The Tax Court in Brief September 12 – 18, 2020

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The Tax Court in Brief September 12 – September 18, 2020

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 for The Week of September 12 – September 18, 2020


Deckard v. Comm’r, 155 T.C. No. 8 

September 17, 2020 | Thornton, J. | Dkt. No. 11859-17

Short SummaryWaterfront Fashion Week, Inc. (Waterfront) was organized under Kentucky law as a nonstock, nonprofit corporation in 2012.  Mr. Deckard was Waterfront’s president and one of its three directors.  Waterfront never applied for recognition of tax-exempt status with the IRS.

On October 28, 2014, Waterfront mailed to the IRS Form 2553, Election by a Small Business Corporation.  In the Form 2553, Waterfront sought to elect to be an S corporation retroactively as of the date of its incorporation in 2012.  Mr. Deckard signed the Form 2553 in his capacity as Waterfront’s president.  In addition, Mr. Deckard signed the Form 2553 shareholder’s consent statement, indicating that he owned 100% of Waterfront.

In 2015, Waterfront filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for its taxable years 2012 and 2013, reporting operating losses.  Mr. Deckard reported these flow-through losses on his 2012 and 2013 returns.

The IRS disallowed the losses on the ground that Waterfront filed to make a valid S corporation election and alternatively that Mr. Deckard was not a shareholder of Waterfront.  Mr. Deckard filed a timely petition with the United States Tax Court.

Key IssueWhether Mr. Deckard can claim the losses from Waterfront on his 2012 and 2013 tax returns?

Primary Holdings

Key Points of Law:  

InsightThe Deckard decision was an interesting one in that it is unusual for taxpayers to request subchapter S status for a nonprofit corporate entity.  Rather, most taxpayers who organize a nonprofit corporation under State law also file an IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.  The decision is a good read for those that want to see how state law interacts with federal tax law.


Cindy Damiani v. Comm’r, T.C. Memo. 2020-132 

September 17, 2020 | Lauber, J. | Dkt. No. 14914-19W

Short SummaryThe case involved the rejection of a whistleblower award to a foreign national. The foreign national argued that the IRS abused its discretion when rejecting the award. The Tax Court determined that the IRS did not abuse its discretion because the foreign national did not provided information concerning a Federal Tax violation.

In 2019, Mrs. Cipriani (the “whistleblower”), a foreign national with residence in Germany, filed Form 211, Application for Award for Original Information. She identified two targets, a German insurance company and the managing director of such company. On her application, she alleged that the targets have committed multiple illegal acts, such as fiduciary fraud, bond fraud, securities fraud and identity theft. She also alleged that they have committed money laundering and tax fraud. On her application she asked the IRS if Form 1099-OID was required and if Form 1040 has already been submitted by the managing director. To support her allegations, she provided Form 3949-A, Information Referral and Form 14039, Identity Theft Affidavit and invoices in German.

The IRS Whistleblower Office (the “Office”) began two different claims, one for each target. After conducting the research on the targets, the Office determined that no US person or entity was part of the allegations and concluded that the whistleblower did not identified a federal tax issue. The whistleblower petitioned, after the 30-day period specified in section 7623(b)(4), the Tax Court for review the Office’s rejection. The IRS filed a motion for summary judgment, which the whistleblower did not responded. The Tax Court affirmed the IRS’ rejection.

Key Issues:  Whether the IRS can reject a claim under section 7623(b)(1) under the abuse of discretion standard, when the claim does not raise a federal tax issue involving the violation or underpayment of the US tax laws.

Primary Holdings: The IRS did not abuse its discretion when rejecting the award, because the whistleblower did not raise a federal tax issue involving the violation or underpayment of the US tax laws.

Key Points of Law:

InsightThis case evidences the importance of providing clear information on whistleblowers claims. Although abuse of discretion can be used as a defense against the rejection of a claim in these types of cases, the claim necessarily must specify the underpayment of taxes or violation of the US tax laws committed by the targets.


Felix Ewald Friedel v. Comm’r, T.C. Memo. 2020-131

September 17, 2020 | Lauber, J. | Dkt. No. 11239-19W

Short SummaryThe case involved the rejection of a whistleblower award to a foreign national. The foreign national argued that the IRS abused its discretion when rejecting the award. The Tax Court determined that the IRS did not abuse its discretion because the foreign national did not provided information concerning a federal tax violation.

In 2019, Mr. Friedel (the “whistleblower”), a foreign national with residence in Germany, filed Form 211, Application for Award for Original Information. He identified six targets, allegedly German Government officials. He alleged that the targets have committed multiple illegal acts, such as fiduciary fraud, bond fraud, identity theft and human trafficking, among others. He also alleged that they have committed tax fraud by refusing to submit Forms 1099-OID, f1096 and f1040. To support his allegations, he provided Form 3949-A, Information Referral and Form 14039, Identity Theft Affidavit and letters issued by a German court and prosecutor written in German.

The IRS Whistleblower Office (the “Office”) began six different claims, one for each target. After conducting the research on one target, the German court, the Office determined that the allegation lacked credibility, noting the whistleblower’s failure to supply documents to support the claim and rejected the claim. On the other five targets, the IRS determined that no US person or entity was part of the allegations and concluded that the whistleblower did not identified a federal tax issue, or tax period or money amounts involved. The whistleblower petitioned, after the 30-day period specified in section 7623(b)(4), the Tax Court for review the Office’s rejection. The IRS filed a motion for summary judgment, which the whistleblower did not responded. The Tax Court affirmed the IRS’ rejection.

Key Issues:  Whether the IRS can reject a claim under section 7623(b)(1) under the abuse of discretion standard, when the claim does not raise a federal tax issue involving the violation or underpayment of the US tax laws.

Primary Holdings: The IRS did not abuse its discretion when rejecting the award, because the whistleblower did not raise a federal tax issue involving the violation or underpayment of the US tax laws.

Key Points of Law:

InsightThis case evidences the importance of providing clear information on whistleblowers claims. Although abuse of discretion can be used as a defense against the rejection of a claim in these types of cases, the claim necessarily must specify the underpayment of taxes or violation of the US tax laws committed by the targets.

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