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

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

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 15 – March 19, 2021

Catania v. Commissioner, T.C. Memo. 2021-33 | March 15, 2021 | Vasquez, J. | Dkt. No. 13332-19

Short Summary

Petitioner worked for Home Depot and participated in its section 401(k) plan. In 2014 he retired from Home Depot and transferred his section 401(k) plan account balance to a traditional individual retirement account (IRA) held at Vanguard Fiduciary Trust Co. (Vanguard). Petitioner was 55 years old at that time.

In 2016 petitioner withdrew $37,000 from his Vanguard IRA. Petitioner used the funds to pay for the maintenance of his home and other necessary living expenses. Petitioner was 57 years old as of December 31, 2016.

Vanguard issued to petitioner Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2016 reflecting the distribution. Petitioner reported the Vanguard distribution on his 2016 Federal income tax return. While the petitioner included the distribution as income on his return, he did not include the 10% additional tax pursuant to section 72(t)(1).

Key Issue:

Primary Holdings

Key Points of Law:

(1) Imposition of additional tax.–If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c) ), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

(2) Subsection not to apply to certain distributions.–Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:

(A) In general.–Distributions which are–

(i) made on or after the date on which the employee attains age 591/2,

* * * *

(v) made to an employee after separation from service after attainment of age 55 * * *

Insight: The case demonstrates the limited exceptions for the 10% early-withdrawal penalty under section 72(t), and the fact that there is not a general equitable or hardship exception to the penalty.  It also serves as a reminder that the Tax Court is not a court of equity.

Siebert v. Commissioner of Internal Revenue | T.C. Memo. 2021-34 | March 15, 2021 | Jones, J. | Dkt. No. 25685-15L

Short Summary

The case arose from a collection due process (CDP) case petitioners seek review pursuant to section 6330(d)(1) of a determination by the Office of Appeals (Appeals or Appeal Office) of the Internal Revenue Service (IRS) to proceed with a proposed levy action to collect their unpaid Federal income tax liability for the 2013 tax year.

Mr. Siebert is an attorney who ran his own law practice. Both petitioners are business owners. Mrs. Siebert is the sole member of Siebert Consulting, and Mr. Siebert is the owner of Siebert Corp. Petitioners timely filed (with an extension) their 2013 tax return, and the IRS assessed the resulting liability, which petitioners did not pay upon notice and demand.

On April 27, 2015, the IRS sent petitioners a Notice CP90, Notice of Intent to Seize Your Assets and Notice of Your Right to a Hearing. On May 27, 2015, the IRS timely received petitioners’ Form 12153, Request for a Collection Due Process or Equivalent Hearing. Petitioners indicated they wished to obtain a collection alternative of an offer-in-compromise (OIC), an installment agreement (IA), or currently not collectible (CNC) status.

Petitioners’ submitted an OIC that proposed to compromise their unpaid tax liabilities for the 2013 tax year as well as the 2001, 2003-05, 2008-12, and 2015 tax years (which at that time totaled approximately $645,314).

Petitioners proposed to settle their total outstanding tax liability of $645,314 with a lump-sum payment of $12, 443. Petitioners enclosed a $2,489 check at the time of submission, representing a 20% down payment, with the remaining balance payable within five months of acceptance. Petitioners premised their OIC on doubt as to collectibility.

The revenue officer (RO) observed that Mr. Siebert had sold his partnership interest for $171,546 in 2015 and that the proceeds from the sale of the partnership interest were not used to pay petitioners’ outstanding tax liability. The RO also remarked that petitioners had previously agreed to use the proceeds from a section 401(k) account (section 401(k) account) to pay a portion of their outstanding tax liability. He determined that in 2015 petitioners had dissolved the section 401(k) account with a value of $151,000, yet the IRS did not receive any payments from the proceeds. The RO noted that petitioners did not report the income from the liquidation of the section 401(k) account on their 2015 tax return.

The RO determined that petitioners had $345,880 of assets that could be used to pay their outstanding tax liability. He calculated that petitioners’ RCP was $2,012,380. He concluded that petitioners’ RCP was full payment of their outstanding tax liability and recommended rejection of their OIC as not in the best interest of the Government.

The RO explained his reasoning in a narrative report. Specifically, the offer specialist indicated that petitioners had “an egregious history of noncompliance” spanning 15 years and neglected to pay their tax debts even when they had the means to do so. The RO also considered that petitioners had a large outstanding tax liability. Citing Internal Revenue Manual (IRM) pt. (Oct. 7, 2016), he observed that petitioners had failed to pay Federal income tax for the last eight consecutive years. He also observed that during the years of petitioners’ noncompliance, they lived in a home valued at $4 million and paid large expenses associated with their lifestyle.

Appeals concurred with the OIC unit that petitioners’ OIC should be rejected because it was not in the best interest of the Government. This decision was based on: (1) petitioners’ “egregious compliance history”; (2) petitioners’ high income and commensurate lifestyle; combined with (3) petitioners’ failure to turn over funds that would have been available to pay delinquent tax. Appeals repeated the observation that petitioners’ noncompliance spanned 15 years, including the last 8 consecutive years in which they had not paid Federal income tax. Appeals also noted that petitioners’ outstanding tax liability when they submitted their OIC was $645,314. Appeals stated in the supplemental notice of determination that petitioners were high-income earners who enjoyed a commensurate lifestyle during the period in which their tax was not paid, yet they neglected to pay tax even when they possessed the means to do so. In the notice, Appeals reviewed the prior instances in which the IRS had reached agreements with petitioners for payment of their tax liabilities but did not receive payment.

Key Issues:

Primary Holdings

Key Points of Law:

Insight: The case provides an excellent background and summary of the Internal Revenue Manual provisions relevant to determining a taxpayer’s financial status and eligibility for various collection alternatives, such as an offer in compromise.  The case also serves as a reminder that the IRM does not provide legal rights to a taxpayer, but that an IRS appeals officer does not abuse their discretion by relying upon the relevant IRM provisions.

Latessa Ward v. Comm’r; Ward & Ward Company v. Comm’r, T.C. Memo 2021-32 March 15, 2021 | Holmes, J. | Dkt. No. 29568-15, 29569-15.

Short SummaryThe case discusses the substantiation of expenses by a sole shareholder of an S-corporation and the inaccurate reporting of income earned through such an entity.

Latessa Ward (the taxpayer) is an attorney that opened her own firm, Ward & Ward Company (the firm) in 2006. She organized her firm as an S-corporation. During 2011, 2012, and 2013 the firm reported on its Form 1120S certain losses, officer compensation and wages. The firm also reported employee compensation on its Form 941.

On her personal tax return for 2011, the taxpayer reported the amount of loss as showed by the firm. However, the taxpayer did not report wages or salaries. Additionally, she incorrectly reported the firm´s income and expenses on her Schedule C and not the applicable Schedule E. Finally, during 2012 and 2013, the taxpayer had some debt discharged.

Because the firm´s 1120S and the taxpayer’s 1040 did not match, the IRS audited both returns. The controversy focused on the firm´s return (1120S) to determine whether it correctly reported employment taxes on the compensation paid to the taxpayer as an officer of the S-corporation. Additionally, the IRS contested certain expenses such as travel expenses incurred while ¨schmoozing a client¨, contractor expenses, office groceries, and membership expenses. In all these cases, the Court ruled that the taxpayer did fail to substantiate the business purpose of each expense, and it rejected them.

As for the taxpayer 1040, the IRS focused on the appropriate reporting of the income earned through the S-corporation, which the taxpayer claimed it was distribution. The IRS also argued that the compensation received by the taxpayer as an officer was not reported by her. Finally, the taxpayer did not report the discharge of debt that occurred during 2012 and 2013, claiming that she was insolvent at that time. In all these items, the Court ruled in favor of the IRS, mainly because the taxpayer failed to provide proper documents to support the expenses.

Key Issues:

Primary Holdings:

Key Points of Law:

The analysis of the Court for each of the items in controversy is as follows:

As for the taxpayer’s tax return, the Court ruled on three points:

Insight: A common problem with S-corporations is the proper reporting of the income earned by the entity and the consequent reporting of such income by the taxpayer. This case shows the common misconceptions of the taxpayers when using these types of structures. Although not especially relevant, the taxpayers also must be aware that the proper reporting of the income earned by the S-corporations must be reported on their personal tax returns on Schedule E and not C as happened in this case.


Tax Court Litigation Attorneys 

Need assistance litigating in the U.S. Tax Court? Freeman Law’s tax attorneys are experienced litigators with trial-tested litigation skills and in-depth substantive tax knowledge, having collectively litigated hundreds of cases before the U.S. Tax Court. Our tax controversy lawyers have extensive experience in Tax Court matters involving partnership audits and litigation under both the TEFRA and BBA regimes, international tax penalties, foreign trusts, valuation, reasonable compensation disputes, unreported income, fraud penalties, other tax penalties, any many other matters. We draw on our experience and wealth of tax knowledge to advise and guide clients through the entire tax controversy process, building the right strategy to resolve tax controversies from day one. Schedule a consultation or call (214) 984-3000 to discuss your Tax Court concerns or questions.