The Tax Court in Brief July 26 – July 31, 2021

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The Tax Court in Brief July 26 – July 31, 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 Court: The Week of July 26 – July 31, 2021

Harrington v. Comm’r, T.C. Memo. 2021-95 

July 26, 2021 | Lauber, J. | Dkt. No. 13531-18

Tax Dispute Short SummaryMr. Harrington is a U.S. citizen; his wife is a dual citizen of the United States and Germany.  Mr. Harrington sold his house after meeting Mr. John Glube, a Canadian attorney for Eastern Wood Harvesters (EHW).  He then provided these proceeds—$350,000—to Mr. Glube, who deposited that amount in a Union Bank of Switzerland (UBS) account under the name of Reed International, Ltd. (the “Reed Account”).  At trial, Mr. Harrington testified that he lent this $350,000 as part of his effort to stabilize EHW, a company in which he became an employee.  Later, EHW went under due to the European Union banning the import of North American softwood products, products that EHW sold.

In 2007, the Reed Account was closed because Reed International was being dissolved.  UBS Bankers advised Mr. Harrington that the funds would be safer in a “stiftung,” a European trustlike vehicle.  Mr. Harrington agreed and the funds were transferred under the name Schroder Stiftung, a newly formed Liechtenstein entity, and were held for the benefit of Mr. Harrington and his family.

In 2009, UBS closed the Schroder Stiftung account.  Also in that year, the U.S. Department of Justice entered into a deferred prosecution agreement with UBS “based on a charge of conspiracy to defraud the United States by impending the IRS in the ascertainment, computation, assessment, and collection of income taxes[.]”  After UBS informed Mr. Harrington that the account would be closed, a UBS banker connected him with a Swiss national who advised Mr. Harrington to contribute the assets from the Schroder Stiftung account to a life insurance policy in Liechtenstein.  Mr. Harrington did so and named his wife and children as the beneficiaries.

In 2013, the life policies were canceled, and Mr. Harrington again moved the assets to an account at LGT Bank, a Liechtenstein entity, under his wife’s name.  He testified that the account needed to be in his wife’s name because “that bank wasn’t accepting U.S. clients.”

Mr. Harrington and his wife prepared and filed joint income tax returns for 2005-2010.  On these returns, they did not report any income attributable to the offshore investment vehicles discussed above.  In 2012, the IRS selected the Harringtons’ 2005-2010 returns for examination.  The IRS did so on the basis of information and documents it received from UBS pursuant to the deferred prosecution agreement.  During the examination, the Harringtons provided the IRS with amended returns for 2005 through 2010 and FBARs.  In addition, the Harringtons provided the IRS with Forms 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, after the IRS requested these forms.

Using a sampling method analysis, the IRS determined that Mr. Harrington had received, but failed to report, $791,661 in offshore investment income during the years at issue.  The IRS also imposed fraud penalties against the Harringtons under Section 6663 for 2005-2010.

Tax Litigation Key Issue:

  Whether the IRS’ assessment of tax and fraud penalties was barred by the three-year period of limitations for assessment in Section 6501(a).

Primary Holdings

Key Points of the Laws:

Tax Court InsightAs shown in Harrington, issues of fraud can arise when taxpayers fail to report income from foreign sources and file appropriate informational returns (e.g., FBARs, Forms 3520, etc.).  If the IRS can successfully show fraud, it is permitted to open up those tax years for additional assessments, provided it can demonstrate fraud by clear and convincing evidence.

Ononuju v. Commissioner, T.C. Memo. 2021-94

 July 26, 2021 | Lauber, J. | Dkt. No. 22401-18

Tax Dispute Short Summary

Petitioner’s husband had founded American Medical Missionary Care, Inc. (AMMC) in 1998. AMMC applied to the IRS for recognition of tax-exempt status in 2000, claiming the tax exempt status of operating a “clinic to provide medical examination and treatment” for those who are unable to afford such services. The IRS granted AMMC’s application, thereby categorizing AMMC as a tax-exempt entity under section 501(a) and (c)(3).

Petitioner held various positions in AMMC between 2000 and 2014. In particular, Petitioner was listed as a member of AMMC’s board of directors in 2000 and was listed as secretary and treasurer in an annual report filed in October 2012 with the State of Michigan, AMMC’s state of incorporation. Petitioner was also listed as a director on AMMC’s Form 990 for 2013, and as its secretary on Form 990 for 2014. Petitioner regularly attended AMMC’s board meetings during 2013 and 2014, but neither she nor her husband had an employment contract with AMMC in either year. Nevertheless, AMMC provided on its Form 990 for 2013 that it provided compensation to Petitioner in her capacity as “Secretary/Dir” and to Petitioner’s husband in his capacity as “Pres/Dir.” AMMC issued Petitioner and her husband W-2 forms and a Tax Statement for 2013, and Petitioner reported these wages on a jointly filed Form 1040. However, AMMC reported on its Form 990 for 2014 that Petitioner and her husband had each received zero reportable compensation from the organization. AMMC did not issue the Ononujus a Form W-2 for 2014, and Petitioner and her husband reported that they received no salaries or wages from any sources on their 2014 return.

During 2014, AMMC maintained at least three checking accounts: a Bank of America account; a Saginaw Medical Federal Credit Union account; and a Financial Plus Credit Union account. Petitioner had signature authority over all three accounts. During that year, AMMC had issued the petitioner several checks from the Saginaw and the Financial Plus accounts, totaling to $115,000 for the taxable year. Additionally, AMMC had paid $15,000 to Blue Cross Blue Shield of Michigan for health insurance covering Petitioner and her family.

In October 2015, the IRS commenced an examination of AMMC’s Form 990 for 2013, and the revenue agent (RA) later expanded the examination to include AMMC’s Form 990 for 2014 and the potential excise tax liability of Petitioner and her husband. The RA found Petitioner to have received excess benefits in the amount of $130,000 (the proceeds from the Saginaw and Financial Plus accounts, plus the health insurance benefits).[1]

The RA determined that Petitioner was required to file a return reporting the excess benefit transactions on Form 4720. However, neither AMMC nor Petitioner filed such return. As a result, in May 2018, the examining agent prepared on Petitioner’s behalf a substitute Form 4720 (SFR), reporting for 2014 a first-tier excise tax of $32,500 as mandated by section 4958(a) of the Code (which allows excise tax to be computed as 25% of the excess benefits Petitioner had received). In August 2018, the IRS issued Petitioner a timely notice of deficiency for 2014, which determined a first-tier excise tax of $32,500 and a second-tier excise tax of $260,000 (200% of the excess benefit, as allowed under section 4958(b), when a disqualified person fails to correct the excess benefit transaction in a timely fashion). The notice also determined additional taxes for failure to file a return on Form 4720 and failure to pay the excise tax shown on the SFR. Petitioner sought a redetermination of the excise tax liability.

Additionally, the IRS had determined that AMMC failed to establish that it was operating exclusively for a tax-exempt purpose. As such, the IRS revoked AMMC’s tax-exempt status in October 2018, retroactive to January 1, 2014. This determination was sustained by the Tax Court in November 2020. See Am. Med. Missionary Care, Inc. v. Commissioner, T.C. Dkt. No. 318-19X (Nov. 6, 2020).

Tax Litigation Key Issue:

Primary Holdings

Key Points of the Laws:

Tax Court InsightThe following method proves useful in determining tax liability for excise taxes. First, the organization must be a tax-exempt organization within five years from the date of the transaction at issue (it is immaterial whether the organization is still tax-exempt after the five year period). Second, the Petitioner must be a disqualified person (either on her own accord by way of family relation to a disqualified person). Third, there must be no clear intent that the transferred benefit was for compensation for services (this intent would be either evidenced by timely reporting or (2) via “other written contemporaneous evidence” as noted above). Fourth, nontaxable benefits, such as employer-provided health benefits, are excluded from the excise tax calculation. Lastly, second-tier taxes may be avoided if the Petitioner corrects the deficiency during the correction period, which generally remains open 90 days after the date of mailing the notice of deficiency with respect to the second tier-tax.

[1] Additionally, the RA found Mr. Ononuju to have received excess benefits of $658,168; however, as Mr. Ononuju did not appear for trial, his case was dismissed for lack of prosecution and the excise tax deficiencies and additions to tax were sustained as to him. As a result, this case concerns only Petitioner’s, Mrs. Ononuju’s, tax liability for 2014.

Tax Zuo v. Comm’r, No. 5716-19S, 2021 BL 279235, 2021 Us Tax Ct. Lexis 53 (T.C. July 26, 2021) 

July 26, 2021 | Panuthos | Dkt. No. 5716-19S

Short SummaryThis Small Tax Case involved a deduction claimed by Petitioner for expenses related to his pursuit of a Master of Business Administration (“MBA”) degree.  Such expenses were claimed as unreimbursed employee expenses on Schedule A, Itemized Deductions.  Respondent denied the entirety of Petitioner’s claimed deduction and assessed an accuracy-related penalty pursuant to 26 U.S.C. § 6662(a).

Tax Litigation Key Issue:  Whether Petitioners’ education expenses constituted a deductible business expense.

Primary Holdings

Key Points of the Laws:

Tax Court InsightThis case provides a good roadmap for satisfying the requirements for the deduction of a graduate-level degree as an unreimbursed employee expense.


For other installments of our Tax Court in Brief series, check on the following links or search our archives:


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