The Tax Court in Brief February 22 – 26, 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.
The Week of February 22 – February 26, 2021
- Llanos v. Commissioner | February 22, 2021 | Kerrigan, K. | Dkt. No. 8424-19L
- Rogers v. Commissioner | February 22, 2021 | Nega, J. | Dkt. No. 8930-17
- Friendship Creative Printers, Inc. | February 22, 2021 | Nega | Dkt. No. 7945-19L
- Konstantin Anikeev and Nadezhda Anikeev v. Comm’r, 156 T.C. February 23, 2021 | Goeke, J. | Dkt. No. 13080-17
- Galloway v. Comm’r, T.C. Memo. 2021-24 | February 24, 2021 | Urda | Dkt. No. 18722-18L
Llanos v. Commissioner
Short Summary: IRS assessed § 6702 penalties against petitioner for filing frivolous returns. Eventually the IRS issued a Final Notice of Intent to Levy, to which the taxpayer timely request a CDP hearing. At the CDP hearing, the petitioner indicated that he had not received the required notices of deficiency for the civil penalties. Petitioner did not request any collection alternatives. The settlement officer upheld the levy action, and petitioner filed in tax court. Tax court held for the IRS.
Key Issue: Whether petitioner made a “meaningful” challenge to the penalties so as to trigger a de novo review, and whether the levy action was appropriate.
- The petitioner provided meritless arguments with no real substance, so the penalties were upheld. The taxpayer did not provide any other reasonable collection alternatives, so the levy was upheld.
Key Points of Law:
- Where the validity of the underlying tax liability is properly at issue, the Tax Court reviews that matter de novo.
- A taxpayer may challenge the underlying tax liability during a CDP hearing if he or she did not receive a statutory notice of deficiency for such liability or did not otherwise have the opportunity to dispute such liability.
- The Tax Court reviews administrative determinations by the Appeals Office regarding nonliability issues for abuse of discretion.
- In determining abuse of discretion the Tax Court considers whether the determination was arbitrary, capricious, or without sound basis in fact or law.
- De novo review of a section 6702 penalty determination is not automatic. If the taxpayer at a CDP hearing presents no evidence or rational argument why the penalty does not apply, the taxpayer has not made a meaningful challenge to the penalty.
- Following a CDP hearing the settlement officer must determine whether to sustain the proposed collection actions. In making that determination, section 6330(c)(3) requires the settlement officer to consider: (1) whether the requirements of any applicable law or administrative procedure have been met; (2) any issues appropriately raised by the taxpayer; and (3) whether the collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.
Insight: The Llanos decision demonstrates the application of different standards of review depending on the nature of the case. But most importantly, the case discusses the standards used to review the collection action determinations of an IRS settlement/appeals officer.
Rogers v. Commissioner
Short Summary: Petitioner sought review of respondent’s determination that she is not entitled to relief from joint and several liability under section 6015(b), (c), or (f) for tax years 2010 and 2011 (years at issue) with respect to the joint Federal income tax returns that she filed with intervenor, her former spouse.
Key Issue: Whether petitioner was entitled to relief from joint and several liability under section 6015(b), (c), or (f).
- The petitioner was not entitled to relief under § 6015 because she knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her Federal income tax return filing obligations.
Key Points of Law:
- A requesting spouse may be relieved from joint and several liability under section 6015 if certain conditions are met. Section 6015 provides a requesting spouse with three alternatives for relief from joint and several liability: (1) full or partial relief under subsection (b), (2) proportionate relief under subsection (c), or (3) if relief is not available under subsection (b) or (c), equitable relief under subsection (f) . Except as otherwise provided in section 6015, petitioner, as the taxpayer requesting relief, bears the burden of proof
- Section 6015(b)(1) provides that a requesting spouse shall be relieved of joint and several liability for a particular year if each of the following requirements is met: (1) a joint return was filed for the year in issue; (2) the return contains an understatement attributable to an erroneous item of the nonrequesting spouse; (3) the requesting spouse establishes that, in signing the return, he or she did not know and had no reason to know of the understatement; (4) it is inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement; and (5) the requesting spouse’s claim for relief is timely. Failure to meet one of these requirements precludes relief under section 6015(b).
- The Court applies a reasonably prudent person standard to evaluate the requesting spouse’s knowledge in cases involving both erroneous deductions and unreported income.
- A spouse knew or had reason to know of an understatement if a reasonably prudent person in her position would have known that the return contained an understatement when she signed it. The reasonably prudent person standard also imposes a duty of inquiry on the requesting spouse.
- In applying the reasonably prudent person standard, the Court consider sfour factors: (1) the spouse’s level of education, (2) her involvement in the financial and business activities of the family, (3) the presence of unusual or lavish expenses beyond the family’s norm, and (4) the nonrequesting spouse’s evasiveness or deceitfulness about the family’s finances.
- Section 6015(c) permits an individual who filed a joint return to elect to limit his or her liability to the portion of the deficiency that is allocable to him or her under section 6015(d). Under section 6015(d), a portion of the deficiency is allocable to the electing spouse if the erroneously reported items giving rise to that portion of the deficiency are allocable to the electing spouse.
- To be eligible to make an election under section 6015(c), the requesting spouse must have either: (1) been legally separated or divorced from the nonrequesting spouse at the time of the election, sec. 6015(c)(3)(A)(i)(I) , or (2) not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the election, sec. 6015(c)(3)(A)(i)(II) . The request for relief under section 6015(c) must be made no later than two years after the IRS began collection actions against the requesting spouse. Sec. 6015(c)(3)(B).
- If the IRS demonstrates by a preponderance of the evidence that the requesting spouse had actual knowledge, when signing the return, of erroneous items that are allocable to the nonrequesting spouse and give rise to the deficiency (or portion thereof), then the requesting spouse is generally not entitled to relief under section 6015(c) with respect to that deficiency (or portion thereof).
- Section 6015(f) provides an alternative means for innocent spouse relief for a requesting spouse who does not otherwise qualify for relief under section 6015(b) or (c). Sec. 6015(f)(1)(B) . Section 6015(f) provides relief from joint and several liability if it is inequitable to hold the requesting spouse liable for any unpaid tax or any deficiency (or any portion thereof) after taking into account all the facts and circumstances of the case.
- The taxpayer bears the burden of proving that she is entitled to section 6015(f) relief. Rev. Proc. 2013-34 , 2013-43 I.R.B. 397 , modifying and superseding Rev. Proc. 2003-61, 2003-2 C.B. 296, sets forth a three-step procedure for evaluating requests for innocent spouse relief: (1) a list of seven threshold requirements that a requesting spouse must satisfy to be eligible for relief, (2) a three-part test for a streamlined determination to grant relief, and (3) if the taxpayer is not entitled to a streamlined determination, a nonexclusive list of factors that the IRS will consider in determining whether it would be inequitable to hold the spouse jointly and severally liable.
- When the threshold conditions have been met, Rev. Proc. 2013-34 , sec. 4.02 , 2013-43 I.R.B. at 400 , allows a requesting spouse to qualify for a streamlined determination of relief under section 6015(f) if all of the following conditions are met: (1) the requesting spouse is no longer married to the nonrequesting spouse, (2) the requesting spouse will suffer economic hardship if relief is not granted, and (3) the requesting spouse did not know or have reason to know that there was an understatement or deficiency on the joint income tax return.
- Actual or constructive knowledge may be negated if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information such that the nonrequesting spouse’s actions prevented the requesting spouse from questioning or challenging the treatment of any items on the joint return.
- Proc. 2013-34, sec. 4.03(2), 2013-43 I.R.B. at 400-403, sets forth seven nonexclusive factors to be considered in determining whether a requesting spouse is entitled to equitable relief under section 6015(f) : (1) whether the requesting spouse is no longer married to the nonrequesting, (2) whether the requesting spouse will suffer any economic hardship if relief is not granted, (3) whether the requesting spouse knew or had reason to know of the item giving rise to the understatement, (4) whether either spouse has a legal obligation to pay the outstanding Federal income tax liability, (5) whether the requesting spouse significantly benefited from the underpayment, (6) whether the requesting spouse has made a good faith effort to comply with the income tax laws in the years following the years for which relief is sought, and (7) whether the requesting spouse was in poor mental or physical health when the returns at issue were filed, when the request for relief was made, or at the time of trial.
- In making a determination under section 6015(f) , the Court considers the enumerated factors as well as any other relevant factors. No single factor is dispositive, and “[t]he degree of importance of each factor varies depending on the requesting spouse’s facts and circumstances.”
Insight: The Rogers decision demonstrates how the Tax Court reviews and analyzes innocent spouse relief claims. These cases are unpredictable given the broad discretion of the Court to consider nearly every relevant fact in determining whether relief is appropriate, but this provides practitioners with opportunities to make creative arguments on behalf of their clients.
Friendship Creative Printers, Inc.
Short Summary: The Tax Court granted an IRS motion for summary judgment and upheld a proposed levy action in collection of $213,460, arising from a corporation’s employment tax liabilities and related Sec. 6651(a)(1)(2) additions to tax for failure to timely file Forms 94, and failure to timely pay employment taxes, and not making timely deposits for certain quarters.
Key Issue: Whether petitioner is liable for related section 6651(a) additions to tax and section 6656 penalties.
- The Court held that there was no genuine dispute of material fact and that the respondent is entitled to summary judgment as a matter of law.
Key Points of Law:
- Summary judgment is intended to expedite the litigation and avoid unnecessary and expensive trials.
- The court in reviewing the IRS’s determination, including challenges to the underlying liability, it only considers issues that the taxpayer property raised during the collection due process hearing.
- The Court sustained respondent’ s determination of additions to tax and penalties because the record indicated that petitioner did not timely file employment tax returns or make timely payments for its employment taxes.
- In deciding whether there was an abuse of discretion in sustaining a proposed levy, the Court considers whether the settlement officer: (1) properly verified that the requirements of applicable law and administrative procedure have been met; (2) considered issues raised by the taxpayer; and (3) considered whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. See 6330(c)(1), (2), and (3).
Konstantin Anikeev and Nadezhda Anikeev v. Comm’r, 156 T.C.
Short Summary: The case discusses whether credit card cash rewards are includible within income. Specifically, the case analyzes whether rewards acquired from cash equivalents such as gift cards constitute income, considering that such rewards are not goods or services that may be subject to rebates.
During 2013 and 2014, Mr. Anikeev (the taxpayer) had a Blue Cash American Express credit card. Under the rewards program of such card, a customer could receive Reward Dollars equal to 5% of everyday purchases and the number of Rewards that a cardholder could accumulate was unlimited. To maximize his Rewards Dollars, the taxpayer used his credit card to purchase Visa gift cards from grocery stores. After this purchase, the taxpayer used the gift cards to buy money orders. Such money orders were deposited in the taxpayer’s bank account. At the end of the month, he paid his credit card bill and started the process again. The taxpayer redeemed his Rewards and received $36,200 and $277,275 as statements credits for 2013 and 2014, respectively. These amounts were not included in income.
The IRS issued a notice of deficiency determining that the previous amounts constitute income. The Tax Court analyzed the long-standing policy of the IRS applicable to credit cards rewards and determine that the cash rewards obtained from the purchase of the gift cards under the cash equivalent theory, were indeed, income.
Key Issues: Whether cash rewards paid to the taxpayer as statement credits relating to cash equivalent are an accession to wealth and constitute income?
Primary Holdings: Under particular circumstances, credit card rewards may be subject to taxation, when the purchases made with the credit card do not constitute goods or services, but rather cash equivalents.
Key Points of Law:
Section 61(a) defines gross income in a very broad manner. Adjustments to the purchase prices of goods and services are, generally, considered nontaxable. In the case of credit cards rewards, the IRS has a long-standing policy of considering that card rewards are not taxable. See Rev. Ru. 76-96.
Under the rebate rule set forth by the IRS, a purchase incentive such as a credit card rewards, or points is not income but rather it is a reduction of the purchase price. The IRS argued that the taxpayer’s Reward Dollars were not purchase price adjustments but rather cash equivalents that are property equal to their face value. Under this argument, no adjustment could be made because cash equivalents have a basis equal to their face values. Because this argument does not hold with the IRS policy of considering that the rebates received from the purchases of goods or services are not taxable, the Court concluded that the Reward Dollars associated with eh Visa gift cards purchases were not properly included in income.
As for the taxpayer’s direct purchases of money orders and reloads of cash into the debit cards using the American Express credit card constitutes a different issue. The Court determined that the Visa gift cards have product characteristics but did not constitute neither a good nor service. Based on such conclusion, the Court ruled that the Reward Dollars obtained from direct purchases of money orders and cash infusions to reloadable debit cards, constitute income.
Insight: This case will probably lead to modifications to the IRS policy regarding credit card rewards. Under the traditional approach, a reward is not taxable, however, in extreme cases such as this, the rewards may constitute an accession to wealth and consequently, subject to taxation.
Galloway v. Comm’r, T.C. Memo. 2021-24
Short Summary: In this collection due process (CDP) case, the taxpayer sought review pursuant to sections 6320(c) and 6330(d)(1) of the determination by the Internal Revenue Service (IRS) Office of Appeals to uphold the filing of a notice of Federal tax lien (NFTL) with respect to an unpaid Federal income tax liability for 2014, as well as associated interest and additions to tax. The taxpayer asserted that, during his CDP hearing, he was improperly barred from resuscitating an offer-in-compromise (OIC) that had been rejected before the NFTL filing.
Both parties moved for summary judgment. The Tax Court granted summary judgment to the IRS and denied same for the taxpayer.
Key Issue: Whether the IRS improperly rejected the taxpayer’s 2017 OIC, and correspondingly, whether the issue of the claimed improper rejection could be considered a second time in the context of a CDP hearing when it had previously been addressed in an IRS Appeals hearing.
- The IRS did not abuse its discretion in rejecting the taxpayer’s 2017 offer-in-compromise. The settlement officer:
- (1) properly verified that the requirements of any applicable law or administrative procedure have been met;
- (2) considered any relevant issues Mr. Galloway raised; and
- (3) considered whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of * * * [Mr. Galloway] that any collection action be no more intrusive than necessary.” Sec. 6330(c)(3).
Therefore, the settlement officer satisfied all the requirements.
- A CDP Hearing officer properly rejected consideration of the issue of improper rejection of the 2017 OIC when it had already been addressed in the context of an IRS Appeals hearing.
Key Points of Law:
- Generally, a taxpayer may raise any relevant issue at a CDP hearing, including a collection alternative. But section 6330(c)(4)(A) prohibits a taxpayer from raising an issue during a CDP hearing where: (1) the issue was raised and considered at a previous section 6320 hearing or in any other previous administrative or judicial proceeding; and (2) the taxpayer participated meaningfully in such a hearing or proceeding
- Consideration by the Office of Appeals constitutes an administrative proceeding within the meaning of § 6330(c)(4)(A). Here, where Mr. Galloway had previously appealed the rejection of the 2017 OIC to the Office Appeals, he had meaningfully participated, and such appeal was rejected, he could not renew the same issue in a CDP hearing.
Insight: Taxpayers should always raise and prosecute to completion every grounds for which they believe they are entitled to relief. Once a determination has been made in one forum, the same issue cannot be re-raised in a different forum. And as always, without additional mitigating facts, if a taxpayer’s financial information demonstrates an ability to pay the entire amount of the liability, the IRS will reject any offer-in-compromise.