The Tax Court in Brief June 21 – June 25, 2021

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The Tax Court in Brief June 21 – June 25, 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 June 21 – June 25, 2021

Tax Court Case: Ervin v. Commissioner, T.C. Memo. 2021-75 

June 23, 2021 | Lauber, J. | Dkt. No. 485-15 

Tax Dispute Short Summary

For nearly a decade, the taxpayer and his wife failed to file Federal income tax returns and made no payments.  The couple were indicted and convicted for tax evasion for a three-year period of the near-decade non-payment.  The following year, the taxpayer was ordered to pay restitution for the entire period of non-filing and non-payment.

After remanded to custody, the IRS completed a civil examination for the taxpayer’s individual income tax liabilities for a six-year period, which included years subject to the criminal court’s order for restitution. IRS prepared and certified a substitute for return for the relevant years. IRS, then, sent taxpayer two notices of deficiency for two three-year periods, providing for penalties.

The taxpayer, from prison, submitted a tax court petition, but failed to allege errors in the IRS’ determinations.  In the time between the petition being filed and the opinion, the U.S. Department of Justice auctioned off the taxpayer’s gold coins and certified that the taxpayer’s restitution was paid, in full.  In response to requests for admissions, the taxpayer admitted to failing to file, failing to make timely income tax payments, failing to make timely estimated tax payments, and he lacked reasonable cause to abate the penalties.  The Commissioner moved for summary judgment.  The taxpayer argues that liability should not exist by virtue of the restitution obligation.

Tax Litigation Key Issue:

Primary Holdings

Key Points of Law:

Insight: The Tax Court’s decision brings a deluge of life lessons. Namely, crime doesn’t pay.  However, that old cliché needs a caveat – But the criminal sure will.  The Court made it clear that an IRS’ assessment of penalties and additional tax stands independent from a criminal order, even when the same tax years are at issue. To soften the blow, the restitution payments allow for a tax credit on taxes owed.

Hussey v. Commissioner, 156 T.C. No. 12 

June 24, 2021 | Colvin, J. | Dkt. No. 19249-18

Tax Dispute Short Summary

In 2009, the petitioner purchased 27 investment properties on which he assumed outstanding loans totaling $1,714,520.  All of the loans were held by the same bank.  By 2012, petitioner began to struggle with making payments on the loans.

In 2012, the petitioner sold short 16 investment properties and received from the mortgage lender a discharge of indebtedness totaling $754,054 for 15 of those properties.  In 2013, petitioner sold 7 investment properties.  He did not receive from the lender a discharge of indebtedness relating to the 2013 property sales.

Although the petitioner originally filed his returns for 2012 through 2014, he believed that the tax treatment for the sale and indebtedness reported on his original returns was incorrect.  Accordingly, he hired a tax law firm to file amended returns for 2012 and 2013.  On the amended 2012 return, petitioner reported a loss of $613,263 related to the sales of properties.  On Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), petitioner reported that he had excludable income of $685,281 “for a discharge of qualified real property business indebtedness (QRPBI) applied to reduce the basis of depreciable property.”  On his 2013 return, petitioner reported a loss totaling $499,417 related to the sale of the investment properties and his primary residence.  The losses for 2013 were carried forward by petitioner on his 2014 return.

The IRS issued a notice of deficiency to petition for taxable years 2013 and 2014.  For 2013, the IRS disallowed the loss deductions.  For 2014, the IRS disallowed the loss carryover deduction from 2013.

Tax Litigation Key Issues:

Primary Holdings

Key Points of Law:

Insight: The Hussey decision demonstrates that taxpayers may be able to avoid federal tax penalties for reporting positions if they rely in good faith on a tax professional for the preparation of a tax return.


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, and 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.