The Tax Court in Brief July 19 – July 23, 2021
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Tax Litigation: The Week of July 19 – July 23, 2021
- Tax Court Case: Morris F. Garcia, Deceased, and Sharon Garcia v. Commissioner
- New World Infrastructure Organization v. Commissioner, T.C. Memo. 2021-91
Morris F. Garcia, Deceased, and Sharon Garcia v. Commissioner
Tax Dispute Short Summary:
As of January 1, 2020, petitioners have an unpaid joint tax liability exceeding $500,000 for 2012, a year in which they filed a joint tax return. On February 10, 2020, the IRS issued Sharon Garcia a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt, showing an unpaid liability of $583,803 for 2012. Further, on March 2, 2020, the IRS issued Morris F. Garcia a substantially identical Notice CP508C, showing the same delinquent tax debt for 2012. These notices informed petitioners that the IRS had certified to the State Department that they were persons owing seriously delinquent tax debt.
On July 10, 2020, petitioners jointly petitioned for review. On July 16, 2020, petitioners filed a second joint petition for review, again appending copies of both notices, and that petition was docketed at No. 10671-20. On November 16, 2020, the Tax Court granted the respondent’s motion to close the case at docket No. 10671-20 on the ground of duplication with the instant case.
In their earlier petition, petitioners alleged that they had submitted to the IRS an offer-in-compromise of their 2012 tax liability, predicting the offer on doubt as to liability. Petitioners alleged that they had filed, in October 2019, an amended return for 2012, reporting what they believed their correct tax liability to be. However, petitioners feared the IRS had improperly rejected their offer, requiring the tax court to: (i) declare that their certifications as persons owing a seriously delinquent tax debt were erroneous; and (ii) issue a “declaratory relief” to the effect that their offer-in-compromise “was erroneously denied in violation of their rights.” At a time not disclosed by the record, but after the petition was filed, Morris F. Garcia died.
In his answer to the petition, the respondent confirmed that petitioners had submitted an offer-in-compromise for 2012 and that their offer “was subsequently deemed processable and remains pending.” Respondent represented that the IRS was “in the process of reversing petitioners’ certifications as individuals owing seriously delinquent tax debt.” On November 2, 2020, the IRS reversed both certifications and so notified the State Department. Petitioners’ account transcript shows that their amended return for 2012 was “forwarded for processing” on October 31, 2019; that the IRS received their offer-in-compromise on December 4, 2019; and that an examination of their amended return commenced on February 28, 2020. An accounting entry dated September 29, 2020, reads: “Mandated reversal and/or exclusion from passport certification.” Account entries dated November 2, 2020, read: “Passport certified seriously delinquent tax debt reversal.”
On January 29, 2021, the respondent filed a motion to dismiss on the ground of mootness, representing that the IRS had “notified the Secretary of State that the certifications of petitioners as individuals owing seriously delinquent tax debt were reversed on or about November 2, 2020.” Therefore, the respondent contends that petitioners have received all of the relief to which they are entitled. Counsel for petitioners filed an objection to the respondent’s motion.
Tax Litigation Key Issue:
- Whether (i) petitioners’ tax debts are considered “seriously delinquent tax debt” under I.R.C. sec. 7345(b); and whether (ii) the case must be dismissed on the ground of mootness.
- Tax Court held that: (i) married taxpayers who receive separate but substantially identical notices of certification arising from the same tax liability may file a joint petition, in the same manner as in a deficiency case under Tax Court Rule 34(a)(1); (ii) because respondent has reversed his certifications as erroneous and so notified the Secretary of State, Petitioners’ challenge in that respect is moot; and (iii) Court lacks authority under I.R.C. sec. 7345(e) to address the merits of Petitioner’s offer-in-compromise.
Key Points of Law:
- Section 7345 is captioned “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.
- Section 7345(a) provides that, if the Commissioner certifies that an individual has a “seriously delinquent tax debt,” that certification shall be transmitted “to the Secretary of State for action with respect to denial, revocation, or limitation of a passport.”
- Section 7345(b)(1),(f) defines “seriously delinquent tax debt” as a Federal tax liability that has been assessed, exceeding $50,000 (adjusted for inflation), unpaid and legally enforceable, and with respect to which a lien notice has been filed or levy made.
- Section 7345(b)(2)(A) defines exceptions to the “seriously delinquent tax debt” definition, which includes “a debt that is being paid in a timely manner pursuant to an agreement to which the individual is [a] party under section 7122,” dealing with offers-in-compromise.
- The IRS added discretionary exceptions to the definition of “seriously delinquent tax debt.”. One of these exceptions covers a debt that is covered by an offer-in-compromise that is pending before the IRS, even if that offer has not yet been accepted. See Internal Revenue Manual (IRM) pt. 18.104.22.168.4(1)(E).
- Section 7345(c)(1),(d) establishes that if a certification “is found to be erroneous or if the debt with respect to such certification ceases to be a seriously delinquent tax debt by reason of subsection (b)(2) the IRS must reverse its certification and notify the Secretary of State and the taxpayer.
- Section 7345(c)(2)(D) determines that in case of a certification found to be erroneous, the IRS must issue a notification as soon as practicable after such finding.
- Section 7345(d) states that the IRS is responsible for notifying the taxpayer contemporaneously with the making of the respective certification.
- Section 7345(e) determines the tax court’s jurisdiction over the passport cases, captioned “Judicial review of certification.”
- Section 7345(e)(1) determines that a taxpayer aggrieved by such action may petition to the tax court “to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.”
- Rule 34(a)(1) governs the filing of a petition in a “Deficiency or Liability Action.” It provides that a separate petition ordinarily shall be filed “with respect to each notice” but that “a single petition may be filed seeking a redetermination with respect to all notices of deficiency or liability directed to a husband and a wife individually.”
- Rule 34(c), for the content of petitions in cases other than deficiency and liability actions, cross-refers to the Rules governing those actions. But these other Rules do not address the question of whether spouses may file a joint petition to secure review of notices issued to them separately.
- Rule 60(a)(1) states that Under other circumstances the Court may order one (or both) taxpayers to ratify the petition.
- Rule 62 determines that the misjoinder of parties is not ground for the dismissal of a case.
- Rule 351 and 351(b) govern the commencement of certification cases actions and description what such a petition shall contain. But neither Rule addresses the possibility of a joint filing.
- Rule 141(a) If petitioners had filed separate petitions in response to their separate notices, the Tax Court would almost certainly have consolidated their cases for trial, briefing, and opinion.
- Rule 331(a) and Rule 331(b) govern the commencement of CDP and provide general guidance about the contents of such petitions respectively. These Rules, which are virtually identical to the Rules governing passport certification cases, do not address the possibility of joint filing. But married taxpayers have routinely filed joint petitions in these circumstances, and we have never questioned the propriety of their doing so. See Spain v. Commissioner, T.C. Memo. 2021-58 ; Krehnbrink v. Commissioner, T.C. Memo. 2019-56.
- A case becomes moot when “the court can provide no effective remedy because a party has already ‘obtained all the relief that [it has] sought.'” See Conservation Force, Inc. v. Jewell, 733 F.3d 1200, 1204, 407 U.S. App. D.C. 22 (D.C. Cir. 2013).
Tax Litigation Insight: The Garcia decision concluded that married individuals that received separate but substantially identical notices of certification arising from the same tax liability may file a joint petition. Also, the docket shows how the delay in the IRS’s system – e.g. processing the offer-in-compromise – was able to put petitioners in a hard spot, making them seek judiciary support. However, once the IRS processed/received the documentation submitted by the taxpayers it corrected its own mistake and solves the petitioners’ issue.
New World Infrastructure Organization v. Commissioner, T.C. Memo. 2021-91
Tax Dispute Short Summary:
The New World Infrastructure Organization is a successor to The Pipe Man Corp. (TPMC), owned by Scott Johnston and Pam Johnston. According to TPMC’s articles of incorporation, it was organized to develop a “Portable Pipe Manufacturing System, also an Arching Machine utilized to reshape pipe. Therefore, the company developed its business activities to seek capital. However, the company was not profitable and thus it abandoned its efforts to develop and market any products before the petitioner was organized.
The Johnstons caused the incorporation of the petitioner as a nonprofit corporation under the laws of Nevada on January 5, 2015. Despite being incorporated as a nonprofit, nothing in the record shows that the petitioner adopted bylaws or that petitioner is affiliated with any Government or public institution.
In January 2018, 2015, the petitioner submitted to respondent Form 1023 Application for Recognition of Exemption under section 501(c)(3) of the Internal Revenue Code. Petitioner included a narrative description of its activities with the form stating as its “ultimate purpose and core focus will be charitable with its main beneficiary being Federal, State, and Local Government Agencies.” Also, the petitioner affirmed that it will “publish, own or have rights in music, literature, tapes, artworks, choreography, scientific discoveries, or other intellectual property”.
Further, the petitioner’s narrative description clarified that it “will retain ownership and control over any patents, copyrights, processes, etc., resulting from this research and development”. According to the narrative description, the petitioner intends to sell the machinery (“large corrugated metal pipe”) to governmental agencies and private companies. The company estimates the costs of manufacturing the finished product to be 30% of its fair market value. Therefore, the respondent requested additional information. The parties exchanged correspondence and information from March 11 through May 7, 2015.
On April 7, 2017, the respondent issued petitioner a final adverse determination letter denying petitioner’s application for the following reasons: (i) petitioner is a successor organization to a for-profit business; (ii) petitioner’s principal activity will involve production and sale of pipes at market rates; (iii) petitioner has not demonstrated that it will be operated exclusively for charitable, scientific, or other exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code; and (iv) petitioner has not shown its proposed activities will lessen the burdens of government or otherwise further activities.
- Whether Petitioner qualifies as a tax-exempt entity under section 501(c)(3) of the Internal Revenue Code.
Tax Court sustained Respondent’s determination that Petitioner p does not qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. TPMC failed to prove that his activities were charitable, scientific, and also that the organization wasn’t organized and operated for benefit of private interest.
Key Points of Law:
- Section 7428(a)(1)(A) confers jurisdiction on the Court to make a declaration in a case of actual controversy involving a determination by the Commissioner with respect to the initial qualification or continuing qualification of an organization as an organization described in section 501(c)(3) which is exempt from tax under section 501(a).
- The taxpayer bears the burden of proving that the Commissioner’s determination in such situations is erroneous. See Christian Manner Int’l, Inc. v. Commissioner, 71 T.C. 661, 664-665 (1979).
- Case without a trial. The evidence consists solely of the administrative record. See Rules 122 and 217(b)(2).
- Section 501(a) generally exempts from taxation an organization described in subsection (c).
- Section 501(c)(3) describes a qualifying organization in relevant part to include “corporations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes”.
- Section 1.501 (c)(3)-1(c)(1), Income Tax Regs describes the operational test. The presence of a single substantial purpose that is not described in section 501(c)(3) precludes exemption from tax under section 501(a) regardless of the number or the importance of the purposes that are present and described in section 501(c)(3). See Better Bus. Bureau of Wash., D.C., Inc. v. the United States, 326 U.S. 279, 283 (1945).
- Section 170(a),(c)(2) describes the possibility of an organization that qualifies under section 501(c)(3) to be not only is exempt from Federal income tax but also may solicit and accept donations that are normally deductible by the donor.
- Scientific Purpose
- 1.501 (c)(3)-1(d)(5)(i), Income Tax Regs provide the term “scientific” described under section 501(c)(3) of the Internal Revenue Code “includes the carrying on of scientific research in the public interest”.
- Section 1.501 (c)(3)-1(d)(5)(ii), Income Tax Regs, provides: “(ii) Scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc.”
- Charitable Purpose
- The term charitable described under section 501(c)(3) is generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions. Such term includes Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government.
- Section 1.501 (c)(3)-1(d)(2), Income Tax Regs. describe as charitable the “erection or maintenance of public buildings, monuments, or works and the lessening of the burdens of Government”.
- Private Inurement
- Section 1.501 (c)(3)-1(d)(1)(ii) of the Treasure Regulations Tax Regulations provides that an organization is not operated exclusively for exempt purposes unless it is operated for the benefit of the public rather than for the benefit of private interest.
- The petitioner must therefore establish that it is not organized or operated for the benefit of private interests such as those of its founder. See Basic Bible Church v. Commissioner, 74 T.C. 846 (1980).
Tax Litigation Insight: The New World Infrastructure Org. decision shows that the mere act of creating a nonprofit organization (under the state law) and filing Form 1023 through the IRS in order to grant the tax-exempt status does not automatically guarantee the status of the tax-exempt organization under section 501(c)(3) of the Internal Revenue Code. The organization must prove its exclusively exempt character (charity, educational, etc.) and not for the benefit of private interest.
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