The Tax Court in Brief September 21 – September 25, 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.
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The Week of September 21 – September 25, 2020
Patel v. Comm’r, T.C. Memo. 2020-133
September 22, 2020 | Jones, J. | Dkt. Nos. 24344-17, 11352-18, 25268-18
Short Summary: Generally, the IRS determined deficiencies in federal income tax and accuracy-related penalties under Section 6662 against the taxpayers for the tax years 2013, 2014, 2015, and 2016. In 2016, the IRS opened an examination into the taxpayers’ 2013 tax return. On May 8, 2017, the revenue agent issued a Letter 5153 and the Revenue Agent’s Report (“RAR”), which imposed accuracy-related penalties under Section 6662(a), (b)(2) and (6), and (i) for tax year 2013.
On May 25, 2017, the revenue agent completed a civil penalty approval form (which was approved that day) to impose penalties under Section 6662(a), (b), (c), (d), and (i) for tax years 2013, 2014, and 2015. On January 30, 2018, the revenue agent issued a Letter 5153 and RAR (imposing penalties) for tax year 2014.
On January 31, 2018, the revenue agent’s supervisor approved a second civil penalty approval form that imposed the same penalties for tax years 2014, 2015, and 2016. On April 10, 2018, the revenue agent issued a Letter 950 and RAR (imposing penalties) for tax years 2015 and 2016.
The IRS issued notices of deficiency on August 25, 2017 (tax year 2013), March 25, 2018 (tax year 2014), and September 25, 2018 (tax years 2015 and 2016). The taxpayers ultimately petitioned the Tax Court to redetermine the IRS’s determination for tax years 2013, 2014, 2015, and 2016. Both the taxpayers and the Commissioner moved for partial summary judgment as to whether the IRS appropriately complied with the requirements of Section 6751(b)(1).
Key Issue: Whether the IRS satisfied its obligations under Section 6751(b)(1) with respect to the penalties it asserted under Section 6662.
Primary Holdings:
- For tax year 2013, the IRS failed to satisfy the requirements of Section 6751(b)(1) with respect to the penalties asserted under Section 6662(a), (b)(2) and (6), and (i), but did satisfy such requirements with respect to the penalty asserted under Section 6662(b)(1). Additionally, for tax years 2014, 2015, and 2016, the IRS satisfied the requirements of Section 6751(b)(1) with respect to the penalties asserted under Section 6662(a), (b)(1), (2), and (6), and (i).
Key Points of Law:
- The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988). Under Rule 121(b), the Tax Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
- Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty equal to 20% of the portion of an underpayment of tax required to be shown on a return that is attributable to “[n]egligence or disregard of rules or regulations” or “[a]ny substantial understatement of income tax”, or both.
- Section 6662(a) and (b)(6) imposes an accuracy-related penalty equal to 20% of the portion of an underpayment that is attrituable to “[a]ny disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law.”
- Section 6662(i) increases the accuracy-related penalty imposed under Section 6662(a) to 40% of an underpayment which is attributable to one or more “nondisclosed noneconomic substances transactions.”
- No penalty shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the intermediate supervisor of the individual making such designation or such higher level official as the Secretary may designate. Sec. 6751(b)(1).
- The Tax Court has interpreted the requirement for written supervisory approval under Section 6751(b)(1) before the first formal communication to the taxpayer demonstrates an initial determination has been made. See Belair Woods, LLC v. Comm’r, 154 T.C. __, __ (slip op. at 24-25) (Jan. 6, 2020); Clay v. Comm’r, 152 T.C. 223, 249 (2019); Carter v. Comm’r, T.C. Memo 2020-21, at *27.
- The “initial determination” of a penalty must be a “formal act” that resembles a determination, and, in a deficiency context, “the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties” would constitute the intial determination of such penalties. See Belair Woods, LLC v. Comm’r, 154 T.C. __, __ (slip op. at 15, 24-25) (Jan. 6, 2020).
Insight: The Patel case reinforces the requirement for written supervisory approval before the IRS may assess accuracy-related penalties under Section 6662. Timing is everything. Written supervisory approval must be obtained before the IRS makes any “intial determination” of a penalty, which includes issuing a Revenue Agent’s Report.
Robinson v. Comm’r, T.C. Memo. 2020-134
September 23, 2020 | Copeland, J. | Dkt. No. 12498-16
Short Summary: Beverly Robinson married Shelly Robinson on November 25, 1998, and later divorced him on May 1, 2014. Ms. Robinson had a high school education and worked for Mr. Robinson’s business from 1999 to 2009. Starting in 2010, Ms. Robinson was no longer involved in Mr. Robinson’s business.
The Robinsons’ joint return for tax year 2010 only included income from Mr. Robinson’s business; consequently, the resulting tax liability was solely related to Mr. Robinson’s income. Ms. Robinson was not involved in the preparation of the tax return and did not review or understand the return before signing. Mr. Robinson never paid the tax liability for 2010. Moreover, Mr. Robinson was unfaithful, fathered a child outside of the marriage, and paid child support to the child’s mother.
In May 2012, the IRS sent a Notice of Intent to Levy to the Robinsons with respect to the 2010 tax liability. Ultimately, on April 20, 2015, Ms. Robinson submitted Form 8857 to the IRS, seeking innocent spouse relief for the 2010 tax liability. The IRS denied her request for relief in May 2016.
Key Issue: Whether Ms. Robinson is entitled to equitable relief from joint and several liability associated with a joint return for 2010.
Primary Holdings:
- Robinson was not in compliance with her income tax obligations post-divorce, and she had constructive knowledge of the outstanding tax liability for tax year 2010. However, based on all facts and circumstances, Ms. Robinson is entitled to relief from joint and several liability under Section 6015(f) for tax year 2010.
Key Points of Law:
- If a joint income tax return is filed, both spouses will be jointly and severally liable for the tax. Sec. 6013(d)(3).
- A taxpayer may only seek relief from joint and several liability under Section 6015(f) if a disputed tax liability involves nonpayment of tax shown on a joint return. See Washington v. Comm’r, 120 T.C. 137, 146-47 (2003).
- Equitable relief from joint and several liability is appropriate if “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either).” Sec. 6015(f)(1).
- When determining relief under Section 6015(f), the Commissioner conducts a multistep analysis, which includes threshold or mandatory requirements followed by either a streamlined determination or a weighing of equitable factors. See Proc. 2013-34.
Insight: Requests for innocent spouse relief are truly based on each taxpayer’s facts and circumstances—it is a case by case basis. However, the Robinson case does show that relief may be granted even in instances where the party requesting relief has certain negative factors, such as failing to timely file or pay federal income taxes post-divorce.
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