The Tax Court in Brief July 5 – July 9, 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.
Tax Litigation: The Week of July 5 – July 9, 2021
- Peter Freund v. Commissioner, T.C. Memo. 2021-83
- Delgado v. Commissioner, T.C. Memo. 2021-84
- Mathews v. Commissioner, T.C. Memo. 2021-85
Tax Court Case: Peter Freund v. Commissioner, T.C. Memo. 2021-83
Tax Dispute Short Summary:
Petitioner, acting as a whistleblower, filed a Form 211, Application for Award for Original Information, regarding a target taxpayer’s mischaracterization of loan payments. Petitioner discovered the improper characterization after review of a decedent’s estate records. The IRS Whistleblower Office received the Form 211, which an IRS employee reviewed. The IRS employee determined that the statute of limitations for assessment had expired. And ultimately, the IRS never assigned the petitioner’s Form 211 to any examiner. The Whistleblower Office issued a final determination letter to the petitioner denying his whistleblower award. Petitioner filed in the Tax Court for review of the Whistleblower Office’s determination.
- Whether petitioner is entitled to a whistleblower award where the IRS did not bring administrative or judicial action?
- The Tax Court sustained the respondent’s determination that the petitioner was not entitled to a whistleblower award because the IRS did not bring an administrative nor judicial action and did not collect any proceeds.
Key Points of Law:
- The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992). The party moving for summary judgment bears the burden of demonstrating that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law. Sundstrand Corp., 98 T.C. at 520. However, the summary judgment standard is not generally apt when reviewing whistleblower award determinations because the Tax Court confines itself to the administrative record to decide whether there has been an abuse of discretion. Van Bemmelen v. Comm’r, 155 T.C. 4 (2020).
- In “record rule” cases, which include whistleblower cases, involving judicial review of a final agency action, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law. Van Bemmelen, 155 T.C.
- The Tax Court has jurisdiction to review final determinations by the Commissioner regarding whistleblower award claims including so-called rejections and denials as classified by the Whistleblower Office. See Lacey v. Comm’r, 153 T.C. 146, 163-164 (2019).
- The regulations provide that a rejection is a determination limited to the whistleblower and the information provided on the face of the claim. Proced. & Admin. Regs. § 301.7623-3(c). On the other hand, a denial is a determination that relates to or implicates taxpayer information.
- The Code provides for two types of whistleblower awards: discretionary and nondiscretionary. Section 7623(a) authorizes the Commissioner to pay sums necessary for detecting underpayments of tax or detecting and bringing to trial and punishment persons who are guilty of violating the internal revenue laws or conniving at the same. Subsection (b)(1) provides for non-discretionary (i.e., mandatory) awards of at least 15% and not more than 30% of the collected proceeds if certain requirements are met. Under this statutory scheme whistleblower awards are preconditioned upon the Commissioner’s proceeding with an administrative or judicial action and collecting proceeds from the target taxpayer. IRC § 7623(b)(1). If the Commissioner does not proceed with an administrative or judicial action and collect proceeds from the taxpayer, there can be no whistleblower award. See Cohen v. Comm’r, 139 T.C. 299, 302 (2012). Similarly, the Tax Court has no authority to require the Commissioner to commence an administrative or judicial action against the target taxpayer.
- If the IRS does not proceed with an administrative or judicial action, thereby definition can be no collected proceeds and hence no whistleblower award. Perales v. Comm’r, T.C. Memo 2017-90
Tax Litigation Insight: An individual pursuing a whistleblower action must remember that simply taking the rightful action fails to pay, sometimes. While the IRS may have broad discretion when determining whether to pursue a whistleblower claim, it will not reward where the law clearly restricts their ability to collect.
Tax Court Case: Delgado v. Commissioner, T.C. Memo. 2021-84
Tax Dispute Short Summary:
Two companies paid the Petitioner for services performed as an independent contractor. The companies submitted Forms 1099-MISC, Miscellaneous Income, to the IRS reporting the payments. For the tax period, the Petitioner timely filed two Forms 1040EZ, Income Return, reporting zero income. Based on the two Forms 1099-MISC it received, the IRS issued a Notice of Deficiency, which provided an increase in tax liability as well as a section 6662(a) penalty. Petitioner timely petitioned the court for redetermination based on the Petitioner’s interpretation of section 7701(a)(26).
TaxLitigation Key Issues:
- Whether the IRS’s determination of the Petitioner’s tax liability and accuracy-related penalties is correct?
- Whether the Petitioner engaged in a trade or business as defined by section 7701(a)(26)?
- The Court concluded the IRS’s determination was correct.
- The Tax Court concluded that the Petitioner was engaged in a trade or business defined by section 7701(a)(26) and that the Petitioner’s arguments were meritless.
Key Points of Law:
- The Commissioner’s determination of a deficiency is generally presumed correct, though the taxpayer may rebut this presumption. See IRC § 7491(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). For the presumption of correctness to attach to the notice of deficiency in unreported income cases, however, the Commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity or demonstrating that the taxpayer actually received unreported income. See Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 386 (5th Cir. 1995). If the Commissioner introduces some evidence that the taxpayer received unreported income, the burden shifts to the taxpayer, who must establish by a preponderance of the evidence that the deficiency was arbitrary or erroneous. See Portillo v. Comm’r, 932 F.2d 1128, 1133-1134 (5th Cir. 1991).
- Gross income includes compensation for services. Sec. 61(a)(1).
- Section 7701(a)(26) provides that the term “trade or business” includes the performance of the functions of a public office. However, section 7701(c) provides that the term “includes” is not to be interpreted to exclude other things otherwise within the meaning of the term defined. The Tax Court finds arguments seeking to convert “includes” to “includes only” to be frivolous. See Wnuck v. Comm’r, 136 T.C. 498, 506 (2011). Moreover, the overall theory that only those performing “the functions of a public office” need to pay Federal income tax has been consistently rejected as a common, frivolous, tax-protestor argument of no merit. Worsham v. Comm’r, T.C. Memo. 2012-219
- Section 1401(a) imposes, in addition to other taxes, a tax on the self-employment income of every individual. Self-employment income generally consists of the gross income derived by an individual from any trade or business carried on by such individual, less the allowable deductions attributable to such trade or business, during any taxable year. IRC § 1402(b).
Tax Litigation Insight: The Court’s decision reminds potential tax protestors that the Courts ignore the persuasiveness and credibility of the arguments formulated in the depths of the internet and in a Bohemian book clubs.
Tax Court Case:
Mathews v. Commissioner, T.C. Memo. 2021-85
Tax Dispute Short Summary:
The IRS mailed a Notice of Deficiency to the Petitioner in 2016 covering a four-year tax period to an address on file with the IRS. In 2019, Petitioner mailed a letter to the Tax Court regarding the Notice of Deficiency that he received. Likewise, the Petitioner challenged an additional tax year that the Notices did not mention. Tax Court accepted the Petitioner’s letter, which the Court filed as his petition. The IRS filed a motion for summary judgment, alleging that the Court lacks jurisdiction to decide the Petitioner’s case.
Tax Litigation Key Issues:
- Whether the Tax Court possesses jurisdiction to determine the Petitioner’s claim?
- The Court concluded that it lacked jurisdiction to determine the Petitioner’s claim because the petitioner filed the petition untimely for the 4-year tax period.
- The Court determined that it lacked jurisdiction over the Petitioner’s claim regarding the tax year not at issue in any of the Notices of Deficiency.
Key Points of Law:
- Like all Federal courts, the Tax Court is a court of limited jurisdiction, which it may exercise only to the extent authorized by Congress. Naftel v. Comm’r, 85 T.C. 527, 529 (1985). As the party invoking the Tax Court’s jurisdiction, the Petitioner bears the burden of proving the facts necessary to establish that we have jurisdiction over his case. See David Dung Le, M.D., Inc. v. Comm’r, 114 T.C. 268, 270 (2000).
- The Tax Court’s jurisdiction to redetermine a deficiency depends on the issuance of a valid notice of deficiency and a timely-filed petition. Rule 13(a), (c); Monge v. Comm’r, 93 T.C. 22, 27 (1989). A notice of deficiency is valid, whether or not the taxpayer receives it, if it is mailed to the taxpayer’s last known address by certified or registered mail. SeeR.C. § 6212(a) and (b); see also, Yusko v. Comm’r, 89 T.C. 806, 810 (1987). A taxpayer generally has 90 days from the date of the notice of deficiency to file a petition with this Court. IRC § 6213(a).
- In the collection due process (CDP) context, the Tax Court’s jurisdiction depends upon the issuance of a valid notice of determination and the filing of a timely petition. See Smith v. Comm’r, 124 T.C. 36, 38 (2005). A notice of determination is valid if it is sent by certified or registered mail to a taxpayer at the taxpayer’s last known address. See Weber v. Comm’r, 122 T.C. 258, 261-262 (2004). Section 6330(d)(1) sets a 30-day jurisdictional deadline for filing a petition in a CDP case.
Tax Litigation Insight:
Taxpayers sometimes suffer the hard lesson that putting an IRS notice on the backburner may often lead to being singed. The IRS moves quickly when it makes its assessments. The sooner the taxpayer can make contact with the IRS…the better!
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