The Tax Court in Brief | Williams v. Commissioner

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The Tax Court in Brief February 7 – February 11, 2022

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 February 7 – February 11, 2022

Larry T. Williams v. Comm’r, T.C. Memorandum 2022-7 | February 7, 2022 | Urda, J. | Dkt. No. 939-20

Short Summary: 

The taxpayer challenged a notice of deficiency issued by the Internal Revenue Service (IRS) that determined a deficiency in tax in his federal income tax for his 2016 tax year as well as an addition to tax under section 6651(a)(1) and an accuracy-related penalty under section 6662(a).  The notice of deficiency disallowed certain deductions claimed by the taxpayer in connection with his business.  The IRS thereafter determined that the taxpayer had failed to substantiate his 2016 expenses and issued him a notice of deficiency that disallowed most of his claimed deductions.

The taxpayer raised what the Tax Court described as “assorted frivolous or groundless arguments that have been oft rejected by this Court,” including among other things, that the U.S. Government went bankrupt and no longer exists, that the Internal Revenue Code does not constitute “law,” and that he is not a U.S. citizen.

Key Issues: While potential issues appear to have existed, the taxpayer focused solely on what the court referred to as “frivolous” arguments, rather than addressing the legal or factual merits of the IRS’s proposed assessments.  As such, the substantive issues effectively faded away and the sole interesting issue became whether the Tax Court would impose a Section 6673(a)(1)(B) penalty of up to $25,000 for the taxpayer’s arguments.

Primary Holdings: The Tax Court, not hiding its frustration, held that the taxpayer “ha[d] chosen to focus his challenge on frivolous and groundless arguments.”

Key Points of Law:

  • Gross income includes all income from whatever source derived.
  • The Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving error in the determinations.
  • The taxpayer bears the burden of proving his entitlement to any deduction or credit claimed on his return.
  • Section 162(a) generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The taxpayer bears the burden of proving that his reported business expenses were actually incurred and were “ordinary and necessary.”
  • The taxpayer bears the burden of substantiating expenses underlying his claimed deductions by keeping and producing records sufficient to enable the Commissioner to determine the correct tax.
  • Failure to keep and present such records counts heavily against a taxpayer’s attempted proof.
  • In certain circumstances, the Court may approximate the amount of an expense if the taxpayer proves it was incurred but cannot substantiate the exact amount (Cohan rule).
  • A court may not apply the Cohan rule to approximate expenses subject to the stricter substantiation requirements under section 274(d), including expenses for travel (including meals and lodging while away from home) and with respect to the business use of any listed property (such as a passenger automobile).
  • Section 6651(a)(1) imposes an addition to tax for the failure to file a required return timely unless the taxpayer can establish that such failure was due to “reasonable cause and not due to willful neglect”.
  • The taxpayer then bears the burden of proving that the late filing was due to reasonable cause and not willful neglect.
  • Section 6673(a)(1)(B) provides this Court with the discretion to require a taxpayer to pay to the Government a penalty of up to $25,000 when a taxpayer takes a frivolous or groundless position in this Court.

Insight:  The Tax Court takes seriously the prohibition on certain tax-related arguments that have been determined to be “frivolous.”  Taxpayers and counsel should always be mindful that such arguments will not only be unsuccessful, they will also result in serious potential penalties.

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.