The Tax Court in Brief November 7 – November 13, 2020
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The Week of November 7 – November 13, 2020
- Lashua v. Comm’r, T.C. Memo. 2020-151| November 9, 2020 | Marvel, J. | Dkt. No. 9144-19
- Dang v. Comm’r, T.C. Memo. 2020-150| November 9, 2020 | Marvel L.P. | Dkt. No. 4346-18L
- Kissling v. Comm’r, T.C. Memo. 2020-153 | November 12, 2020 | Holmes, M. | Docket No. 19857-10
Lashua v. Comm’r, T.C. Memo. 2020-151
Short Summary: In 2016, the taxpayer had an IRA with National Financial Services, LLC, from which he received a distribution of $7,800. The taxpayer filed a 2016 tax return but failed to report the IRA distribution and any addition to tax under Section 72(t). At the time of the IRA distribution, the taxpayer had not yet reached the age of 59 ½ and no portion of the IRA distribution was deposited into another IRA or other retirement account. The IRS issued a notice of deficiency to the taxpayer; however, the notice of deficiency was not signed by any IRS employee. The taxpayer petitioned the Court for a redetermination.
Key Issue: Whether the taxpayer: (1) had $7,800 of unreported retirement income; (2) is liable for an additional tax of $780 under Section 72(t) for an early distribution from a qualified retirement plan; and (3) received a valid notice of deficiency.
- The taxpayer is liable for tax on the $7,800 distribution from a retirement account—moreover, the taxpayer is liable for an addition to tax of $780 under Section 72(t) because it was an early distribution. In addition, although the notice of deficiency was not signed, it constituted a valid notice of deficiency because it identified the taxpayer and notified him that the IRS had determined a deficiency for the 2016 tax year.
Key Points of Law:
- Generally, the Commissioner’s determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it is erroneous. Rule 142(a); Rule 122(b); Welch v. Helvering, 290 U.S. 111, 115 (1933).
- Section 61(a) defines gross income as “all income from whatever source derived” unless specifically exempted or excluded. Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955).
- Generally, a distribution from an IRS is includible in gross income in the manner prescribed by Section 72 unless it is rolled over into another IRA or other eligible retirement plan. 408(d)(1), (3).
- Section 72(t)(1) imposes an additional tax of 10% when a participant in a qualified retirement plan as defined in Section 4974(c)(4) receives an early distribution that does not satisfy one of the exceptions enumerated in Section 72(t)(2). A distribution is premature if the distributee has not attained 59 ½ years of age at the time of the distribution. 72(t)(2)(A)(i).
- A statutory notice of deficiency need not take any particular form to be valid. Campbell v. Comm’r, 90 T.C. 110, 115 (1988). A statutory notice of deficiency must advise the taxpayer that the IRS has determined a deficiency with respect to the taxpayer and must specify the year and amount. It does not require a signature. Comm’r v. Oswego Falls Corp., 71 F.2d 673 (2d Cir. 1934), aff’g 26 B.T.A. 60 (1932).
Insight: The Lashua decision shows that the IRS can utilize information returns to determine whether income from IRAs has been properly reported on a taxpayer’s tax return. In the event an early IRA distribution has been made and no other exception applies, the IRS can impose an additional 10% addition to tax under Section 72(t).
Dang v. Comm’r, T.C. Memo. 2020-150
Short Summary: At the conclusion of the trial, Petitioners filed a motion for reasonable litigation and administrative costs. Neither party requested a hearing on the matter, there was no material fact in dispute. The Tax Court decided the Petitioner’s motion on the basis of the parties’ submissions and the existing record. The Tax Court found that the Petitioners did not incur “reasonable administrative costs” and were not entitled to an award of reasonable litigation costs because the position of the IRS was “substantially justified.”
Key Issue: Did the Petitioners meet the statutory requirements for litigation and/or administrative costs after having been through an IRC § 6330/6320 hearing and a Tax Court trial.
- A taxpayer cannot recover administrative costs if it goes through an IRC § 6330/6320 hearing.
- A taxpayer is not treated as a “prevailing party,” if the IRS establishes that its position in the proceeding was “substantially justified.”
Key Points of Law:
- IRC § 7430 provides for an award of reasonable litigation and administrative costs to a taxpayer in a proceeding involving the collection of any tax, interest, or penalty.
- An award may be made where the taxpayer can demonstrate that he: (1) is the “prevailing party”, (2) has exhausted administrative remedies within the IRS, (3) has not unreasonably protracted the proceedings, and (4) has claimed “reasonable” costs. See IRC § 7430(a), (b)(1), (3), (c)(1) and (2).
- The above requirements are conjunctive; failure to satisfy any one requirement precludes an award of costs to the taxpayer. See Minahan v. Commissioner, 88 T.C. 492, 497 (1987); Marten v. Commissioner, T.C. Memo. 2000-186.
- When a taxpayer seeks both administrative and litigation costs, the Tax Court will apply a bifurcated analysis to separately determine whether the ‘position of the United States was substantially justified in the administrative proceeding and the litigation proceeding. See Huffman v. Commissioner, 978 F.2d 1139, 1144 (9th Cir. 1992), aff’g in part, rev’g in partC. Memo. 1991-144.
- A “prevailing party” is a party that “has substantially prevailed with respect to the amount in controversy” or “with respect to the most significant issue or set of issues presented.” See IRC § 7430(c)(4)(A)(i).
- A party is not treated as a “prevailing party,” however, if “the United States establishes that the position of the United States in the proceeding was substantially justified.” Id.
- The “position of the United States” in litigation is generally established in its answer. See Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), aff’g in part, rev’g in partC. Memo. 1991-144.
- The “substantially justified” standard means “‘justified in substance or in the main’–that is, justified to a degree that could satisfy a reasonable person.” See Pierce v. Underwood, 487 U.S. 552, 565 (1988).
- When the IRS concedes a case in its answer, its conduct is reasonable. See Huffman v. Commissioner, 978 F.2d at 1148 (citing Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991)).
- Reasonable administrative costs are limited to those costs incurred by the taxpayer on or after the earliest of: (1) the date of the receipt by the taxpayer of the notice of determination, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency that allows the taxpayer to appeal a decision to the IRS Appeals Office. See IRC § 7430(c)(2); See also 26 CFR § 301.7430-4(a).
- IRC §6330/6320 proceedings ordinarily occurs only after an assessment is recorded, the date of the notice of determination is the only applicable date under the statute for a claim of administrative costs in IRC § 6330/6320 cases to begin accruing. See IRC § 7430(c)(2).
- Because the notice of determination in section 6330/6320 cases also concludes the administrative proceeding, a taxpayer cannot recover an award for administrative costs arising in an IRC § 6330/6320 proceeding. See IRC § 7430(c)(2); See also 26 CFR § 301.7430-3(a) and (b).
Insight: This case clearly lays outs the requirements that a taxpayer must meet in order to be awarded litigation and/or administrative costs. It also highlights the need for taxpayers to fully research the requirements so as to not spend funds unnecessarily.
Kissling v. Comm’r, T.C. Memo. 2020-153
Short Summary: The Court examined charitable contribution deductions taken by Petitioners based on historic preservation conversation easements. Specifically, the Court examined the value before and after the easement to determine if the amount of charitable contribution deduction was warranted. It was warranted, but reduced slightly.
Key Issues: What is the value of a conservation easement for historic preservation purposes when local law already restricted what could be done with the property?
- Where local law already limits what can be done with a property, later donating a conservation easement limiting the use of the property may not decrease the property’s value so as to give rise to a charitable contribution deduction pursuant to Section 170. However, as seen in this case, certain properties may still have actual conservation value to be deducted.
Key Points of Law:
- Section 170 allows a taxpayer to deduct the value of any charitable contribution made.
- There is an exception for contributions of real property, if the gift “consists of less than the * * * entire interest in such property.” Sec. 170(f)(3)(A).
- There is an exception to this exception that allows a deduction for a partial interest in real property if the donation is a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii).
- A “qualified conservation contribution” is “a contribution (A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes.”
- Under section 170(h)(2)(C), a qualified real-property interest must be “a restriction (granted in perpetuity) on the use which may be made of the real property.”
- And “[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.”
- The retained power of all contracting parties to change contractual terms does not by itself destroy an easement’s required perpetuity, but a retained right to add improvements “appurtenant to residential development” does violate the perptetuity requirement.
- the value of a conservation easement is the “fair market value of the perpetual conservation restriction at the time of the contribution.”
- Tax Court will look to state law to determine when the contribution was made (i.e. grant date or recording date).
- In determining the value of such easements, the sales price of similar easements will be considered. If no other comparable sales exist, the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.
- Three methods exist for analyizing the value of such easements under the before and after approach: (1) sales comparison, (2) income capitalization, and (3) replacement cost.
- Where a taxpayer donates “façade” easements on buildings in historic preservation districts, inherent valuation issues arise. The Tax Court will “take into account * * * any effect from zoning, conservation, or historic preservation laws that already restrict the property’s potential highest and best use.” In other words, the Tax Court will scrutinize the conservation protection that the easement adds beyond already established local law.
Insight: Kissling analyzes the rules regarding charitable contribution deductions for conservation easements under Section 170. Specifically, this case presents an interesting circumstance where conservation easements donated on property are already limited on improvements to some extent by local law. However, the Petitioners successfully argued that the conservation easement still provided conservation value over that already provided by local law. This is a notable case where a taxpayer actually reversed the full disallow of a conservation easement deduction by the IRS.
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