The Tax Court in Brief August 30 – September 3, 2021

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The Tax Court in Brief August 30 – September 3, 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 August 30 – September 3, 2021

Tax Court Case: Sherrie L. Webb v. Comm’r; T.C. Memo. 2021-105

August 31, 2021 Weiler, J. | Dkt. No. 7819-20L

Tax Dispute Short Summary: It was not an abuse of the Commissioner’s discretion not to provide a collection alternative when the taxpayer did not furnish necessary documentation that may have justified alternatives, such as currently not collective (CNC) status.

Tax Litigation Key Issues: To justify collections alternatives, including CNC status, the taxpayer must provide the documentation necessary to show that the alternative is warranted.

Primary Holdings:

Although the petitioner sought to have her account placed into CNC status, the Appeals Officer was unable to provide a collection alternative – including granting CNC status – since the petitioner did not furnish the necessary documentation. On the basis of these circumstances, Appeals performed a balancing test, concluding that the proposed levy did balance the needs of collection with the concerns of the petitioner. On the basis of its review, the court held that the Appeals Officer did not abuse her discretion in so concluding.

Key Points of the Tax Laws:

The taxpayer may propose the suspension of collection activity as a collection alternative. To justify an account’s being placed into CNC status, the taxpayer must supply all relevant information requested by Appeals, including financial statements for consideration of the facts and issues involved in the hearing. An Appeals officer does not abuse his or her discretion in denying CNC status where the taxpayer has not submitted the financial information necessary for the officer to make such a determination.

Tax Court Motion: Not a profound insight but an obvious and important one: when the Appeals Officer requests additional information, respond. The Appeals Officer here requested information from the taxpayer through her representative and, after he withdrew, multiple times from the taxpayer directly. Having failed to provide that information, the taxpayer could not show that the Appeals Officer abused her discretion.

Wai-Cheung Wilson Chow and Deanne Chow v. Comm’r, No. 14249-18W, T.C. Memo 2021-106

September 1, 2021 | Buch | Dkt. No. 14249-18W

Tax Dispute Short SummaryThis case involves a review of a rejected whistleblower claim.  The Whistleblower Office determined that the Chows’ claim, in which they alleged that their former landlord owned numerous properties from which she collected rents and did not report income, was not credible.  The Chows appealed, and the Tax Court affirmed the IRS’ determination.

Tax litigation Key Issue:  Did the Chows, the whistleblowers in this case, make a credible claim that entitled them to an award under the IRS Whistleblower statute?

Primary Holdings

Key Points of the Tax Laws:

Tax Court Motion:
The Whistleblower provision of the Internal Revenue Code could prove valuable under the right circumstances.  However, the circumstances of this case did not rise to the level necessary to satisfy the requirement of I.R.C. § 7623.

Tax Court Case: Gaston v. Comm’r, T.C. Memo. 2021-107

Sept. 2, 2021 |Marvel, J. | Dkt. No. 25899-17

Tax Dispute Short Summary:

Tax Litigation Key Issues:

  1. Whether Petitioner engaged in acting as a trade or business in the tax years at issue and, if so, whether Petitioner is entitled to deduct any reported expenses relating to that trade or business
  2. Whether Petitioner engaged in jewelry sales as a trade or business in the tax years at issue and, if so, whether Petitioner is entitled to deduct any claimed flowthrough losses relating to that trade or business, and
  3. Whether petitioner is entitled to deduct contributions to an alleged qualified profit-sharing plan for the tax years at issue

Primary Holdings

  1. Petitioner taxpayer proved that she had a primary purpose of making a profit from acting, and thus was entitled to deduct any reported expenses relating to that trade. However, not all of these expenses were substantiated. Thus, Petitioner is entitled to deducting the following substantiated ordinary and necessary business expenses as they relate to acting:
    • expenses inherently connected with acting (e.g., photography costs, fees paid to a casting agency, cost of refining Petitioner’s acting skills, etc.)
    • a portion of the compensation paid to Petitioner’s personal assistant insofar as that compensation relates to services which aided Petitioner’s acting career
    • a portion of Petitioner’s professional service expenses
  2. Petitioner taxpayer is not entitled to deduct any claimed flowthrough losses relating to her jewelry trade, as she did not meet the “primary purpose” requirement of claiming the jewelry sales activity as a business deduction
  3. Petitioner taxpayer may not deduct the contributions that she made to her allegedly qualified plan because she has not proven that the income contributed was derived from a trade or business with respect to which the plan was established.

Key Points of the Tax Laws:

Deducting Ordinary and Necessary Expenses

      1. the manner in which the taxpayer carried on the activity;
      2. the expertise of the taxpayer or his advisors;
      3. the taxpayer’s time and effort expended in carrying on the activity;
      4. the expectation that assets used in the activity may appreciate in value;
      5. the taxpayer’s success in carrying on other similar or dissimilar activities;
      6. the taxpayer’s history of income or losses with respect to the activity;
      7. the amount of occasional profits, if any, which are earned;
      8. the financial status of the taxpayer;
      9. consulting with experts in a given industry; and
      10. the presence of personal pleasure or recreation.
      1. belong to an acting network or union,
      2. take classes or otherwise formally develop their skills,
      3. develop industry contacts,
      4. seek or secure multiple auditions or roles,
      5. advertise their services,
      6. prepare headshots or a portfolio,
      7. retain an agency or assistant to help secure roles, and
      8. maintain their efforts over time, given the nature of the industry
        1. the amount of the expense or other item;
        2. the time and place of travel, entertainment, or use of the property;
        3. the business purpose of the expense or other item; and
        4. the business relationship of the taxpayer to the persons entertained or using the property.

See I.R.C. § 274(d).

For Determining whether S corporations Qualify for Business Expense Deductions

For Determining Whether Contributions to a Profit-Sharing Plan are Deductible

    1. Contributions are deductible only to the extent that they do not exceed the “earned income…derived from the trade or business with respect to which…[the] plan is established”. I.R.C. § 404(a)(8)(C) (emphasis added).
    2. Contributions made must qualify as “earned income” within the meaning of sections 401 and 404 of the Code

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.