The Tax Court in Brief – March 8 – 12, 2021

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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 March 8 – March 12, 2021

Clarence J. Mathews v. Comm’r, T.C. Memo 2021-28 March 9, 2021

Wells, J. | Dkt. No. 11829-14

Short SummaryThe case discusses the substantiation of expenses, and the applicability of self-employment tax for income incorrectly reported on a taxpayer’s tax return.

During 2011, Mr. Mathews (the taxpayer) worked for a trucking company. He also was a Minister of the Beulah Missionary Baptist Church. On his tax return, he reported his wage and pension income, but also included a Schedule C, Profit or Loss, and stated that his profession was that of a Minister, reporting income and expenses mostly related to car and truck, repairs and maintenance and meals & entertainment.

The IRS issued a notice of deficiency rejecting the deductions of Schedule C and determined self-employment tax on the income reported on such Schedule. The taxpayer filed an amended return and replaced Schedule C with form 2106, Employee Business Expenses. The IRS did not accept such amended return.

During the trial, the petitioner did not provide evidence to substantiate his expenses. Moreover, he testified that his car and truck expenses represented mileage from commuting from his work to his job. However, the petitioner provided a letter from the pastor of the Beulah Missionary Baptist Church stating that the taxpayer did not receive a W-2 because he was not employed as a paid minister.

Key Issues: Whether the taxpayer has to substantiate his expenses with proper documents and whether the activities of a taxpayer as a Minister, for which he did not receive compensation, are subject to self-employment tax.

Primary Holdings: The taxpayer has the burden of proof to substantiate his expenses. Moreover, self-employment tax did not apply for the activities of the taxpayer as a Minister, for which he did not receive compensation.

Key Points of Law:

Insight: This case clearly shows the common items rejected by the IRS concerning business activities reported on Schedule C. As always, it is important that taxpayers maintain appropriate records to substantiate his expenses. Finally, the judgment shows the relevance of Section 6751(b)(1) in any case involving accuracy-related penalties.

Smith v. Comm’r, T.C. Memo. 2021-29

March 10, 2021 | Halpern, J. | Dkt. No. 1312-16L

Short SummaryMrs. Smith submitted four income tax returns, each of which reported zero gross income, zero taxable income, and zero tax.  The returns also sought full refunds of all amounts withheld by employers for Social Security tax, Medicare tax, and Federal income tax.  The IRS assessed civil penalties for frivolous filings under I.R.C. § 6702(a).  When such amounts were not paid, the IRS filed a notice of federal tax lien (NFTL).  During the Collection Due Process hearing, Mrs. Smith continued to advance arguments that she was not subject to Federal income tax.

Key Issue:  Whether:  (1) the Settlement Officer abused her discretion in concluding that the NFTL was appropriate; (2) Mrs. Smith should be sanctioned under Section 6673 for frivolous and groundless positions instituted or maintained during the Tax Court proceedings?

Primary Holdings

Key Points of Law:

Insight:  The Smith decision serves as a cautionary tale to taxpayers that frivolous positions maintained during Tax Court and frivolous filings with the IRS can result in harsh civil penalties.

Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-30 

March 10, 2021 | Holmes, J. | Dkt. No. 17204-13 

Short Summary

The case involved IRS challenges to a captive insurance arrangement.  The IRS issued notices of deficiency to various entities owned or controlled by the taxpayer.  Those issues were consolidated in the case.

For nearly three decades Caylor Construction bought traditional third-party commercial property, casualty, and liability insurance through its longtime insurance broker.  But in the years at issue, the taxpayers utilized a captive insurance arrangement.

The Caylors’ captive insurance company, named Consolidated, Inc., was incorporated under the laws of Anguilla7 and licensed as an Anguilla insurance company. It was owned by the principal of taxpayers. The captive insurance facilitator filed the articles of incorporation for Consolidated on December 20, 2007. On December 21, Consolidated elected under section 953(d)8 to be treated as a domestic U.S. corporation for tax purposes, as well as an election under section 831(b)(2)(A)(ii) to be taxed solely on investment income so long as its annual premiums did not exceed $1.2 million–which is what made Consolidated a microcaptive. That same day Caylor Construction paid Consolidated $1.2 million, which it deducted as an insurance expense on its 2007 tax return.  It utilized the captive arrangement thereafter.

The payment of Consolidated’s 2009 premiums began on December 30, 2008 when Caylor Construction paid Caylor Land $1,224,160 for “consulting”. Caylor Land’s only workers in 2009 were Rob and Paula, and Carly and Casey–who at the time were only 11 and 18 years old. The consulting payments were made without any contract between Caylor Construction and Caylor Land, and indeed without any records that described when the consultation took place, what advice was received, or even what subjects were discussed.

After Caylor Construction sent this $1.2 million payment to Caylor Land for consulting at the end of 2008, Caylor Land made two payments that totaled $168,000 to Consolidated in 2009. It then paid another $1.1 million for “professional-consulting fees” to the other Caylor entities that were covered under Consolidated’s program.  Those entities utilized the funds on insurance from Consolidated.

Key Issues:

Primary Holdings

The taxpayer was pitched the idea of a microcaptive as a “tax planning solution” and a “tax planning tool.” The presentation he attended stated that this scheme would provide “a tax deduction of up to $1,200,000 * * * per year.” A sophisticated businessman like Rob should have seen this as “too good to be true.” We find that they had no reasonable cause and did not take their position in good gaith and that “[p]enalites apply across the board.”

Key Points of Law:

Insight: The IRS continues its efforts to crack down on captive insurance arrangements that it views as abusive.  The Caylor Land case follows in the line of recent Tax Court cases, such as Avrahami v Commissioner, finding that the captive insurance arrangement at issue did not provide “insurance” within the meaning of the Internal Revenue Code.  The case demonstrates why taxpayers with captive insurance arrangements should consult with an independent, competent tax attorney for a review of their compliance with the governing statutory provisions.

Brian E. Harriss, T.C. Memo. 2021-31 | March 11, 2021

Thornton, J. | Dkt. No. 23017-17

Short Summary

On August 2, 2017, the Internal Revenue Service (IRS) issued to petitioner a notice of deficiency for the taxable year 2012, determining a deficiency of $31,862. The notice explained that the IRS had adjusted the petitioner’s gross wages to $146,003 as shown on Form W-2.

On August 22, 2017, the IRS issued to petitioner a notice of deficiency for the taxable year 2013, determining a deficiency of $46,692. The notice explained that the IRS had adjusted the petitioner’s gross wages to $149,802 as shown on Form W-2.

The notice also adjusted the petitioner’s gross income to include the $36,830 distribution reported by Fidelity on Form 1099-R and imposed $3,683 of additional tax for early distribution, pursuant to section 72(t).

On December 20, 2017, the IRS issued to petitioner a notice of deficiency for the taxable year 2014, determining a deficiency of $43,730. The notice explained that the IRS had adjusted the petitioner’s gross wages to $175,600 as shown on Forms W-2.

The signature blocks for the notices of deficiency for taxable years 2012, 2013, and 2014 each state identically “Commissioner By Christine L. Davis, Program Manager, Return Integrity and Compliance Services, Integrity and Verification Operation” and include the signature of Christine L. Davis.

Petitioner chose not to testify at the trial, pleading the Fifth Amendment in response to respondent’s questions.

Key Issues:

Primary Holdings

Key Points of Law:

InsightThe Harriss case arose in a somewhat peculiar procedural posture, as the taxpayer (after filing a Tax Court petition) filed a motion to dismiss for lack of jurisdiction.  That posture aside, the case breaks no major doctrinal ground with respect to the underlying substantive tax issues.  The taxpayer’s arguments regarding delegation and re-delegation, however, were rather creative.  Ultimately, however, they were not sufficient to overcome the presumption of validity that attaches to a duly-issued notice of deficiency.


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