The Tax Court in Brief February 15 – February 19, 2021

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The Tax Court in Brief February 15 – February 19, 2021

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 February 15 – February 19, 2021


Tax Court Case: Kramer v. Comm’r, T.C. Memo. 2021-16

February 16, 2021 | Gale, J. | Dkt. Nos. 15224-17 & 15368-17

Tax Dispute Short Summary:

The IRS issued two notices of deficiency to Don Kramer and Lela Arabuli (petitoners).  The first notice of deficiency asserted deficiencies for petitioners’ 2006-2010 tax years and various penalties—fraud penalties were asserted solely against Don Kramer for 2006-2008.  The second notice of deficiency determined related solely to Don Kramer and asserted, among other things, fraud penalties for his 2004-2005 tax years.  Petitoners timely filed a petition with the United States Tax Court to challenge the IRS’ determinations.  However, petitioners failed to respond to the IRS’ discovery requests, including request for admissions.  In reply to the IRS’ discovery requests, don Kramer filed a document entitled “Tax Statement Affidavit,” which set forth hundreds of pages of tax-protestor rhetoric.  Lela Arabuli did not respond at all.  Accordingly, after motion by the IRS, the Court deemed stipulated all matters set forth in the IRS’ proposed stipulation of facts and the first supplemental stipulation of facts.  The IRS then moved the Court in both consolidated cases for entry of default and decision.

Key Issues:

Primary Holdings:

Key Points of Law:

Tax Litigation Insight: The Kramer decision shows the potential dangers to taxpayers when they file a petition in the United States Tax Court but fail to follow the Tax Court Rules of Practice and Procedure and the Tax Court’s own orders.  As shown in the decision, in these instances taxpayers may be held in default under Rule 123(a).


Tax Court Case:

Estate of Warne v. Comm’r, T.C. Memo. 2021-17

February 18, 2021 | Buch, J. | Dkt. Nos. 7019-18 and 7020-18

Tax Dispute Short Summary

: In the final years of her life, Mariam Warne gave fractional interests in limited liability companies to family members.  The LLCs were owned by a family trust and held ground leases in various properties in California.  When Ms. Warne passed away, the family trust held the remaining interests in the LLCs.  Her estate also donated its entire interest in one LLC by splitting that donation between two charitable organizations, with 25% going to a church and the remaining 75% to a family foundation.  The IRS issued notices of deficiency determining a gift tax deficiency for 2012 and an estate tax deficiency.  The IRS disagreed with the valuations used by the estate for the LLCs and also determined lower discounts for lack of control and marketability than used by the estate for several LLCs.  The estate timely filed petitions in response to the proposed deficiencies.

Tax Litigation Key Issues: 

(1) What are the values of the respective LLC interests as of Ms. Warne’s date of death; (2) What is the value to the estate of the charitable contribution deduction; and (3) Whether the estate is liable for a late-filing penalty with respect to the late-filed gift tax return?

Primary Holdings:  (1) Both sides’ experts erred in certain respects regarding the valuations; accordingly, the Tax Court determined the respective valuations of the LLCs based on its own analysis of the data; (2) The estate must include 100% of the value of the property related to the charitable contribution deduction in the estate but may deduct 25% and 75% interests received by the respective charities, respectively; (3)  The estate is liable for a late-filing penalty for filing the gift tax return late because the IRS met is burden of production in showing the penalty applies, and the estate has failed to show reasonable cause.

Key Points of Law:

Tax Litigation Insight: Estate of Warne reminds taxpayers, among other things, that the IRS can impose significant penalties for failure to file a gift tax return (IRS Form 709) when one is otherwise required to be filed.


Tax Court Case:

Blum v. Comm’r, T.C. Memo. 2021-18

February 18, 2021 | Urda, J. | Dkt. No. 20020-17

Tax Dispute Short Summary:

Petitioner received a payment of $125,000 in 2015 in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit.  She did not report the amount on her 2015 return, and the IRS issued a notice of deficiency with respect to the settlement payment.

Tax Litigation Key Issues:

Primary Holdings:

Key Points of Law:

Tax Litigation Insight: The Blum case shows that the language of a settlement agreement, in many cases, may be the most important factor in determining the taxability of the proceeds received under the agreement.  In many cases, taxpayers should consult with tax counsel early on with respect to their damages claims to ensure that proper language is utilized vis-à-vis the taxability of the proceeds.


Tax Court Case:

San Jose Wellness v. Comm’r, 156 T.C. No. 4

February 17, 2021 | Toro, J. | Dkt. Nos. 12313-15, 12353-15, 15714-18

Tax Dispute Short Summary:

Petitioner operated a medical cannabis dispensary pursuant to California law.  It incurred certain expenses in connection with its operations and deducted those expenses on its federal income tax returns for the taxable years 2010, 2011, 2012, 2014, and 2015.  The returns included deductions for depreciation and charitable contributions.  The IRS disallowed all of the deductions pursuant to Section 280E for all of the years at issue.

Tax Litigation Key Issues:

Primary Holdings:

Key Points of Law:

Tax Litigation Insight: San Jose Wellness shows the substantial reach of Section 280E in denying deductions to those engaged in the cannabis industry.

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