The Tax Court in Brief – July 19 – July 24, 2020

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The Tax Court in Brief July 19 – July 24, 2020

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 July 19 – July 24, 2020

Oropeza v. Comm’r, T.C. Memo. 2020-111

July 21, 2020 | Lauber, J. | Dkt. No. 9623-16

Short SummaryMr. Oropeza was the sole shareholder of FIRM, Inc. (FIRM), an S corporation and “micro-captive” insurance company.  The IRS examined Mr. and Mrs. Oropeza’s 2011 and 2012 tax returns.  Later, the IRS issued them a revenue agent report (RAR) proposing an increase of $1,070.200 to Mr. Oropeza’s distributive share of FIRM’s income.  In addition, the RAR proposed an accuracy-related penalty of 40% attributable to one or more of the following:  (1) a gross valuation misstatement; (2) a non-disclosed transaction lacking economic substance; and (3) undisclosed foreign financial assets.  The RAR did not definitively indicate the proposal of the alternative 20% accuracy-related penalty for negligence, disregard of rules and regulations, or a substantial understatement.

The taxpayers did not respond to the RAR.  Thereafter, the Revenue Agent’s immediate supervisor signed a Civil Penalty Approval Form authorizing assertion of a 20% penalty for negligence or substantial understatement of income tax.  The form did not reflect approval for the 40% penalty.

The IRS issued the taxpayers a notice of deficiency determining a deficiency of $374,570 and a 40% penalty of $149,828.  The notice explained that the 40% penalty was appropriate because the underpayment was “attributable to one or more non-disclosed noneconomic substance transactions.”  The notice also set forth in the alternative a 20% penalty for negligence or a substantial understatement of income tax.

Key Issue:  Whether the taxpayers:  (1) are liable for the 40% accuracy-related penalty, or (2) are liable for the 20% accuracy-related penalty.

Primary Holdings

Key Points of Law:

InsightThe Oropeza decision shows that Section 6751(b) continues to be a potent defense against the IRS’ assertion of penalties.  In cases where the IRS has failed to satisfy Section 6751(b), taxpayers should consider moving for summary judgment on the penalty issue.

Barnhill v. Comm’r, 155 T.C. No. 1

July 21, 2020 | Gustafson, J. | Dkt. No. 10374-18L

Short SummaryMr. Barnhill was a director of Iron Cross, Inc. (Iron Cross).  Iron Cross failed to file employment tax returns and pay employment taxes.  The IRS later assessed employment taxes against Iron Cross for 10 calendar quarters.  Moreover, the IRS proposed assessments of approximately $160,000 against Mr. Barnhill as civil penalties under Section 6672 with respect to the trust fund taxes that were required to be withheld from Iron Cross’s employee wages.

The IRS sent Mr. Barnhill a Letter 1153, Trust Fund Recovery Penalty Letter, proposing to assess the TFRPs against him as a responsible person.  Mr. Barnhill received the Letter 1153 and timely mailed a protest to Appeals challenging the proposed TFRP assessments.  The IRS issued a Letter 1157 response letter to Mr. Barnhill, but he never received it.  The IRS later issued a notice of federal tax lien, which provided Mr. Barnhill with Collection Due Process (CDP) rights.  Mr. Barnhill timely filed a request for a CDP hearing and disputed the amount of the TFRP liability.

During the CDP hearing, Mr. Barnhill argued that he should not be liable for the TFRP.  However, the Appeals officer determined that Mr. Barnhill had a prior opportunity to contest the liability when the IRS issued Letter 1153 and that he was therefore precluded from raising any issues with respect to the liability at the CDP hearing.  Later, the Appeals officer issued a Notice of Determination to this effect.

Key Issue:  Whether IRS Appeals abuses its discretion in sustaining a NFTL and not permitting the taxpayer to contest the TFRP liabilities in a CDP hearing where:  (1) the taxpayer receives a Letter 1153; (2) the taxpayer timely contests the TFRP; and (3) the taxpayer does not receive a Letter 5157.

Primary Holdings

Key Points of Law:

InsightThe Barnhill decision was a major win for taxpayers and particularly those with trust fund recovery penalty issues. In the event Mr. Barnhill had lost, he would have been required to pay a divisible part of the employment taxes at issue, file a claim for refund, and also litigate the matter in the federal district court or Court of Federal Claims.  Due to the Tax Court’s decision, Mr. Barnhill can now litigate the tax liabilities at the Tax Court.

Belair Woods, LLC v. Comm’r, T.C. Memo. 2020-112 

July 22, 2020 | Lauber, J. | Dkt. No. 19493-17

Short SummaryThe case involved charitable contribution deductions for conservation easements. It arose on the IRS’s motion for partial summary judgments, contending that the charitable contribution deduction claimed by Belair Woods, LLC (Belair), was properly disallowed be- cause the conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A).

In December 2008 Belair acquired, by contribution from HRH Investments, LLC (HRH), a 145-acre tract of land in Effingham County, Georgia. On December 30, 2009, Belair donated a conservation easement over 141 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the property were sold following judicial extinguishment of the easement, paragraph 17 provided that “[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.” Paragraph 19, captioned “Proceeds,” specified that the deed granted the Conservancy “a real property interest, immediately vested in Grantee,” and that this vested property interest entitled the Conservancy to receive, in the event of an extinguishment, a share of any future proceeds 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.

Key Issue:  Whether the charitable contribution deductions related to conservation easements should be recognized. Ultimately, the issue turned on whether the underlying deed granting the easement satisfied the Treasury Regulation’s “protected in perpetuity” requirement.

Primary HoldingsThe Court granted the IRS’s Motion for Summary Judgment, holding, that Belair’s deed fails to satisfy the “protected in perpetuity” requirement. 

Key Points of Law:

InsightThis case raises substantially the same issues raised in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); and Carroll v. Commissioner, 146 T.C. 196 (2016). It is yet another example of the IRS’s continued focus on syndicated conservation easements and its substantial devotion of enforcement resources towards attacking their validity.  The case, as many prior cases, has ultimately turned on technical issues related to the underlying deed and its legal descriptions, rather than valuation or other issues.

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