The Tax Court in Brief May 3 – May 7, 2021

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The Tax Court in Brief May 3 – May 7, 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 May 3 – May 7, 2021

Chancellor v. Comm’r, T.C. Memo. 2021-50 

May 4, 2021 | Urda, J. | Dkt. No. 20389-18

Tax Dispute Short Summary:

Ms. Chancellor claimed deductions on her 2015 federal income tax return related to business expenses, charitable contributions, and State and local tax.  The IRS disallowed the deductions and issued a notice of deficiency.  Ms. Chancellor filed a petition with the United States Tax Court challenging the proposed adjustments in the notice of deficiency.

Tax Litigation Key Issue

Whether Ms. Chancellor has adequately substantiated her claimed deductions.

Primary Holdings:  No—not beyond those already conceded by the IRS.

Key Points of Law:

Insight:  The Chancellor decision reaffirms the significance of maintaining good records for each tax year.  To the extent a taxpayer has lost such records, the taxpayer can attempt to reconstruct such records with the information available—however, the taxpayer will continue to have the burden of showing his or her entitlement to any claimed deductions as reported on the return at issue.

Barnes v. Comm’r, T.C. Memo. 2021-49

May 4, 2021 | Lauber, J. | Dkt. No. 6330-19L

Tax Dispute Short Summary

The taxpayers challenged a proposed deficiency in the Tax Court related to their 2003 tax year.  Prior to the Tax Court issuing an opinion, the taxpayers filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia.  The IRS participated in the bankruptcy proceedings and filed a proof of claim for tax deficiencies—however, the 2003 tax year was not included.

After the plan was confirmed, the IRS moved to lift the automatic stay to permit the Tax Court to render a decision on the taxpayers’ 2003 tax year.  The bankruptcy court granted the motion, and the Tax Court held that taxpayers owed deficiencies, penalties, and additions to tax for 2003 as determined in the notice of deficiency.

The IRS later assessed the 2003 liability and issued a Notice of Federal Tax Lien for the taxpayers’ 2003, 2008, and 2009 tax years.  The taxpayers filed a timely request for a Collection Due Process (CDP) hearing.  The IRS Settlement Officer agreed to a partial release of the NFTL, finding that the 2008 and 2009 tax liabilities were including in the taxpayers’ bankruptcy.  However, the SO concluded that the lien filing as to 2003 was appropriate.

Tax Litigation Key Issue:

Whether the SO abused its discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge.

Primary HoldingsThe SO did not abuse his discretion in determining that the 2003 tax debt was collectible after the bankruptcy discharge because unassessed tax liabilities are nondischargeable.

Key Points of Law:

InsightThe Barnes decision shows the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  In these cases, taxpayers should ensure that they have an attorney knowledgeable in both tax and bankruptcy cases to ensure that their best arguments are put forward in those two proceedings.

Jacobs v. Comm’r, T.C. Memo. 2021-51

May 5, 2021 | Toro, J. | Dkt. No. 7118-19

Tax Dispute Short Summary:

Mr. Jacobs is a full-time college professor.  He published a book on the BP oil spill and also represents clients as a lawyer.  On his personal income tax returns for 2014 and 2015, Mr. Jacobs claimed deductions on Schedule C.  Generally, these deductions related to payments for meals and lodging for his visiting scholar position at UCLA, costs for the business use of his home, bar dues and other professional fees, and travel expenses.  The IRS disallowed the claimed deductions at the examination level.  At IRS Appeals, the IRS conceded some of the deductions but issued a statutory notice of deficiency because the statute of limitations for assessment was about to expire.  Mr. Jacobs filed a timely Tax Court petition, and Mr. Jacob’s case was forwarded back to IRS Appeals.  IRS Appeals conceded some additional deductions but closed the case with deficiencies due.  When IRS counsel received the case, IRS counsel conceded that there were no deficiencies for either year.  Thereafter, Mr. Jacobs filed a motion for an award of his litigation costs.

Tax Litigation Key Issue:

Whether Mr. Jacobs is entitled to an award of his litigation costs under Section 7430?

Primary HoldingsNo, the IRS was substantially justified in disallowing the claimed deductions at the time it filed its Answer in the Tax Court.

Key Points of Law:

Insight:  The Jacobs decision reminds taxpayers that they can be awarded litigation costs (i.e., costs of their attorney) in certain instances.  However, the Jacobs decision also reminds taxpayers how difficult a task that may be.

Berry v. Comm’r, T.C. Memo. 2021-52

May 5, 2021| Kerrigan, J. | Dkt. Nos. 6584-19 and 11180-19

Tax Dispute Short Summary

Mr. Berry is a realtor and reported his income on Schedules C.  He also participated in car racing during the years at issue.  For 2014 and 2015, he earned $8,700 and $1,200, respectively, from winning drag racing tournaments.  He assigned these winnings to Phoenix Construction and Remodeling, Inc. (Phoenix).  For the years at issue, Phoenix also paid expenses related to Mr. Berry’s race car driving.

Phoenix is an S corporation owned equally by Mr. Berry and his father.  Phoenix was involved in construction projects in California.  On June 13, 2016, Phoenix filed its 2014 Form 1120S, reporting gross income of $1,664,364 and cost of goods sold of $1,329,575, including $150,414 for building permits.  Phoenix also claimed a Section 179 deduction totaling $135,297 for 11 items, including an excavator and a utility trailer.

The IRS examined the Berrys’ tax return for 2014.  It later issued a notice of deficiency determining that the Berrys had underreported their Schedule E income from Phoenix.  The IRS also disallowed the claimed Section 179 deduction and cost of goods sold for building permits.

Later, the IRS also examined the Berrys’ 2015 Form 1040.  In the notice of deficiency, the IRS disallowed a depreciation expense of $8,000.

Tax Litigation Key Issue:

Whether (1) $8,700 and $1,200 for 2014 and 2015, respectively, should be recharacterized as the Berrys’ other income and not gross receipts of Phoenix; (2) Phoenix is entitled to deduct car racing expenses for 2014 and 2015; (3) Phoenix is entitled to a deduction pursuant to section 179 for an excavator and a utility trailer for 2014; (4) Phoenix has cost of goods sold of $33,294 for building permits for 2014; (5) the Berrys are entitled to deduct depreciation of $8,000 reported on Schedule C for 2015; (6) the Berrys are liable for an addition to tax pursuant to section 6651(a)(1) for 2014; and (7) the Berrys are liable for the accuracy-related penalty under section 6662(a) for 2014.

Primary Holdings

Key Points of Law:

InsightThe Berry decision shows that shareholders of an S corporation are subject to IRS audit at the shareholder level. Accordingly, shareholders should ensure that they have the ability to request books and records from the company to substantiate items related to the S corporation that are disallowed by the IRS during the examination.

Tikar, Inc. v. Comm’r, T.C. Memo. 2021-53

May 6, 2021 | Leyden, J. | Dkt. No. 14410-17X

Tax Dispute Short Summary:

Tikar, Inc. (Tikar) was organized as a Texas nonprofit corporation on May 14, 1999.  According to its articles of incorporation, Tikar was organized “to present expositions of objections belonging to the corporation.  To negotiate contracts with Museums and other organizations to organize expositions.  To promote African Art by exhibits through the corporation itself or through museums.  To do any and all necessary and incidental to the stated purpose but in no . . . [way] in violation of Section 501(c)(3) of the Internal Revenue Code.”

The IRS examined the activities of Tikar, Inc. (Tikar) and issued a final adverse determination letter revoking its tax-exempt status.  The IRS determined that Tikar was not operated exclusively for tax-exempt purposes.  Tikar challenged the IRS’ determination by timely filing a petition with the Tax Court seeking declaratory judgment.

Tax Litigation Key Issue

Whether Tikar was operated exclusively for one or more exempt purposes as set forth in Section 501(c)(3).

Primary HoldingsNo, because it has not proven:  (1) that it owned the African artifacts or the Seghers Collection and (2) that all of its activities with respect to those artifacts primarily benefit the private interest of Dr. Seghers or the Seghers Foundation or both.

Key Points of Law:

InsightThe Tikar decision shows that a tax-exempt organization can lose its exempt status under Section 501(c)(3) if it benefits the founder or a close group of related persons.  If the organization loses its tax-exempt status, the organization is taxable on its income and any donors who contribute to the organization will not be permitted a charitable contribution deduction for such donations.


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.