The Tax Court in Brief May 17 – May 21, 2021

The Tax Court in Brief May 17 – May 21, 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 17 – May 21, 2021

• Fumo v. Comm’r, T.C. Memo. 2021-31
• PEEPLES v. Comm’r, Summary Op 
• Shitrit v. Commissioner, T.C. Memo. 2021-63 
• Ginos v. Comm’r, T.C. Memo. 2021-14
• Mason v. Comm’r, T.C. Memo. 2021-64

Fumo v. Comm’r, T.C. Memo. 2021-31 

May 17, 2021 | Lauber, J. | Dkt. No. 17614-13

• Opinion

Tax Litigation Short Summary: 

Taxpayer, a state senator with 30 years of service, was convicted on Federal criminal charges, including mail and wire fraud. One victim included a 501(c)(1) & (3) organization, exempt from Federal income tax.  Taxpayer influenced the tax-exempt organization’s formation as, at his direction, three members of his senatorial staff incorporated the organization for the purposes of maintaining and improving the aesthetic appearance of the taxpayer’s district. At all periods in question, at least one member of the taxpayer’s staff worked for the charity organization as either President or Executive Director while remaining employed by the Senator.  Taxpayer influenced, as chairman of a senate appropriations committee, funding for the charitable entity from public and private sources.

A Federal criminal court convicted the taxpayer on multiple accounts related to a scheme to defraud the organization of funds to purchase personal property for the taxpayer and ordered taxpayer to pay substantial restitution to the tax-exempt organization.  The taxpayer’s criminal trial testimony revealed that the taxpayer would often derive benefits from the tax-exempt organization by simply emailing a member of his staff, who was a fiduciary of the organization.  Further, at the criminal trial, the taxpayer admitted to influencing and making decisions on important topics for the organization, including admitting that he had substantial influence over the organization.

The IRS determined liability to the taxpayer under Section 4958(a)(1) for a 25% tax of excess benefit from any excess benefit transaction involving a charity by a disqualified person although the taxpayer was never employed by the 501(c)(3) as an officer, director, trustee, or employee.

Tax Dispute Key Issues:

• Whether the taxpayer was a “disqualified person,” although he was not an officer, director, or employee of the organization, within the meaning of Section 4958?

Primary Holdings: 

• Whether the taxpayer satisfies the definition of a disqualified person shall not determined by title or formal role within a tax-exempt organization but based on whether the individual or organization exercises substantial influence over the organization’s affairs.

Key Points of Law:

• The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Comm’r, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regarding an issue as to which there is no genuine dispute of material fact, and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party “may not rest upon the mere allegations or denials” of his pleadings but instead “must set forth specific facts showing there is a genuine dispute” for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
• Section 4958(c)(1)(A) defines an “excess benefit transaction” to mean “any transaction in which an economic benefit is provided by an applicable tax- exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration [*4] (including the performance of services) received for providing such benefit.” An “applicable tax-exempt organization” is defined to include an organization described in section 501(c)(3) and exempt from tax under section 501(a). See sec. 4958(e)(1).
• Section 4958(a)(1) imposes on each excess benefit transaction an excise tax “equal to 25 percent of the excess benefit” and provides that this tax “shall be paid by any disqualified person referred to in subsection (f)(1) with respect to such transaction.” If the excess benefit transaction is not corrected in timely fashion, the disqualified person is liable for a second-tier tax equal to 200% of the excess benefit. See sec. 4958(b) .2 A “disqualified person” is defined to include (among others) “any person who was, at any time during the 5-year period ending on the date of an excess benefit transaction, in a position to exercise substantial influence over the affairs of the organization.” Sec. 4958(f)(1)(A).
• Persons holding specified powers and responsibilities with respect to a charity are automatically deemed to be in a position to exercise substantial influence over its affairs. See Treas. Reg. §53.4958-3(c). The persons include voting members of the governing body, presidents, chief executive officers (CEOs), chief operating officers, treasurers, and chief financial officers (CFOs). subparas. (1), (2), and (3). Family members of disqualified persons, down to the level of great-grandchildren, are also “disqualified persons” with respect to the charity. See id. para. (b)(1).
• Apart from these enumerated officials, members of their families, and certain affiliated entities, the question whether an individual is a disqualified person generally “depends upon all relevant facts and circumstances.” para. (e)(1). The regulation specifies a nonexclusive list of factors “tending to show that a person has substantial influence over the affairs of an organization.” Id. subpara. (2). These include whether the person “founded the organization,” is “a substantial contributor to the organization,” has or shares authority to determine a substantial portion of its capital expenditures or operating budget, or “manages a discrete segment or activity of the organization that represents a substantial portion of its activities, assets, income, or expenses.” Id. subdivs. (i), (ii), (iv), (v).
• The first factor listed in the regulation as tending to show that a person has “substantial influence” over an organization is whether he “founded the organization.” subdiv. (i).
• The second factor listed in the regulation as tending to show that a person has “substantial influence” over an organization is whether he was “a substantial contributor to the organization (within the meaning of section 507(d)(2)(A)).” subdiv. (ii). A person may be a “substantial contributor” to an organization if his annual contributions constitute as little as 2% of its total contributions. See sec. 507(d)(2)(A).
• The regulation indicates that a 2% contributor will tend to have “substantial influence” over a charity. Section 53.4958-3(e)(2)(ii), Foundation Excise Tax Regs. That is presumably because a threat by such a donor to terminate his current level of funding would give him meaningful leverage over the charity’s decision making.
• The regulation provides that the facts and circumstances tending to show that a person has substantial influence “include, but are not limited to,” the seven factors listed therein. Sec. 53.4958-3(e)(2), Foundation Excise Tax Regs.; see Wnuck v. Comm’r, 136 T.C. 498, 507 (2011) (holding that the verb “includes,” when used in statutes and regulations, “is non-exclusive”).
• The fourth factor listed in the regulation as tending to show that a person has substantial influence over an organization is whether he “has or shares authority to control or determine a substantial portion of the organization’s capital expenditures [or] operating budget.” Sec. 53.4958-3(e)(2)(iv), Foundation Excise Tax Regs.

Insight: The Fumo decision reminds all taxpayers that titles or employment status does not define the relationship between the taxpayer and a tax-exempt organization.  A taxpayer that has the ear of a fiduciary of a 501(c)(3) opens himself or herself up to the scrutiny of the IRS or the Tax Court to formulate your level of influence.

PEEPLES v. Comm’r, Summary Op 

May 19, 2021 | Paris, J. | Docket No. 17117-17S.

Tax Dispute Short Summary: Mr. Peeples deducted unreimbursed employee business expenses on his 2014 federal income tax return. The IRS disallowed the deductions and issued a notice of deficiency. Mr. Peeples filed a petition with the United States Tax Court challenging the proposed adjustments in the notice of deficiency.

Tax Litigation Key Issues: Whether Mr. Peeples is entitled to deduct (1) certain unreimbursed employee business expenses and (2) tax preparation fees (under Section 162) for 2014.

Primary Holdings: No, Mr. Peeples is not entitled to deduct either because he failed to provide the Court adequate documentation or information that would have substantiated either the application of the Cohan rule for the deductions or the tax preparation expense.

Key Points of Law:

• The Commissioner’s determinations in a notice of deficiency are generally presumed correct and the taxpayer generally bears the burden to prove them incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
• Because deductions are a matter of legislative grace, the taxpayer must satisfy the specific requirements for any deductions claimed. See INDOPCO, Inc. v. Comm’r, 503 U.S. 79 , 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435 , 440 (1934).
• Section 162(a) allows for the deduction of all ordinary and necessary business expenses paid or incurred during the course of any trade or business for the taxable year. “Ordinary and necessary” expenses must be directly connected with or pertaining to the taxpayer’s trade or business.
• Section 212 generally allows the deduction of ordinary and necessary expenses paid or incurred during the tax year for the production of income so long as the expenses are a reasonable amount and bear a reasonable and proximate relationship to the production of income. Sec. 1.212-1 (d), Income Tax Regs.
• Section 262(a), however, generally disallows the deduction of personal expenses. As a general rule, expenses related to traveling between one’s home and one’s place of business or employment constitute commuting expenses and are nondeductible personal expenses. See 262(a); Fausner v. Comm’r, 326 U.S. 465 (1946); Feistman v. Comm’r, 63 T.C. 129 , 134 (1974).
• Generally, a taxpayer must maintain records sufficient to substantiate items underlying their claimed deductions. 6001; Treas. Reg. § 1.6001-1(a).
• If a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the precise amount, the Court generally may estimate the amount of the deductible expense, bearing heavily against the taxpayer and dependent upon the taxpayer presenting sufficient evidence to serve as a basis for said estimate. See Cohan v. Comm’r, 39 F.2d 540 , 543-544 (2d Cir. 1930); Vanicek v. Comm’r, 85 T.C. 731 , 743 (1985). This estimation process is often referred to as the ‘Cohan Rule.’ Id.
• Section 274(d) supersedes the Cohan Rule for certain categories of expenses and establishes higher substantiation requirements for expenses related to travel, other activities, and “listed property” as defined in Section 280F(d)(4). The definition of listed property includes passenger automobiles. See Sanford v. Comm’r, 50 T.C. 823 , 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969). Sec. 280F(d)(4)(i).
• To satisfy the 274(d) requirements regarding a passenger automobile, as at issue in Peeples, a taxpayer must keep a contemporaneous mileage log, calendar, or other adequate record that substantiates the extent to which the vehicle was actually used for business rather than personal purposes. See Michaels v. Comm’r, 53 T.C. 269 , 275 (1969); Larson v. Comm’r, T.C. Memo. 2008-187 ; sec. 1.274-5T (c)(2)(i) , Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985)
• In short, the Cohan Rule may only be applied so long as the petitioner provides the Court adequate documentation of the relevant and questioned information and the Court may not apply the Cohan rule to approximate expenses covered under Section 274(d). See Sanford v. Comm’r, 50 T.C. 823 (1968).

Insight: The Peeples decision reaffirms the importance of maintaining expense records for all business-related events and expenditures. In the event that a taxpayer can establish that a deductible expense has been paid but relevant records are lost, damaged, or otherwise insufficient, the court generally may estimate an expense­—however, the court will bear heavily against the taxpayer and the estimation will be dependent upon the presentation of sufficient evidence to provide the court a basis for said estimate.

Shitrit v. Commissioner, T.C. Memo. 2021-63 

May 20, 2021 | Urda, J. | Dkt. No. 21104-18P

• Opinion

Short Summary: 

Mr. Shitrit is a dual citizen of Israel and the United States. Despite three separate companies had reported that he had received income from them during that year, Mr. Shitrit did not file a Federal income tax return for 2006.

Therefore, the IRS prepared a substitute for return for Mr. Shitrit’s 2006 taxable year. On January 10, 2011, the IRS issued a notice of deficiency to Mr. Shitrit at the California address, determining a total assessment of $143,415. The notice was returned as undeliverable by the U.S. Postal Service which led to the assessment of the taxes and additions to tax were assessed on June 6, 2011. In 2016, the case was assigned to a revenue officer for collection, which verified that Mr. Shitrit had not visited the address in over a decade. Despite all the efforts, the IRS was unenabled to notify the Petitioner.

In 2017 Mr. Shitrit filed Federal income tax returns for 2014, 2015, and 2016 on which he included his address in Israel. The IRS notified Mr. Shitrit at his Israeli about the application of a $3,000 overpayment from his 2016 tax year against the 2006 tax liability, leaving $222,654 due for the 2006 tax year.

After being notified at his Israeli address about his serious tax debt (CP508C), on October 25, 2018, Mr. Shitrit filed a petition with the Court, asserting that he was the victim of identity theft, which resulted in the 2006 liability; He also requested the Court to conclude that: (i) he did not have a seriously delinquent tax debt and to require the reinstatement of his passport; (ii) the IRS had failed to send the notice of deficiency to the correct address; (iii) he “is not liable for any additional tax, interest, or penalty” for 2006; and (iv) he “is entitled to a refund of $3,000”.

While the case was pendent, the IRS reversed its certification that Mr. Shitrit owed a “seriously delinquent tax debt” given that it could not clearly establish that the notice of deficiency was sent to Mr. Shitrit’s last known address.

Key Issue:

• Whether: (i) the Tax Court has jurisdiction under I.R.C. §7345 to consider Mr. Shitrit’s liability and refund claim; (2) the justiciable case or controversy remains concerning Mr. Shitrit’s passport.

Primary Holdings: 

• The Tax Court lacks jurisdiction over Mr. Shitrit’s additional claims for relief in which he seeks a declaration that he was not liable for the underlying tax liability from 2006 and a refund of tax overpayments from 2016.
• The Tax Court concluded that regarding the passport claims, Mr. Shitrit has already been afforded all of the relief available to him under I.R.C. § 7345. Therefore, the Court is unable to provide further relief at this juncture, and that the case is therefore moot.

Key Points of Law:  

• R.C §7345(a) provides that if the Secretary of the Treasury receives certification by the Commissioner that a taxpayer has a “seriously delinquent tax debt,” the Secretary of the Treasury shall transmit such certification “to the Secretary of State for action with respect to denial, revocation, or limitation” of the taxpayer’s passport.
• R.C §7345 (b)(1) states that A “seriously delinquent tax debt” is defined as a Federal tax liability that has been assessed which exceeds $50,000 (adjusted for inflation), which is unpaid and legally enforceable, and against which a lien notice has been filed or a levy has been made.
• When a certification is found to be erroneous or if the debt concerning such certification is fully satisfied”:
• R.C §7345(c)(1), (d) provides that the IRS must reverse its certification and notify the Secretary of State and the taxpayer.
• R.C §7345(e)(1) provides that a taxpayer who has been notified of the certification may petition this Court “to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.”
• R.C §7345(e)(1), (2) provides that if this Court “determines that such certification was erroneous, then the Court may order the Secretary [of the Treasury] to notify the Secretary of State that such certification was erroneous.” See Ruesch v. Commissioner, 153 T.C. at 294.
• The Jurisdiction of the Tax Court:
  • As an initial matter, the Tax Court may exercise jurisdiction only to the extent authorized by Congress and lacks “authority to enlarge upon that statutory grant”. See R.C §7442, Wright v. Commissioner, 571 F.3d 215, 219 (2d Cir. 2009), Kasper v. Commissioner, 137 T.C. 37, 40 (2011)
  • Jurisdiction must be shown affirmatively, and, as the party invoking the Court’s jurisdiction, the taxpayer bears the burden of proving the facts that establish our jurisdiction. See David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 270 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001).
• R.C §7345(e)(1): Civil Action into the Tax Court Jurisdiction circumscribes quite narrowly the Tax Court’s jurisdiction in passport cases, limiting the jurisdiction “to determining whether the Commissioner erred in certifying (or in failing to reverse a certification) that a taxpayer owes a ‘seriously delinquent tax debt’ as defined in section 7345(b).”. See Ruesch v. Commissioner
• R.C §7345 likewise does not grant the Tax Court jurisdiction to determine an overpayment or to order a refund or credit of tax paid. See also Weber v. Commissioner, 138 T.C. 348, 369-370 (2012); McLane v. Commissioner, T.C. Memo. 2018-149 , at *10-*11; cf. Greene-Thapedi v. Commissioner, 126 T.C. 1, 12 (2006).
• R.C §6512(b)(1) gives the Tax Court jurisdiction to determine an overpayment only in a case in which we also determine the existence of a deficiency. See McLane v. Commissioner
• The case/controversy requirement under Article III applies to the exercise of the Tax Court’s judicial power.” See Ruesch v. Commissioner, 154 T.C. at 298; see also Battat v. Commissioner, 148 T.C. 32, 46 (2017) (and cases cited therein); Anthony v. Commissioner, 66 T.C. 367, 370 (1976), aff’d without published opinion, 566 F.2d 1168 (3d Cir. 1977).
• The Tax Court will dismiss a case as moot if the parties’ subsequent actions have produced a situation in which neither party retains any “legally cognizable interest in the outcome.” See City of Erie v. Pap’s A.M., 529 U.S. 277, 287, 120 S. Ct. 1382, 146 L. Ed. 2d 265 (2000) (quoting County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S. Ct. 1379, 59 L. Ed. 2d 642 (1979)).
• A case is moot when “the court can provide no effective remedy because a party has already ‘obtained all the relief that [it has] sought.'” See Ruesch v. Commissioner, 154 T.C. at 299 (alteration in original) (quoting Conservation Force, Inc. v. Jewell, 733 F.3d 1200, 1204, 407 U.S. App. D.C. 22 (D.C. Cir. 2013)).
• In interpreting the “principle of the voluntary cessation”, the Tax Court weights whether interim relief or events have completely eradicated the effects of the alleged violation and whether there is no reasonable expectation that the alleged violation will recur. Therefore, when both conditions are satisfied it may be said that the case is moot because neither party has a legally cognizable interest in the final determination of the underlying questions of fact and law.”. See Davis, 440 U.S. at 631

Insight: The Shitrit decision shows that the I.R.C. §7345 does not grant the Tax Court jurisdiction to determine an overpayment, refund, or credit of tax paid. Also, the decision elucidates that the court can dismiss a case as moot when the relief is already granted to the taxpayer.

Ginos v. Comm’r, T.C. Memo. 2021-14 

May 19, 2021 | Carluzzo, J. | Dkt. No. 6147-17S

• Opinion

Tax Dispute Short Summary: 

The opinion shall not be treated as precedent for any other case and the decision shall not be reviewed by any other court.

Although she was not employed nor received income, the taxpayer and her then-husband filed a joint 2008 Federal Income tax return with income only attributable to the husband’s business, formed, at least in part, by funds borrowed or gifted from the taxpayer’s grandmother.  The signed 2008 Federal income tax return reflected taxes due.  The amount went unpaid.  In 2011, taxpayer and then-husband filed for divorce.  Divorce settlement negotiations led to a non-memorialized, verbal agreement where the then-husband agreed to pay the 2008 tax liability if the taxpayer did not contest the divorce.  In extinguishing her obligations under the agreement, the taxpayer executed a quitclaim deed conveying her interest in the marital home to her then-husband.  Thus, the taxpayer realized and recognized income from the cancellation of indebtedness.  Further, taxpayer began receiving salary from employment with a nonprofit organization.  Taxpayer filed a separate 2011 Federal income tax return including her salary. However, the taxpayer failed to include the debt discharge assumed by her then-husband.

Taxpayer relocated to a foreign country for a period, between 2012 and 2013, before returning the U.S.  Shortly after returning to the U.S., taxpayer married for the second time.  Prior to the marriage, taxpayer received a large monetary gift from her mother, which was subsequently used to purchase stocks in a joint brokerage account of the taxpayer and husband.  Taxpayer and husband moved to Colorado.  Taxpayer maintained no job and received an allowance from her husband as the only source of income.

In 2015, taxpayer submitted Form 8857, Request for innocent Spouse Relief, requesting relief from liability for tax years 2008 and 2011.

Tax Litigation Key Issues:

• Whether Section 6015(f) of the Internal Revenue Code entitled taxpayer to relief for tax liabilities owed under the threshold conditions of Sleeth v. Commissioner?

Primary Holdings: 

• Tax Court found the taxpayer jointly and severally liable for tax liabilities shared on a jointly filed tax return.
• Tax Court found that the taxpayer failed to satisfy the threshold conditions to entitle relief under section 6015(f).

Key Points of Law:

• Generally, married taxpayers may elect to file a joint Federal income tax return. I.R.C. §6013(a). After making this election, each spouse is responsible for the accuracy of the items shown on the joint return, and each spouse is jointly and severally liable for the entire amount of the income tax liability reported on the joint return. I.R.C. §6013(d)(3); see Butler v. Comm’r, 114 T.C. 276, 282 (2000).
• Section 6015 provides various ways in which a spouse can be relieved of the joint and several income tax liability that results from the filing of a joint return – commonly referred to as “innocent spouse relief”. If, as here, the tax due arises from an underpayment of tax, such relief is available only under section 6015(f). Pursuant to that section, the Commissioner may grant equitable relief from joint and several liability if “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)”. I.R.C. §6015(f)(1)(A).
• Petitioner, as the requesting spouse, bears the burden of proving that she is entitled to relief under section 6015(f). SeeRule 142(a); see also Porter v. Comm’r, 132 T.C. 203, 210 (2009). The Court applies a de novo scope and standard of review in deciding whether a taxpayer is entitled to relief under section 6015(f). I.R.C. §6015(e)(7); Porter, 132 T.C. at 210.
• The Commissioner has outlined procedures for determining whether a requesting spouse qualifies for equitable relief under section 6015(f) in Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. 397, 399-400. Although the Court considers those procedures when reviewing the Commissioner’s denial of section 6015(f) relief in cases such as this one, we are not bound by them; our determination ultimately rests on an evaluation of all the facts and circumstances. See Sleeth v. Comm’r, 991 F.3d 1201, 1205 (11th Cir. 2021), aff’g T.C. Memo. 2019-138. Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399, lists seven threshold conditions, all of which a spouse must meet to qualify for relief under section 6015(f).
• According to Rev. Proc. 2013-34, sec. 4.02,2013-43 I.R.B. at 400, if the threshold requirements have been satisfied, then the Commissioner considers whether the requesting spouse qualifies for streamlined relief. The requesting spouse is eligible for streamlined relief under Rev. Proc. 2013-34 , sec. 4.02, only in cases in which that spouse establishes that: (1) on the date the IRS makes its determination, the requesting spouse, as relevant here, is no longer married to, or is legally separated from, the non-requesting spouse; (2) the requesting spouse will suffer economic hardship if relief is not granted; and (3) on the date the joint return was filed, the requesting spouse did not know or have reason to know the non-requesting spouse would not or could not pay the underpayment of the tax reported on the joint return.
• Economic hardship, as defined in Rev. Proc. 2013-43, sec. 4.03 (2)(b), 2013-43 I.R.B. at 401, results if satisfaction of the tax liability, in whole or in part, would result in the requesting spouse’s being unable to meet his or her reasonable basic living expenses.
  • Whether the requesting spouse will suffer economic hardship is determined based on rules similar to those provided in Treas. Reg. § 301.6343-1(b)(4), and the Service will take into consideration a requesting spouse’s current income and expenses and the requesting spouse’s assets. In determining the requesting spouse’s reasonable basic living expenses, the Service will consider whether the requesting spouse shares expenses or has expenses paid by another individual (such as a family member, including a current spouse).
• If, as in this case, a requesting spouse meets the threshold conditions for section 6015 relief but fails to qualify for streamlined relief, then the Commissioner will take into account the following nonexclusive list of factors set forth in Rev. Proc. 2013-34 , sec. 4.03, 2013-43 I.R.B. at 400-403 , in determining whether to grant relief: (1) whether the requesting spouse is separated or divorced from the non-requesting spouse; (2) whether the requesting spouse will suffer economic hardship if relief is not granted; (3) whether on the date the joint return was filed the requesting spouse did not know and had no reason to know that the non-requesting spouse would not or could not pay the tax liability; (4) whether the requesting or non-requesting spouse has a legal obligation to pay the tax liability pursuant to a decree of divorce or other agreement; (5) whether the requesting spouse received a significant benefit from the unpaid income tax liability; and (6) whether the requesting spouse has made a good-faith effort to comply with the Federal income tax laws for the taxable years following the taxable year(s) to which the request for relief relates. Two additional factors that the Commissioner may consider in favor of granting relief are whether: (1) the non-requesting spouse abused the requesting spouse and (2) the requesting spouse was in poor mental or physical health when the joint return was filed or when the requesting spouse requested relief. See id. sec. 4.03(2)(c)(iv), (g),2013-43 I.R.B. at 402, 403
• If the requesting spouse is no longer married to the non-requesting spouse as of the date that the IRS makes its determination, this factor weighs in favor of relief. Rev. Proc. 2013-43
• Under Rev. Proc. 2013-34, sec. 4.03 (2)(b), the absence of economic hardship is a neutral factor.
• In the case of an underpayment of tax due, the Knowledge or Reason to Know factor turns on whether, as of the date the return was filed, the requesting spouse knew or had reason to know that the non-requesting spouse would not or could not pay the tax at that time or within a reasonable time after the filing of the return. Rev. Proc. 2013-34, sec. 4.03 (2)(c)(ii), 2013-43 I.R.B. at 401 . This factor will weigh against relief if, on the basis of the facts and circumstances of the case, it was not reasonable for the requesting spouse to believe that the non-requesting spouse would or could pay the tax liability shown on the return. Id.
• Spousal abuse can negate an otherwise negative factor “[i]f the requesting spouse establishes that the spouse was the victim of abuse prior to the time the return was filed, and that, as a result of prior abuse, was not able to question the payment of any balance due reported on the return, for fear of the non-requesting spouse’s retaliation”. See. Rev. Proc. 2013-34
• “Legal Obligation” factor will weigh in favor of relief if the non-requesting spouse has the sole legal obligation to pay the outstanding tax liability pursuant to a divorce decree or other legally binding agreement. Rev. Proc. 2013-34
• The Significant Benefit factor calls for an evaluation of whether petitioner received a significant benefit, beyond normal support, such as the “benefits of a lavish lifestyle”, from the underpayment of tax. See id. sec. 4.03(2)(e), 2013-43 I.R.B. at 402; see also sec. 1.6015-2 (d), Income Tax Regs . If so, this factor will weigh against relief. Normal support is measured by the circumstances of the particular parties. Porter, 132 T.C. at 212. On the other hand, “[i]f only the non-requesting spouse significantly benefitted from the unpaid tax, and the requesting spouse had little or no benefit, or the non-requesting spouse enjoyed the benefit to the requesting spouse’s detriment, this factor will weigh in favor of relief.” Rev. Proc. 2013-34, sec. 4.03 (2)(e).
• If the requesting spouse is in compliance with the income tax laws for taxable years following the taxable years to which the request for relief relates, this factor will weigh in favor of relief. sec. 4.03(2)(f)(i), 2013-43 I.R.B. at 402. If the requesting spouse is not in compliance, then this factor will weigh against relief. Id.
• This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health when the relevant return was filed or when she requested relief. Rev. Proc. 2013-34, sec. 4.03 (2)(g), 2013-43 I.R.B. at 403. If the requesting spouse was in neither poor physical nor poor mental health, then this factor is neutral.

Insight: The Ginos decision provides just as much guidance about the need for an agreement in writing when determining which spouse will shoulder any outstanding tax liabilities in a divorce settlement.  While the Tax Court’s decision appears harsh, the taxpayer conceded that many of the Sleeth considerations were neutral.  Remember – Get It In Writing!

Mason v. Comm’r, T.C. Memo. 2021-64

May 20, 2021 | Holmes, J. | Dkt. Nos. 6919-16SL, 7007-16L, 7009-16L

• Opinion

Tax Dispute Short Summary: 

Taxpayers owed tax liability both jointly and individually for various years.  Taxpayers filed joint Federal income tax returns late and made no payments towards their liabilities at the time of filing for two years.  The subsequent year and in following years, “taxpayer A” filed individual income tax returns, separately.  Taxpayer A filed returns late and made no payments for the associated liabilities.  Taxpayers reached an installment agreement with the commissioner and made payment until they ceased making payments a year and a half after the agreement.  In addition to tax delinquencies, the IRS assessed trust-fund-recovery penalties to taxpayer A for various years.

By 2015, the Commissioner began filing liens against the taxpayers’ property and increased its collection efforts.  Revenue Officer phoned the Taxpayers to notify them that IRS will seize their home to settle their tax liabilities.  Soon after the phone call, IRS sent taxpayers notice of intent to levy and right to CDP hearing.  Taxpayers promptly responded to the notice by submitting a CDP hearing directly to the office of the Commissioner Centralized OIC Unit.

Revenue Officer discovered the taxpayer mailed the OIC and CDP hearing request to the Centralized Unit.  Revenue Officer opined that the OIC was sent solely to delay collections as it was mailed two weeks after the Revenue Officer’s threats of seizure.  Within two days, the Centralized OIC Unit returned the taxpayers’ request informing them that the offer was submitted for the sole purpose of delaying an approaching seizure.

A few weeks later, another department of the IRS received the taxpayers’ request for a CDP hearing.  A Settlement Officer was assigned to review the case.  The Settlement Officer informed the Masons that the actions of the Revenue Officer and the Centralized OIC were property under the Internal Revenue Manual.  Settlement Officer refused to review the taxpayers’ OIC on the merits.  The settlement Officer, rather, reviewed only whether the Centralized Office abused its discretion under the I.R.M. Settlement Officer informed the taxpayers that the actions were appropriate and that their circumstance had already been considered.  The taxpayers were forced to file a petition with the Tax Court.

Tax Litigation Key Issues:

• Whether IRS Appeals abused its discretion by failing to review the taxpayers’ offer on its merits and merely reviewing the Centralized Unit’s decision for abuse of discretion?

Primary Holdings: 

• The taxpayers were entitled to a review of merits of the OIC by the Settlement Officer during their CDP hearing.

Key Points of Law:

• When someone fails to pay tax, the IRS will assess the liability against her and send a notice and demand letter. I.R.C. §§6201, 6303(a). After that, things only get worse for the taxpayer: his or her tax liability will become a lien in favor of the IRS against all of his or her property, see 6321, and then he or she will receive a notice of intent to levy (a politely phrased letter that is nevertheless a threat to seize property to collect the tax owed). For more than twenty years, these threats have been accompanied by notices that a delinquent taxpayer is entitled to an informal administrative hearing, called a CDP hearing. I.R.C. §§6330(a), 6331(d). CDP was created as part of a broader effort to address the concern that taxpayers who get caught in the IRS hall of mirrors had no place to turn that was truly independent and structured to represent their concerns. See Lewis v. Comm’r, 128 T.C. 48, 60 (2007). To help break those mirrors, a CDP hearing must be conducted by an “impartial officer” who “has had no prior involvement in the determination and assessment of the underlying tax liability that is the subject of the hearing.” Cox v. Comm’r, 126 T.C. 237, 251 (2006), rev’d, 514 F.3d 1119 (10th Cir. 2008). That officer may also “not engage in ex parte discussions of the strength and weakness of the issues of a case that would appear to compromise the Appeals officer’s independence.” Hoyle v. Comm’r, 136 T.C. 463, 470 (2011). As our caselaw has recognized, CDP is “more than just a rubber stamp for the Commissioner’s determinations,” see Lewis, 128 T.C. at 60; it offers taxpayers the protection of a fresh look at the circumstances of their cases to ensure that the requirements of all applicable laws and procedures have been met, that the issues they raised have been considered and addressed, and that any proposed collection actions balance the government’s need for efficient collection of taxes with the taxpayer’s concern that collection be no more intrusive than necessary, see Cox, 126 T.C. at 248 (citing section 6330(c)(3) ).10
• The Code permits a taxpayer to make an OIC, and section 7122(a) gives the Commissioner very wide discretion to compromise tax liabilities. Sec. 7122(c)(1); sec. 301.7122-1(c)(1), Proced. & Admin. Regs. In an effort to “treat all taxpayers according to published standards of general applicability,” the Commissioner has delegated decisions on whether to accept taxpayers’ offers to IRS employees, who are supposed to follow regulations and policies but with a bit of discretion to tinker at the edges if they find special circumstances. Brombach v. Comm’r, T.C. Memo. 2012-265, at 5; see also 301.7122-1(f)(3), Proced. & Admin. Regs.
• The IRS recognizes three broad classes of OICs: those based on doubt as to liability, those based on doubt as to collectability, and (a catchall third category) those made for the sake of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. The Commissioner’s regulations and policies instruct IRS employees to look at different factors for each of these three different kinds of offers. The IRS analyzes doubt-as-to-collectability OICs by calculating how much it thinks a taxpayer can pay, what it calls her RCP– reasonable collection potential. This calculation is fairly complicated, but its goal is easy to understand: It’s the IRS’s best estimate of what it could get by seizing and selling a taxpayer’s property and then garnishing her income. See IRM pt. 5.8.4.3.1 (Apr. 30, 2015). The IRS generally will not accept an OIC that is less than the RCP without proof of special circumstances. Johnson v. Comm’r, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013);
• An OIC made for the sake of effective tax administration requires the IRS to predict whether collection in full would create economic hardship for the taxpayer. See 301.7122-1(b)(3)(i), (iii), Proced. & Admin. Regs. The regulation gives as an example of economic hardship a situation where, although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses. sec. 301.7122-1(c)(3)(i)(C). If collection would not cause economic hardship, the IRS may still compromise a tax liability to promote effective tax administration when the taxpayer identifies compelling public policy or equity considerations. See 301.7122-1(b)(3)(ii). The IRS will accept an OIC for these reasons if the taxpayer demonstrates that “exceptional circumstances” exist in her situation and meets three requirements:
  • the taxpayer must have remained in compliance since incurring the liability and must not have an overall compliance history that weighs against compromise;
  • the taxpayer must also show that she acted reasonably and responsibly in incurring the liability; and
  • the Commissioner must determine that other taxpayers would view the compromise as fair and equitable.

Sec. 301.7122-1(b)(3)(ii) , (c)(3)(ii)

• The Commissioner must consider a taxpayer’s individual facts and circumstances in light of these principles, but he does have broad discretion in deciding whether to accept an OIC. See Bogart, at 11. The IRS also checks to see that an offer was submitted on the proper form – Form 656 – and with the correct information and accompanying documentation.
• The IRS doesn’t consider all the OICs it receives the same way. See 301.7122-1(d)(2), (g)(4), Proced. & Admin. Regs. Some offers it rejects on their merits. A taxpayer may choose to appeal a rejection within the IRS. Sec. 7122(d)(3)(A) and (B). But there is an important distinction here – a rejected offer is one that the IRS has considered. The IRS has another category of OICs that it returns. See sec. 7122(d)(3), (g). When an OIC is returned, the IRS has not considered it on the merits because the Commissioner has found it to be “submitted solely to delay collection,” or because it is “otherwise non-processable,” or because the taxpayer failed to submit information that the IRS requested before it would consider the OIC. Sec. 301.7122-1(d)(2), Proced. & Admin. Regs. The regulations say that a decision to return an OIC is final and unappealable: The return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals. 301.7122-1(f)(5)(ii).
• We normally don’t see appeals from the IRS’s rejection or returns of OICs-we don’t have jurisdiction to review them, and after a taxpayer exhausts her remedies within the IRS, that’s the end of the matter. Asemani v. IRS, 163 F. App’x 102, 105 (3d Cir. 2006). But there is one exception – Congress gave us jurisdiction to review the Commissioner’s determination after a CDP hearing, and told taxpayers that they could raise collection alternatives such as OICs at those hearings. Sec. 6330(c); Reed v. Comm’r, 141 T.C. 248, 254 (2013. The Code specifically tells a settlement officer who conducts a CDP hearing to address any relevant issues the taxpayer raises. Sec. 6330(c)(2). That doesn’t mean that a taxpayer in a CDP hearing gets any different standard for the Commissioner’s consideration of the merits of her OIC – the settlement officer is governed by section 7122 and its regulations just as much as the Centralized Unit is. See Olsen v. U.S., 414 F.3d 144, 150 (1st Cir. 2005). But it does mean we can review a determination to reject an OIC on grounds that would have triggered a return if the OIC had been submitted outside the CDP hearing process – for example, OICs from taxpayers who don’t submit financial information after being asked to do so; sec. 301.7122-1(d)(2), Proced. & Admin. Regs.; Loveland v. Comm’r, 151 T.C. 78, 88 (2018); or OICs from taxpayers who aren’t current with their filing obligations; Reed, 141 T.C. at 256-57.

Insight: The Mason Case shows the importance of understanding the procedural aspects of dealing with the IRS.  It, also, unfortunately, demonstrates the careless consideration, at times, of certain aspects within the IRS.  Efficiency is no substitution for the correct process and consideration.

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