Freeman Law’s Top 10 Tax Court Cases of 2020

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The 2020 year was . . . well, interesting. So, too, were the Tax Court decisions for the year. In this Insight, Freeman Law takes a closer look at the top 10 Tax Court cases of 2020.

As a reminder, Freeman Law publishes a clear and concise summary of all Tax Court decisions released for any given week in its weekly edition of “The Tax Court in Brief,” which can be found on our Insights webpage. For the last few weeks, the Tax Court had not issued any decisions due to its transition to a new software platform, DAWSON. That changed this week with the release of six new opinions. Freeman Law intends to pick up right where we left off prior to the DAWSON transition and will release The Tax Court in Brief in the near future regarding these decisions.

  1. Frost v. Comm’r, 152 T.C. No. 2 (Jan. 7, 2020)

Issue: Which party (IRS or taxpayer) bears the initial burden of production regarding compliance with I.R.C. § 6751(b)?

Ruling: The initial burden of production to show compliance with I.R.C. § 6751(b) rests with the IRS; after the proper penalty correspondence form is produced by the IRS, the burden shifts to the taxpayer to show that another formal communication of the penalties was provided to the taxpayer prior to the IRS’ asserted first formal communication.

Significance: The Tax Court addressed many I.R.C. § 6751(b) issues this year. In Frost, the Tax Court provided the legal framework for contesting penalties under I.R.C. § 6751(b), i.e., the shifting burdens of production between the IRS and the taxpayer. Significantly, the Tax Court placed the initial burden of production to show I.R.C. § 6751(b) compliance on the IRS.

More on Frost: Tax Court Clarifies Burden of Production in Section 6751(b) Cases

2. Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 154 T.C. No. 4 (Jan. 16, 2020)

Issue: Whether the IRS Independent Office of Appeals abused its discretion in sustaining a proposed levy although it failed to determine that the IRS had complied with I.R.C. § 6751(b) with respect to the assessment of an assessable penalty under I.R.C. § 6707A?

Ruling: I.R.C. § 6751(b) applies to assessable penalties, such as I.R.C. § 6707A. Here, Appeals abused its discretion in summarily determining that the IRS had met “any applicable law or administrative procedure,” see I.R.C. § 6330(c)(1), since the IRS failed to comply with I.R.C. § 6751(b)(1).

Significance: In Laidlaw’s Harley Davidson, the Tax Court confirmed that assessable penalties are also subject to I.R.C. § 6751(b) written managerial approval. Moreover, the Tax Court held that IRS Appeals has an independent obligation to determine whether the IRS complied with such penalties in a CDP hearing pursuant to I.R.C. § 6330(c)(1).

More on Laidlaw’s Harley Davidson: Penalty Defenses and the Supervisory-Approval Requirement

3. Chadwick v. Comm’r, 154 T.C. No. 5 (Jan. 21, 2020)

Issue: Whether a trust fund recovery penalty (TFRP) under I.R.C. § 6672 is a “tax” or a “penalty” for purposes of I.R.C. § 6751(b)?

Ruling: TFRPs are penalties for purposes of I.R.C. § 6751(b).

Significance: In Chadwick, the Tax Court disagreed with a federal district court decision which had held that the TFRP was not a penalty. See U.S. v. Rozbruch, 28 F. Supp. 3d 256 (S.D.N.Y. 2014), aff’d on other grounds, 621 F. App’x 77 (2d Cir. 2015). Accordingly, for CDP cases involving TFRPs, the IRS must confirm that it met the written managerial approval requirement prior to initiating collection actions against the taxpayer.

More on Chadwick: Tax Court Determines §6672 Penalties Subject to § 6751(b) Requirements

4. Oakbrook Land Holdings, LLC v. Comm’r, 154 T.C. No. 10 (May 12, 2020)

Issue: Whether the judicial extinguishment regulation, see Treas. Reg. § 1.170A-14(g)(6) complied with the Administrative Procedure Act (APA) and also whether such regulation is valid under Chevron?

Ruling: Treas. Reg. § 1.170A-14(g)(6) was properly promulgated and is valid under the APA and is valid under Chevron.

Significance: There were a litany of syndicated conservation easement cases decided by the Tax Court in 2020. In Oakbrook, the IRS received a significant win in having the Tax Court conclude that its decades-old judicial extinguishment regulation was valid under APA and Chevron doctrine challenges.

More on Conservation Easements: Settling Conservation Easement Penalties: The IRS and Some New Insights; Senate Releases Report on Syndicated Conservation Easement

5. Sage v. Comm’r, 154 T.C. No. 12 (June 2, 2020)

Issue: Whether the transfer of parcels of real estate from a developer to liquidating trusts produces deductible losses?

Ruling: The transfers of parcels of real estate from a developer to liquidating trusts (which are characterized as grantor trusts for federal tax purposes) does not produce deductible losses.

Significance: The Sage decision has a great discussion of the federal tax rules applicable to grantor trusts. Generally, as the Sage decision recognizes, grantor trusts are not treated as separate entities apart from their owners for federal tax purposes.

More on Sage: Taxpayer’s Use of Liquidating Trusts Found to Create Grantor Trust

6. Ruesch v. Comm’r, 154 T.C. No. 13 (June 25, 2020)

Issue: Whether the Tax Court has jurisdiction in a CDP case to review a taxpayer’s challenge to the IRS’ certification of tax liabilities as “seriously delinquent,” see I.R.C. § 7345(e), when the IRS later reverses the certification as erroneous and notifies the Secretary of State of the erroneous certification.

Ruling: The Tax Court does not have jurisdiction in a CDP case to review a taxpayer’s challenge to the IRS’ certification of tax liabilities as “seriously delinquent” when the IRS reverses the certification; the issue becomes moot.

Significance: Since its enactment a few years ago, there have only been a few cases regarding the construction of the passport revocation provision in I.R.C. § 7345. Ruesch is one such opinion.

More on Ruesch: The Tax Court in Brief (the Week of June 22, 2020)

7. Barnhill v. Comm’r, 155 T.C. No. 1 (July 21, 2020)

Issue: Whether the IRS Independent Office of Appeals abused its discretion in sustaining a notice of federal tax lien and not permitting the taxpayer to contest the TFRP liabilities in a Collection Due Process (CDP) hearing when the taxpayer contests the TFRP in responses to a Letter 1153 but never receives a response from the IRS?

Ruling: If a taxpayer receives a Letter 1153 but does not receive any subsequent correspondence from the IRS regarding his response to the Letter 1153, the taxpayer has not been afforded an opportunity to dispute the underlying TFRP liability under I.R.C. § 6330(c)(2)(B).

Significance: Generally, it is very difficult to contest the amount of a TFRP in a CDP hearing. This is because the IRS generally issues Letter 1153 prior to assessment of the TFRP, which provides the taxpayer with an opportunity to an Appeals hearing. Under the IRS’ regulations, this opportunity precludes a second chance to contest the liability at a subsequent CDP hearing. See Treas. Reg. § 301.6320-1(e)(3), Q&A, E-2. However, in Barnhill, the Tax Court correctly concluded that if the taxpayer attempts to contest the TFRP in response to a Letter 1153 but never receives a response, it does not preclude the taxpayer from contesting the TFRP in the CDP hearing.

More on Barnhill: The Tax Court in Brief (the Week of July 19- July 24, 2020)

8. Bemmelen v. Comm’r, 155 T.C. No. 4 (Aug. 27, 2020)

Issue: Whether the IRS administrative record should be supplemented in a tax whistleblower case?

Ruling: To supplement the administrative record in a tax whistleblower case, the taxpayer must overcome the presumption that the IRS has properly designated the administrative record. To overcome this presumption, the taxpayer must make a substantial showing with clear evidence.

Significance: The administrative record is extremely important in tax whistleblower cases as the Tax Court generally cannot deviate from the record in reaching its determination. The Bemmelen case provides a standard for taxpayers who seek to supplement the administrative record in such cases.

More on Bemmelen: The Tax Court in Brief (the Week of August 22 – August 28, 2020)

9. Thompson v. Comm’r, 155 T.C. No. 5 (Aug. 31, 2020)

Issue: Whether IRS letters offering to settle the taxpayers’ tax liabilities constituted an “initial determination” for purposes of I.R.C. § 6751(b)?

Ruling: The IRS letters do not constitute a formal communication of the penalties and accordingly are not initial determinations pursuant to I.R.C. § 6751(b).

Significance: Generally, the first formal communication of a penalty for purposes of I.R.C. § 6751(b) (i.e, the “initial determination”) is the IRS 30-day letter, although the Tax Court has concluded other correspondence can, in some cases, also be a formal communication. Here, the Tax Court was tasked with again trying to determine what constitutes a formal communication for purposes of I.R.C. § 6751(b).

More on Thompson: The Tax Court in Brief (the Week of August 29 – September 4, 2020)

10. Bemmelen v. Comm’r, 155 T.C. No. 4 (Aug. 27, 2020)

Issue: Whether the IRS administrative record should be supplemented in a tax whistleblower case?

Ruling: To supplement the administrative record in a tax whistleblower case, the taxpayer must overcome the presumption that the IRS has properly designated the administrative record. To overcome this presumption, the taxpayer must make a substantial showing with clear evidence.

Significance: The administrative record is extremely important in tax whistleblower cases as the Tax Court generally cannot deviate from the record in reaching its determination. The Bemmelen case provides a standard for taxpayers who seek to supplement the administrative record in such cases.

More on Bemmelen: The Tax Court in Brief (the Week of August 22 – August 28, 2020)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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