issue a declaratory judgment under Section 6234(c) for 2008 upholding the IRS’ determinations concerning those items.

Key Points of Law:

  • The privilege of filing a joint tax return depends on an election by the making of a return, as provided in Section 6013. Dritz v. Comm’r, T.C. Memo. 1969-175 (1969), aff’d, 427 F.2d 1176 (5th 1970).
  • TEFRA’s unified partnership audit and litigation rules require that the tax treatment of partnership items be determined in partnership-level proceedings that are generally binding on all partners. When applicable, the TEFRA partnership rules avoid the need for duplicative partner-level proceedings that might produce inconsistent results. Staff of J. Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 268 (J. Comm. Print 1982).  The rules generally require the IRS to conduct partnership-level proceedings to adjust partnership items before assessing tax against a partner as a result of the partnership adjustments.
  • If a partner claims a large enough loss from a partnership subject to the TEFRA rules, that loss might not only shelter the income reported by the partner on his individual return but also absorb the effect of any adjustments the IRS seeks to make to the partner’s nonpartnership items, thereby preventing the determination of a deficiency. Congress enacted the “oversheltered return” rules of section 6234 to address that prospect.  Those rules apply when four conditions are met.
  • First, the taxpayer must file an oversheltered return for a taxable year. 6234(a)(1).  A return is “oversheltered” if it shows no taxable income and a net loss from partnership items.  Sec. 6234(b).
  • Second, the Commissioner must make a determination with respect to the treatment of items (other than partnership items) of the taxpayer for the taxable year in question. 6234(a)(2).
  • Third, it must be the case that the Commissioner’s adjustments to nonpartnership items do not give rise to a deficiency. 6234(a)(3).
  • And fourth, those adjustments would give rise to a deficiency if there were no net loss from partnership items.
  • In sum, the rules apply when the effects of adjustments to nonpartnership items are absorbed by the taxpayer’s reported net partnership loss so that the adjustments do not produce a deficiency.
  • When the oversheltered return rules apply, instead of issuing a notice of deficiency to the taxpayer, the Commissioner can “send a notice of adjustment” that reflects his determination regarding nonpartnership items. 6234(a).  The taxpayer can then file with the Tax Court a petition for redetermination of the adjustments.  Sec. 6234(c).  The filing of a petition gives the Tax Court jurisdiction to make a declaration with respect to all items (other than partnership items and affected items which require partner level determinations as described in section 6230(a)(2)(A)(i)) for the tax year to which the notice of adjustment relates.  Id.
  • Congress enacted section 6234 to overrule the Tax Court’s decision in Munro v. Comm’r, 92 T.C. 71 (1989). Rept. No. 105-33, at 253 (1997).
  • The Commissioner’s issuance of a notice of deficiency does not preclude the application of the oversheltered return rules for the year or years covered by the notice. See 6234(h)(2).
  • Section 6231(a)(1)(B)(i) provides: “The term ‘partnership’ shall not include any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.”  That limitation “is applied to the number of natural persons, C corporations, and estates of deceased partners that were partners at any one time during the partnership taxable year.”  Reg. § 301.6231(a)(1)-1(a)(1).  Thus, a partnership qualifies for the exception for a tax year only if it meets the 10-or-fewer limitation throughout the year.
  • There is a “longstanding principle that the party invoking this Court’s jurisdiction bears the burden of demonstrating that it exists.” Dees v. Comm’r, 148 T.C. 1, 23 (2017).  Application of that principle usually places the burden of proof on the taxpayer—who is, after all, the party who initially invoked the Court’s jurisdiction by filing a petition.  But when the Commissioner is the party arguing in favor of jurisdiction—for example, in response to a taxpayer’s motion to dismiss—it may be appropriate to place on the Commissioner the burden of proving the facts that establish the Court’s jurisdiction.  See, e.g., Pietanza v. Comm’r, 92 T.C. 729, 736-737 (1989), aff’d, 935 F.2d 1282 (3d Cir. 1991); see also Jimastowlo Oil, LLC v. Comm’r, T.C. Memo. 2013-195.
  • In deficiency cases, “it is not the existence of a deficiency but the Commissioner’s determination of a deficiency that provides a predicate for Tax Court jurisdiction.” Hannan v. Comm’r, 52 T.C. 787, 791 (1969).
  • In Dees v. Comm’r, 148 T.C. at 5, the Tax Court distilled its prior caselaw into a “two-prong approach to the question of the validity of a notice of deficiency.” In the first step of the Dees approach, the Tax Court “look[s] to see whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount.”  at 6.  A notice that meets that test is valid, without the need for further inquiry.  If instead the notice is “ambiguous . . . the party seeking to establish jurisdiction . . . [must] establish that the Commissioner made a determination and that the taxpayer was not misled by the ambiguous notice.”  Id.
  • Reg. § 1.1012-1(c)(1) provides: “If shares of stock in a corporation are sold or transferred by a taxpayer who purchased or acquired lots of stock on different dates or at different prices, and the lot from which the stock was sold or transferred cannot be adequately identified, the stock sold or transferred shall be charged against the earliest of such lots purchased or acquired in order to determine the cost or other basis of such stock.”  Moreover, it has long been established that taxpayers bear the burden of proving the basis of property claimed as an offset to the amount realized upon its sale.  See, e.g., Burnet v. Houston, 283 U.S. 223, 227-228 (1931).
  • A partnership’s qualification for the small partnership exception must be determined year by year. Reg. § 301.6231(a)(1)-1(a)(3).
  • Section 6651(a)(1) provides for an addition to tax when a taxpayer fails to file a timely return. The addition to tax is a prescribed percentage of the amount of tax required to be shown on the return.  (The prescribed percentage increases, up to a stated maximum, according to the extent of the delinquency of the taxpayer’s return.). The Tax Court has jurisdiction to redetermine a taxpayer’s liability for an addition to tax under section 6651(a)(1) only to the extent it is “attributable to a deficiency in tax described in section 6211”.  6656(b)(1).
  • Section 6662(a) provides for an accuracy-related penalty equal to 20% of an “underpayment” attributable to specified types of misconduct. The definition of “underpayment” is similar to the definition of “deficiency”—generally equal to the excess of the tax imposed over the tax shown on the taxpayer’s return.  6664(a).
  • As the Court of Appeals for the Fifth Circuit observed when it affirmed an order of this Court granting the Commissioner’s motion for summary judgment in Jones v. Comm’r, 338 F.3d 463, 466 (5th 2003): “The IRS has discretion to accept or reject an amended return.”
  • Moreover, Pearce v. Comm’r, 95 T.C. 250 (1990), rev’d, 946 F.2d 1543 (5th 1991), establishes that the Commissioner’s failure to take into account a taxpayer’s return for a year does not invalidate a notice of deficiency issued for the year.

Insight:  The Stevens case again illustrates the complexity in the old TEFRA regime.  However, fewer of these cases will be heard by the Tax Court as the IRS initiates more partnership examinations under the new BBA audit procedures.