The Tax Court in Brief August 15 – August 21, 2020

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The Tax Court in Brief August 15 – August 21, 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 August 15 – August 21, 2020

Emanouil v. Comm’r, T.C. Memo. 2020-120

August 17, 2020 | Gustafson, J. | Dkt. No. 5089-17

Short Summary:  Mr. Emanouil is a real estate developer.  In 1999, he purchased approximately 200 acres of undeveloped property in Westford, Massachusetts.  Although he made several attempts to develop or sell the property over the next several years, he ultimately obtained approval for an affordable housing project on 104 acres of the property.  Towards the conclusion of the project in 2008, he donated 16 acres of the property to Westford.  The following year, after Westford had approved the affordable housing project, Mr. Emanouil donated an additional 71 acres of the property to Westford.

On his 2008 return, Mr. Emanouil reported a $1.5 million charitable contribution deduction with respect to the 16-acre donation.  On his 2009 return, he reported a $2.5 million charitable contribution deduction with respect to the 71-acre donation.  Due to limitations on claiming the charitable contribution deductions for each year, Mr. Emanouil carried forward the deductions to his 2010 through 2012 tax years.

The IRS examined Mr. Emanouil’s 2010, 2011, and 2012 returns and issued a notice of deficiency disallowing the carryover charitable contribution deductions.  The notice of deficiency disallowed the carryovers because, according to the IRS, Mr. Emanouil had failed to substantiate the reported values of the properties transferred and failed to show that the properties were transferred with charitable intent.  The IRS also determined accuracy-related penalties for such years.

Key Issues:  (1) Whether Mr. Emanouil complied with the qualified appraisal requirements of Section 170(f)(11)(C); (2) Whether Mr. Emanouil’s contributions were part of a quid pro quo exchange rather than a charitable gift; (3) What the fair market values were of the properties that Mr. Emanouil contributed; and (4) Whether the accuracy-related penalties apply.

Primary Holdings(1) Although the qualified appraisal did not contain the date (or expected date) of contribution to Westford and although the qualified appraisal did not contain a statement that it was prepared for income tax purposes, Mr. Emanouil substantially complied with the qualified appraisal requirements.  (2) The evidence in this case shows that Mr. Emanouil did not make the charitable contributions as part of a quid pro quo exchange.  (3) The fair market values of the properties that Mr. Emanouil contributed were $1.5 million and $2.5 million, or the amounts as reported on the income tax returns.  (4) The accuracy-related penalties do not apply because there are no underpayments of tax.

Key Points of Law:

InsightThe Emanouil case is a good reminder that strict compliance with certain regulatory provisions is not always required, particularly with respect to the qualified appraisal rules.  Thus, if taxpayers fail to meet one or more requirements for a qualified appraisal, they should carefully consider whether they may raise the doctrine of substantial compliance.

Nirav B. Babu, T.C. Memo. 2020-121

August 17, 2020 | Lauber A. | Docket Nos. 8649-17, 20266-18

Short SummaryPetitioner sought a determination from the Tax Court that he was not liable for an accuracy-related penalty for an underpayment attributable to a substantial understatement of income tax by failing to report passthrough entity income on his Schedule E, Supplemental Income and Loss.  He argued that he had reasonable cause for failing to report and pay the proper amount of tax.  The Tax Court disagreed given that the Petitioner failed to provide credible evidence in favor of his position.

Key Issue:  Whether a taxpayer’s failure to report flow-through income on Schedule E, Supplemental Income and Loss, from a pass-through entity generates an accuracy-related penalty for an underpayment attributable to a substantial understatement of income tax.  Specifically, whether reasonable cause for the failure existed in this scenario.

Primary Holdings

Key Points of Law:

InsightThe Babu case illustrates the importance of presenting credible evidence to establish a “reasonable cause defense” to penalties asserted by the IRS.  Specifically, the case demonstrates that establishing reasonable cause requires credible evidence—particularly in a case where the taxpayer purportedly relied on the advice of a tax professional.  The Tax Court is free to determine if evidence is credible, and may decline to hold that reasonable cause exists if the evidence does not seem credible to the Court.  In other words, providing evidence alone is not enough to establish reasonable cause.  The evidence must also be credible to the fact-finder.

Brashear v. Comm’r, T.C. Memo. 2020-122

August 19, 2020 | Carluzzo, L. | Dkt. No. 13189-13

Short SummaryPetitioners sought review of the IRS’s determination that: (1) many of the claimed deductions for Petitioners’ 2009, 2010, and 2011 Federal income tax returns should be disallowed; (2) Petitioners had additional income in 2010; (3) Petitioners are not entitled to a net operating loss carryover from 2008 to 2009; (4) Petitioners are liable for IRC § 6651 additional tax; and (5) Petitioners’ are liable for IRC § 6662(a) accuracy-related penalties.  The Tax Court found in favor of the IRS.

Key Issue:  Does a taxpayer have the burden of proof for the deductions that he has claimed on his Federal income tax return?

Primary Holdings

Key Points of Law:

InsightThe Brashear case highlights the importance of producing adequate records and documentation that substantiate any deductions taken on a Federal tax return.  Further, it illustrates the pitfalls that pro sese petitioners can fall into who are unfamiliar with the Federal Tax Code or the Tax Court’s Rules of Practice and Procedure when appearing before the Tax Court.  This case shows that it is advisable to consult with a tax attorney when dealing with the Tax Court.

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