The Tax Court in Brief July 12 – July 17, 2020

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The Tax Court in Brief July 12 – July 17, 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 Court: The Week of July 12 – July 17, 2020


Tax Court Case:

Duffy v. Comm’r, T.C. Memo. 2020-108 

July 13, 2020 | Halpern, J. | Dkt. No. 8711-16

Tax Case Short Summary The taxpayers purchased property in Gearhart, Oregon for $2 million in 2006.  The purchase was seller financed, but the taxpayers later borrowed $1.4 million from JPMorgan Chase and used the proceeds to pay the seller.  In 2009 and 2010, the taxpayers rented the Gearhart property to family and acquaintances—prior to, they had used the property as a vacation home.  They sold the Gearhart property in 2011 for $800,000 with JPMorgan Chase agreeing to accept $750,841 of the proceeds in full satisfaction of the mortgage loan that encumbered the property.

In February 2011, Mr. Duffy organized Impact Medical, LLC (Impact Medical), which was formed to design and manufacture equipment to alleviate a medical condition known as deep vein thrombosis.  Later, additional investors became members of Impact Medical.  Mr. Duffy ran the day-to-day operations of Impact Medical.

In 2013, Wells Fargo Bank N.A. forgave $391,532 of debt the taxpayers owed on a home equity line of credit secured by their residence in Portland, Oregon.

The taxpayers filed joint returns for 2009 through 2014.  On those returns, the taxpayers reported:  (1) for 2009 and 2010, a Schedule E loss related to their rental of the Gearhart property, which was treated as nondeductible passive activity losses; (2) for 2011, a loss from their sale of the Gearhart property, cancellation of debt income related to the JPMorgan Chase loan, and a net operating loss which was carried back to 2009 and 2010, (3) for 2012, Schedule E income which reported Mr. Duffy’s guaranteed payments from Impact Medical as not subject to self-employment tax, and a nonpassive loss for unreimbursed partnership expenses, (4) for 2013, a Schedule E nonpassive loss from Impact Medical, and a nonpassive loss for unreimbursed partnership expenses, and none of the Impact Medical guaranteed payment as subject to self-employment tax; and (5) for 2014, nonpassive loss for unreimbursed partnership expenses, and none of the Impact Medical guaranteed payments as subject to self-employment tax.

Key Tax Dispute Issue:  Whether the taxpayers:  (1) are entitled to deduct an ordinary loss from their sale in 2011 of residential property in Oregon; (2) must include in their 2011 taxable income, in connection with the sale of the Oregon property, COD income due to discharge of debt that the property secured; (3) are entitled to deduct losses they reported from their rental of the Oregon property; (4) must include in their taxable income for 2013 COD income from the discharge of a home equity line of credit secured by their property in Portland; (5) are entitled to deduct all or a portion of the losses allocated to Mr. Duffy by Impact Medical; (6) are entitled to deduct other losses reported on Schedules E for their 2012 through 2014 tax years; (7) must pay self-employment tax on Mr. Duff’s guaranteed payments he received from Impact Medical; and (8) are liable for accuracy-related penalties.

Primary Holdings

Key Points of  the Tax Laws:

Tax Court Motion: Mr. and Mrs. Duffy may have lost on some major issues in Duffy, but they obtained a major win on the penalty issue.  Interestingly, the IRS sought to satisfy its burden of production under Section 6751(b) via a civil penalty form and a stipulation which provided that the signer “was the manager or supervisor of one or more of the auditing agents.”  On this basis, the Tax Court concluded that the stipulation alone did not establish that the signer was the immediate supervisor of the person who made the initial determination to assess the penalties in issue.  Thus, the Duffy decision demonstrates that proper wording via the stipulation process in Tax Court matters considerably.


Tax Court Case:
Smith Lake, LLC, David Hewitt, TMP v. Comm’r, T.C. Memo. 2020-84

July 13, 2020 | Kerrigan, J. | Dkt. No. 4980-17

Tax Dispute Short SummaryOn July 29, 2008, Rockefeller Holdings, LLC (Rockefeller), owned in part by David Hewitt, purchased 21.89 acres of property on Lewis Smith Lake in Alabama for $200,000.  Rockefeller transferred the property to Smith Lake, LLC (Smith Lake).  Mr. Hewitt and his wife each owned a 50% interest in Smith Lake at the time of the transfer.

On December 20, 2013, Mr. and Mrs. Hewitt each sold and assigned 49.75% of their interests in Smith Lake to Smith Lake Investment Partners, LLC (Smith Lake Investments).  On December 23, 2013, Smith Lake conveyed a deed of easement for the 21.89 acres to the Pelican Coast Conservancy, LLC, by and through its sole member, Atlantic Coast Conservancy, Inc., a Georgia nonprofit corporation.

For the conservation easement, Smith Lake claimed a $6,524,000 noncash charitable contribution deduction.

Tax Litigation Key Issue:  Whether the taxpayer satisfied the perpetuity requirement of Section 170(h)(5)(A), and whether Treas. Reg. § 1.170A-14(g)(6) is valid under Chevron.

Primary Holdings

Key Points of  the Tax Laws:

Tax Court MotionThe IRS is on a hot streak on the conservation easement front, and the decision in Smith Lake is another notch in its belt.  Taxpayers with docketed Tax Court cases who are able to settle with the IRS under the IRS’ new settlement program should carefully consider their defenses and whether to accept the settlement terms.  Next moves may be extremely important.


Tax Court Case:

Weiderman v. Comm’r, T.C. Memo. 2020-109 

July 15, 2020 | Ashford, J. | Dkt. No. 14432-14

Tax Dispute Short SummaryMrs. Weiderman accepted an executive marketing position with K-Swiss in 2006.  Under the terms of her employment offer, K-Swiss agreed to assist the Wediermans in their relocation to California, providing them with a $500,000 interest-free loan to help finance the purchase of a new residence.  K-Swiss and Mrs. Weiderman later executed a promissory note, dated February 15, 2007, which discussed the terms and conditions of the loan including that the loan was due and payable in full in one lump-sum payment on the earlier of February 15, 2017, or the effective date of her termination (whether voluntary or non-voluntary).  After the loan disbursement, the Weidermans used the loan proceeds to purchase a residence in California.

But on December 1, 2008, K-Swiss terminated Mrs. Weiderman’s employment.  Accordingly, K-Swiss demanded full payment of the $500,000 loan.  Ultimately, Mrs. Weiderman and K-Swiss agreed (through various settlement negotiations) that K-Swiss would cancel $285,000 of the loan with proceeds from the sale of the California residence satisfying the remaining loan balance.

In 2009 and 2010, Mr. and Mrs. Weiderman also claimed various business deductions on Schedules C.

Tax Litigation Key Issue:  Whether the taxpayers:  (1) must include in gross income COD income of $255,000 and $30,000 for 2009 and 2010, respectively; (2) are entitled to deduct certain expenses they reported on their 2009 and 2010 Schedules C, Profit or Loss From Business; and (3) are liable for accuracy-related penalties.

Primary Holdings

Key Points of  the Tax Laws:

Tax Court MotionThe Weiderman decision is a good illustration of the difficulties a taxpayer may face in attempting to fall within an exclusion to COD income under Section 108.  Taxpayers should be aware that in many instances (as in this case), the lender will issue a Form 1099 alerting the IRS that the debt has been cancelled.  In such a case, the IRS will often look to the debtor’s tax return to determine whether the COD income has been properly reported.  In many cases, with proper tax planning, taxpayers can provide better arguments and documentary proof to meet an exception under Section 108.


Tax Court Case:

Robert Elkins v. Comm’r, T.C. Memo. 2020-110

July 16, 2020 | Urda, J. | Dkt. No. 12315-17L

Tax Dispute Short SummaryThe case involved the rejection of an offer-in-compromise (OIC) based on the abuse of discretion by the Office of Appeals of the Internal Revenue Service (IRS).

Dr. Elkins (the “taxpayer”), a prominent businessman and a partner at Delta Trading Partners IV, LP, entered a joint stipulation with the IRS to settle adjustments to certain amount of income and deductions reported by the partnership during 1998 and 1999. The Tax Court entered a decision consistent with the stipulation of the settled issues. Consequently, the IRS made computational adjustments to Dr. Elkins 1998, 2000 and 2001 Federal income tax returns consistent with the Tax Court’s decision and assessed more than $10 million in income tax deficiencies, accuracy-related penalties and interest.

The taxpayer submitted an OIC proposing to settle his tax debt for $17,500. To support his OIC premised on doubt as to collectibility, he argued that he was 71 years old, divorced, unemployed, and did not had any substantial assets and that his reasonable collection potential (RCP) was limited to $15,500 (He later increased his OIC to $33,000 and $71,500).

The IRS rejected the OIC and sustained the Notice of Federal Tax Lien (NFTL) on the ground that the offer was not in the best interest of the Government, considering public policy and tax administration concerns. The main points to sustain such rejection were: (i) that the taxpayer’s increases to his OIC did not shown good faith, (ii) that the taxpayer did not make voluntary payments during the years the OIC had been pending, and (ii) the taxpayer’s negative history with use of company funds. These elements show that the IRS did not abused its discretion in sustaining the OIC’s rejection as not in the best interest of the Government.

Tax Litigation Key Issues:  Whether the IRS abused its discretion to reject an OIC because it was not in the best interest of the Government.

Primary Holdings: The IRS does not abuse its discretion when rejecting an OIC, when (i) the requirements of applicable law or administrative procedure met by the taxpayer have been properly verified, (ii) the IRS considers any relevant issues raised by the taxpayer, such as good faith and previous negative history, and (iii) the proposed collection action balances the need for efficient collection with the taxpayer’s concern that such action is no more intrusive than necessary.

Key Points of  the Tax Laws:

The Court argued that to determine an abuse of discretion by the IRS when rejecting an OIC because it is not in the best interest of the Government, the following elements must be analyzed:

Tax Court MotionThe question presented in this case provides some elements that may be helpful to determine whether an OIC can be rejected by the Government because it is not in its best interest. Factors such as the good faith of the taxpayer, his real reasonable collection potential and background financial history are elements that can support a favorable narrative when filing an OIC.