The Tax Court in Brief July 12 – July 16, 2021

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

The Tax Court in Brief July 12 – July 16, 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 July 12 – July 16, 2021

Blossom Day Care Centers, Inc. v. Comm’r, 2021 T.C. Memo 2021-87 

July 13, 2021 | Paris, J. | Dkt. No. 3868-12

Tax Dispute Short Summary:

The case involved various adjustments to the income of the petitioner and the disallowance of various expenses. The case also discusses the applicability of Indian employment tax credits and civil fraud penalties.

Blossom Day Cares Centers Inc. (the taxpayer), a corporation operating child daycare centers, was owned by Mr. and Mrs. Hacker (the Hackers). The Hackers also owned the Hacker Corp. The Hacker Corp. – an S corporation – received management fees from the taxpayer during 2004-2008. The Hackers personally owned multiple real properties where the childcare centers operated. Such properties were transferred in 2005 to the Hacker Corp. The taxpayer made rent payments to the Hacker Corp. or to the bank owing the mortgage on the properties. The Hacker Corp. took depreciation on the buildings.

The IRS examined the taxpayer’s returns for the 2004-2007 period and assessed deficiencies based on adjustments to depreciation, the payment of management fees, gross receipts, interest expense, rental income, repairs and maintenance, wage reduction for the Indian employment credit, wages to shareholders, interest income, supplies’ expense, among others. The taxpayer challenged such deficiencies. The Court issued a ruling on the different adjustments, mostly ruling in favor of the IRS.

Tax Litigation Key Issues:

Whether multiple categories of business expenses were deductible under the different provisions of the IRC.

Primary Holdings: See below.

Key Points of the Laws:

To determine whether the adjustments made by the IRS were appropriate, the Court has determined that the taxpayer bears the burden to prove that the determinations are in error. Moreover, if the case involves unreported income, the IRS’ determination of such unreported income is presumed correct. United States v. McMullin, 948 F.2d 1188 , 1192 (10th Cir . 1991). Under this standard, it is the taxpayer that bears the burden of proof to show that the determination is incorrect.

In this case, the adjustments were analyzed as follows:

Insight: This case provides a clear example of the multiple issues that arise in an IRS audit. However, the key factor to remember is that the taxpayers must provide proof of the deductions or credits taken. Failure to do so will result in great disadvantage during an examination.

Berger v. Commissioner, T.C. Memo. 2021-89

July 15, 2021 | Nega, J. | Dkt. No. 17196-18 

Tax Dispute Short Summary

Tax Litigation Key Issue:

Primary Holdings

Key Points of the Laws:

Insight: The key takeaway here is that taxpayers have the burden to prove they qualify for deductions by presenting clear evidence, which needs to be substantiated by showing not only the amount of the expense, but that the expense occurred in the taxable year and that the expense was for the deductible purpose claimed.

Morreale v. Commissioner, T.C. Memo. 2021-90

July 15, 2021 | Marvel, J. | Dkt. No. 24762-17

Tax Dispute Short Summary

Tax Litigation Key Issue:
Whether the position of the United States was substantially justified in determining the taxpayer’s tax liabilities, deficiencies, additions to tax, and associated penalties. If the position of the United States was not justified, the issue then becomes: how much can Petitioner recover in reasonable administrative costs and reasonable litigation costs?

Primary Holdings: The position of the United States was not substantially justified, and as such, Petitioner taxpayer was entitled to recover reasonable administrative and reasonable litigation costs associated with this particular proceeding.

Key Points of the Laws:

Insight: The Tax Court here is taking a stance that would be more favorable to the Commissioner. By interpreting reasonableness considering the entirety of the circumstances, rather than by an item-by-item approach, the Court is granting the Commissioner leeway to make mistakes, so long as he can in some way justify that his actions were reasonable. If this approach continues to be followed, it may pose hurdles to taxpayers seeking to recover reasonable administrative and reasonable litigation costs under Section 7430 of the Internal Revenue Code.

[1] In Johnson, the Tenth Circuit was interpreting the Equal Access to Justice Act (EAJA), which used wording similar to § 7430 here.


For other Tax Court in Brief Insight posts, see:

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.