The Tax Court in Brief August 2 – August 6, 2021

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The Tax Court in Brief August 2 – August 6, 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 August 2 – August 6, 2021

Tax Court Case : Belair v. Comm’r, Bench Opinion

August 2, 2021 | Weiler, J. | Dkt. No. 22133-19L

Tax Dispute Short Summary:

On February 28, 2019, Respondent issued a Notice of Federal Tax Lien (“NFTL”) to Petitioner Mary Belair with respect to her income tax liabilities for tax years 2013, 2014, and 2015. Ms. Belair timely mailed her Request for Collection Due Process Hearing on April 3, 2019. Respondent notified Ms. Belair that it could not consider her request for an installment agreement until she filed her delinquent personal income tax returns for 2016 and 2017.

The IRS Appeals officer notified Ms. Belair that the CDP conference would be held on October 16, 2019, and also requested a completed Form 433-A, as well as her tax returns for tax years 2016, 2017, and 2018. Ms. Belair requested a continuance of the CDP hearing, which was denied. During the conference, the IRS Appeals officer advised Ms. Belair that she did not qualify for alternative relief because of the delinquent tax returns. On October 17, 2019, the IRS Appeals officer closed the case, and on November 15, 2019, he issued to Ms. Belair a notice of determination upholding the NFTL. On December 16, 2019, the Court received and filed Ms. Belair’s petition. Respondent filed a motion for summary judgment.

Tax Litigation Key Issues:

Primary Holdings:

Key Points of the Laws:

Tax Litigation Insight: Tax filing compliance should be viewed by taxpayers as a minimum threshold to pursue collection alternatives. A taxpayer’s additional arguments are more or less irrelevant until tax compliance can be proven. Furthermore, Belair highlights the evaluation of an IRS appeals officer, balancing the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.

Rogers v. Commissioner, 157 T.C. No. 3

Aug. 02, 2021 | Toro, J. | Dkt. No. 17985-19W. 

Tax Dispute Short Summary

Petitioner submitted nine claims (collectively, the claim) for a whistleblower award under I.R.C. § 7623 to the IRS Whistleblower Office (WBO). The claim had asserted that Petitioner’s extended family members had conspired to commit “grand theft through conversion” of the assets of Petitioner’s mother. Petitioner attached suppo rting documents to his claim, which then became part of an investigation report.

This report was received by the WBO Initial Claims Evaluation team, who then routed the Petitioner’s claim to a classifier in the IRS Small Business Self-Employed (SBSE) operating division. The SBSE classified reviewed the claim and completed a recommendation on each sheet to reject the claim for lack of specificity and credibility.  Particularly, the classifier noted that the Petitioner did not “provide documentation to show how much money was embezzled and when money was embezzled.” Generally, the classifier stated the Petitioner failed to provide substantive information to support the allegation, and thus rejected the Petitioner’s claim as permitted under Treasury Regulation 301.7623-1(c)(1) for failure to include specific and credible information to support the allegation, as well as failure to supply documentation to support the claim.

A few days after the SBSE classifier completed his review, a Tax Examining Technician for the WBO drafted an Award Recommendation Memorandum (ARM). The ARM included a notation recommending that the WBO reject Petitioner’s claim, stating the same rationale as the classifier as the basis for rejection.

After the ARM’s preparation, the WBO did not forward Petitioner’s claim to an IRS examiner for possible action with respect to the target taxpayers, but instead, the Initial Claims Evaluation team immediately issued Petitioner a letter (“Letter”) which stated: “The claim has been rejected because the IRS decided not to pursue the information you provided.” Petitioner timely appealed to the Tax Court for review of the WBO’s award determination under I.R.C. § 7623(b)(4). The Commissioner filed an answer that did not address certain monetary thresholds under I.R.C. § 7623(b)(5). The Commissioner then filed a motion for summary judgment, seeking a determination that the WBO did not abuse its discretion in its determination that the Petitioner was not entitled to an award.

Tax Litigation Key Issue:

Primary Holdings

Key Points of Law:

Tax Litigation Insight: When reviewing an agency’s decision for abuse of discretion, the Court will apply a two-prong approach: first, it will look to the rationale found within the wording of the decision letter; second, if the decision letter is ambiguous or silent, it will look to the administrative record.

[1] Recall that the WBO Letter here simply stated, among other things, that “the IRS decided not to pursue the information you provided.” In effect, the WBO Letter is saying “we reject your claim because we are denying your claim.” As such, the Letter is ambiguous in terms of whether it forms a basis in rejecting or in denying the Petitioner’s claims.

Today’s Health Care II LLC. v. Comm’r, 2021 T.C. Memo 2021-96

August 2, 2021 | Gustafson, J. | Dkt. No. 25541-18

Tax Dispute Short Summary

The case involved the analysis of the constitutionality of Section 280E.

Today’s Health Care (the “Company”) was engaged in the business of growing, producing, and selling marijuana products. On its 2014-2015 tax returns, it reduced its gross receipts to account costs of goods sold (“COGS”), deducted expenses incurred in its marijuana business and deducted Net Operating Losses (NOL) from his business activities from previous years.

The IRS allowed COGS, rejected the deduction for expenses and the NOLs. The Company challenged the determination and argued the unconstitutionality of Section 280E under the Eight and Sixteenth Amendments to the Constitution.

Tax Litigation Key Issues:

Whether Section 280E violates the Eight and Sixteenth Amendments to the Constitution.

Primary Holdings: Section 280E does not violate the Eight and Sixteenth Amendments to the Constitution.

Key Points of Law:

The taxpayer has the burden of proof to show that the IRS’ determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111 , 115 , 54 S. Ct. 8 , 78 L. Ed. 212 , 1933-2 C.B. 112 (1933). In this case, the burden of proof did not affect the outcome of the case because the Company challenged the IRS’ determination on legal grounds and not on a factual basis.

Section 280E establishes that no deduction or credit is allowed for amounts paid or incurred in a trade or business if such business consists of trafficking in controlled substance. Marijuana is a controlled substance, and the Company acknowledged such fact. Under Tax Court’s precedent, disallowance of deductions under Section 280E does not violates Eight and Sixteenth Amendments to the Constitution. The Court confirmed that opinion.

Tax Court Insight: Section 280E has been actively litigated in Tax Court, and the Court’s position has been to sustain its holding that 280E is constitutional. Further litigation is expected but no different outcome in the near future is visible.

Jerry R. Abraham and Debra J. Abraham. v. Comm’r, 2021 T.C. Memo 2021-97

August 3, 2021 | Urda, J. | Dkt. No. 760-20L

Tax Dispute Short Summary

The case involved the determination of the lawfulness of the rejection of an Offer in Compromise (OIC) by the IRS, under the abuse of discretion standard.

Mr. Abraham, a partner at a law firm, and Mrs. Abraham, a teacher, (the “Abrahams” or the “Taxpayers”), filed tax returns for the 2012-2016 period, but failed to pay their tax liability. The IRS issued a Notice of Federal Tax Lien (“NFTL”), and the Taxpayers timely requested a Collection Due Process or Equivalent Hearing (“CDP”), and submitted an OIC.

The OIC was premised on Doubt as to Collectibility (“DATC”), based on special circumstances (“DATCSC”). The Taxpayers argued bias against large families and a prospective lower income as retirement. The IRS rejected the OIC because the Taxpayers’ returns showed “relatively steady” income, their adult children showed that they had sufficient income to support themselves, expenses such as food and clothing were reduced to the national and local standards, and religious education expenses were disallowed. The IRS also determined that the assets of the Taxpayers, including a personal residence, showed a reasonable collection potential in excess of their offer. No evidence of doubt as to Collectibility or special circumstances were found.

The IRS issued a notice of determination sustaining the NFTL and the rejection of the OIC. The Taxpayers petitioned the Tax Court. On summary judgment, the Tax Court reviewed the rejection under the abuse of discretion standard and sustained the IRS’ determination.

Tax Litigation Key Issues:

Whether a prospective reduction of income by reason of advanced age supports special circumstances for a OIC premised under DATCSC.

Primary Holdings: Prospective reduction of income because of age, considering the level of education and nature of work, does not arise to a special circumstance for purposes of an OIC.

Key Points of Law:

The Tax Court has jurisdiction to review a determination made by the IRS in regard to a NFTL under Section 6320(c) and Section 6330(d)(1). The Court’s analysis is made under the “abuse of discretion” standard when the underlying tax liability is not challenged. Sego v. Commissioner, 114 T.C. 604 , 610 (2000); Goza v. Commissioner, 114 T.C. 176 , 182 (2000). Abuse of discretion is found if the IRS’ determination was arbitrary, capricious or without sound basis in fact or law.

In this case, the Court reviewed three issues: whether the IRS verified that the requirements of applicable law had been met, whether the IRS considered relevant issues raised by the Taxpayers and whether the proposed collection action balanced the need for efficient collection with the Taxpayers’ concern that the action was more intrusive than necessary.

This is because even if there are errors in the calculation of the RCP, the decision is sustained when the taxpayer’s offer is far less than the correct RCP. Alphson v. Commissioner, T.C. Memo. 2016-84 , at *25; see also Gustashaw v. Commissioner, T.C. Memo. 2018-215 , at *24. In this case, the RCP of the Abrahams was approximately $294k, and their offer was $50k. Thus, the Court sustained the rejection.

Tax Court Insight:  OIC is a great tool to reduce tax liabilities. In an OIC submitted under DATCSC, it is relevant to emphasize the special circumstances that surround the taxpayer to allow the IRS to compromise the liabilities. As seen in this case, advanced age is not enough to show the existence of a special circumstance. Moreover, the OIC analysis made by the IRS would almost be always sustained if the offer is low compared to the RCP. In this case, an RCP that is six times the offer submitted allowed the Court to sustain the IRS analysis. Careful analysis of the amount of the offer must be made, to prevent unfavorable results such as this case.


Tax Court Litigation Attorneys

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