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 September 27 – October 1, 2021

Whistleblower 14377-16W v. Comm’r, T.C. Memo. 2021-113 | September 27, 2021 | Halpern, J. | Dkt. No. 14377-16W

Short Summary: The whistleblower brought a whistleblower action under section 7623 of the Code, seeking review of the IRS Whistleblower Office’s (WBO) denial of his claim for a reward. The whistleblower also sought to remain anonymous. In a prior decision, the Tax Court had determined that the whistleblower should not proceed anonymously; however, the Tax Court was reversed by the D.C. Circuit Court of Appeals. The IRS moved for summary judgment and contended that the WBO did not abuse its discretion in denying the whistleblower’s request for an award.

Key Issues:

• Whether the WBO abused its discretion in denying the whistleblower an award.

Primary Holdings:

• The administrative record supports the WBO’s determination that the whistleblower is not entitled to an award. Accordingly, the IRS’ motion for summary judgment is granted.

Key Points of Law:

• Section 7623(b)(1) requires the payment of an award to an individual who provides information concerning underpayments of tax if the Commissioner, on the basis of that information, “proceeds with any administrative or judicial action” that results in the collection of proceeds.
• Section 7623(b)(4) allows whistleblowers to appeal award determinations (including determinations not to grant an award) and gives the Tax Court jurisdiction over those appeals.
• Tax Court Rule 345(a) provides in relevant part: “A petitioner in a whistleblower action may move the Court for permission to proceed anonymously, if appropriate. Unless otherwise permitted by the Court, a petitioner seeking to proceed anonymously pursuant to this Rule shall file with the petition a motion, with or without supporting affidavits or declarations, setting forth a sufficient, fact-specific basis for anonymity.”
• The Tax Court will permit a whistleblower to proceed anonymously if the whistlleblower presents a sufficient showing of potential harm that outweighs counterbalancing societal interests.” Whistleblower 14377-16W v. Comm’r, 148 T.C. at 515.
• In determining whether to grant a whistleblower’s request for anonymity, the Tax Court considers “whether identification poses a risk of retaliatory physical . . . harm to the . . . [whistleblower] or even more critically, to innocent non-parties.” James, 6 F.3d at 238. In addition, the Tax Court has taken into account the risk of “social stigma,” see Whistleblower 11332-13W v. Comm’r, T.C. Memo. 2014-92, at *11-*12, and the risk of “professional stigma and economic duress” that disclose of the whistleblower’s identity would pose. See id.
• For whistleblower claims, the Tax Court reviews for abuse of discretion, and that review is generally limited ot the administrative record. Kasper v. Comm’r, 150 T.C. 8, 14-23 (2018).
• Absent a substantial showing made with clear evidence to the contrary, an agency is presumed to have properly designated the administrative record. Van Bemmelen v. Comm’r, 155 T.C. 64, 74 (2020). But, the Tax Court permits supplementation of the administrative record to include evidence that should have been properly a part of the administrative record but was excluded by the agency. at 73. And, in limited circumstances, the Tax Court will consider “extrajudicial evidence that was not initially before the agency.” Id. However, considering extrarecord evidence “is the exception, not the rule.” Id. at 76.
• The IRS and not the Tax Court decides whether and how to audit a taxpayer’s tax return, and section 7623(b)(4) confers on the Tax Court jurisdiction not to supervise audits but to review the acts of the WBO. See Whistleblower 23711-15W v. Comm’r, T.C. Memo. 2018-34.

Insight: As this case shows, overturning the WBO’s determination not to grant a whistleblower award can sometimes be an uphill battle. Accordingly, whistleblowers should ensure that they properly provide all relevant facts and arguments to the WBO as part of their Form 211.

Gregory v. Comm’r, T.C. Memo. 2021-115 | September 29, 2021 | Jones, J. | Dkt. No. 10336-18

Short Summary: During tax years 2014 and 2015, Petitioners Carl and Leila Gregory operated CLC Ventures, Ltd. (“CLC”), which generated income and incurred expenses from boat chartering activities. The Gregorys reported CLC’s activities on Schedule C for each tax year. The IRS audited the Gregorys’ tax returns and issued a Notice of Defiency, assessing deficiencies and certain accuracy-related penalties. The IRS determined that the CLC activities lacked a profit motive and recharacterized (1) the Schedule C income as non-Schedule C “other income,” and (2) the Schedule C expenses as miscellaneous itemized deductions to the extent allowable under Section 183 (with certain exceptions).

On May 29, 2018, the Gregorys timely filed their petition for redetermination of the deficiencies and accuracy-related penalties. On March 6, 2020, the Gregorys filed a motion, requesting that the Tax Court hold as a matter of law that the deductions provided under Section 183(b) for activities not engaged in for profit are not subject to Section 67(a)’s 2-percent floor on miscellaneous itemized deductions.

Key Issues:

• (1) Whether deductions permitted under Section 183(b) for activities not engaged in for profit are not subject to Section 67(a).

Primary Holdings:

• (1) Deductions permitted under Section 183(b) for activities not engaged in for profit are subject to Section 67(a).

Key Points of Law:

• The Tax Court may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
• Section 183(b)(1) permits a taxpayer to claim deductions, with respect to expenses attributable to their activities that are not predicated on the existence of a profit motive. See Powell v. Comm’r, T.C. Memo. 1986-369, 1986 Tax Ct. Memo LEXIS 242, at *17-*18.
• Section 63(d) defines itemized deductions as deductions other than (i) those allowable in computing AGI and (ii) the deduction for personal exemptions allowed under Section 151. Section 183(b)(2) is not identified as a deduction allowable in computing AGI. SeeR.C. § 62(a).
• If an itemized deduction, such as Section 183(b)(2), is not identified on the list provided under Section 67(b), it is a miscellaneous itemized deduction and therefore subject to the restriction provided under Section 67(a). SeeR.C. § 67(b); see also Strode v. Comm’r, T.C. Memo. 2015-117, at *32 n.12.

Insight: As this case suggests, “hobby loss” issues are a regular issue for taxpayers. Moreover, expenses and deductions denied by the IRS as business deductions may be miscellaneouos itemized deductions subject to a 2-percent floor. Accordingly, taxpayers who have relatively high AGIs will likely miss out on these deductions. Further, taxpayers should note that the particular issue highlighted by Gregory is not applicable for tax years affected by the TCJA (i.e., 2018 through 2025).

[View source.]