The Tax Court in Brief - October 2021 #2

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Freeman Law

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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Tax Litigation: The Week of October 4 – October 8, 2021

Crim v. Comm’r, T.C. Memo. 2021-117 | October 4, 2021 | Lauber, J. | Dkt. No. 16574-17L

Short Summary: During tax years 1999 through 2003, Mr. John Crim promoted a tax shelter scheme involving domestic and offshore trusts. In 2008, Mr. Crim was convicted of certain crimes (conspiracy to defraud the United States and a corrupt endeavor to interfere with the administration of the internal revenue laws) and imprisoned until 2014.

The Internal Revenue Service notified Mr. Crim that it proposed to assess penalties under Section 6700(a) by letter dated June 16, 2010. On July 26, 2010, the Internal Revenue Service assessed the proposed penalties. On November 18, 2011, the Internal Revenue Service filed a notice of federal tax lien. On March 8, 2017, the Internal Revenue Service sent Mr. Crim a Letter 1058, Notice of Intent to Levy.

Mr. Crim’s representative timely filed a request for CDP hearing. At the hearing, Mr. Crim’s representative made various legal arguments, including that the penalties had been assessed and/or collected after the relevant period of limitations had expired. The Internal Revenue Service sustained the collection action. On August 4, 2017, Mr. Crim timely filed his petition with the Tax Court. On November 14, 2019, the Internal Revenue Service filed a motion for summary judgment.

Key Issues:

  • (1) Whether the Internal Revenue Services’ determination to sustain the collection action (notice of intent to levy) was proper as a matter of law.

Primary Holdings:

  • (1) The Internal Revenue Services’ determination to sustain the collection alternative (notice of intent to levy) was proper as a matter of law.

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).
  • A taxpayer’s underlying liability is properly at issue in a CDP case only “if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. I.R.C. § 6330(c)(2)(B); Sego v. Comm’r, 114 T.C. 604, 609 (2000).
  • “The Commissioner has generally prevailed in foreclosing challenges to the underlying liability under section 6330(c)(2)(B) where he establishes that a notice . . . was mailed to the taxpayer’s last known address.” Kamps v. Comm’r, T.C. Memo. 2011-287, 102 T.C.M. (CCH) 580, 582.
  • Section 6502(a)(1) provides that a tax that has been properly assessed may be collected if the levy or other collection action is begun “within 10 years after the assessment.”
  • Section 6501(a) imposes no period of limitations on the assessment of penalties under Section 6700.

Insight: Crim highlights the fact that the Tax Court reviews a settlement officer’s determination for abuse of discretion. Taxpayers should be prudent in contesting tax and penalty assessments at the appropriate time. Further, taxpayers should be cognizant of the applicability of periods of limitation to certain types of penalties, including Section 6700 penalties. Finally, taxpayers should be wary of bombarding the Tax Court with multiple filings/”mountains of paper” that lacks certain critical support, such as personal affidavits from the taxpayer.

Leyh v. Comm’r, 157 T.C. No. 7| October 4, 2021 | Greaves, J. | Dkt. No. 20533-18

Short Summary:  Pursuant to a separation agreement, Mr. Leyh agreed to pay his then spouse’s health insurance premiums through a “cafeteria plan” provided by his employer.  Mr. Leyh excluded from his gross income an amount equal to the health insurance premiums pursuant to section 106 and section 125 of the Code and also claimed an alimony deduction pursuant to section 62 and section 215 for the portion of the premiums covering his then spouse.

Key Issues:

  • Whether Mr. Leyh may deduct, as alimony, the amount equal to the premiums paid to provide health insurance coverage for his then spouse.

Primary Holdings:

  • Neither the double deduction common law principle nor section 265 applies to prevent the deduction of alimony where a separated couple pending a final decree of divorce creates an alimony agreement that includes continued health care coverage as provided by the payor spouse’s employer, premiums for which are properly excluded from the payor’s gross income and included in the recipient spouse’s gross income.

Key Points of Law:

  • The IRS’ determinations set forth in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving that the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • The fact that a case has been submitted under Rule 122 “does not alter the burden of proof, or the requirements otherwise applicable with respect to adducing proof, or the effect of failure of proof.” Rule 122(b).
  • Gross income includes all income from whatever source derived, unless otherwise specifically excluded. 61.
  • When an employee receives health insurance coverage for himself or his spouse and dependents as a benefit through an employer-sponsored health care plan, the premiums paid for such coverage may generally be excluded from that employee’s gross income. 106(a), 125; Prop. Reg. § 1.125-1(h)(2).
  • If a taxpayer pays alimony as defined in section 71(b), then the taxpayer may deduct such payments from gross income if the amounts are includible in the gross income of the recipient under section 71. 62(a)(10), 215(a) and (b).
  • Deductions are a “matter of legislative grace,” and the taxpayer bears the burden of clearly showing the right to a claimed deduction. Interstate Transit Lines v. Comm’r, 319 U.S. 590 (1953).  Moreover, “double deductions (or their practical equivalent) for the same economic loss are impermissible absent a clear declaration of congressional intent.”  Thrifty Oil Co. & Subs. v. Comm’r, 139 T.C. 198, 205 (2012).
  • Section 265(a) generally provides that an amount may not be deducted if it is allocable to wholly tax-exempt income (other than interest). Tax-exempt income includes any class of income wholly excluded from gross income under subtitle A of the Code or under any other provision of law.  Reg. § 1.265-1(b)(1).  The principal purpose of section 265 is to restrict deductions of expenses incurred in connection with an ongoing trade or business or investment activity, the conduct of which generates exempt income.  See Manocchio v. Comm’r, 78 T.C. 989, 994 (1982).

Insight:  The practical effect of the Leyh decision may be limited due to the Tax Cuts and Jobs Act’s permanent disallowance of alimony deductions.  However, although the alimony deduction does not currently sunset, Congress may revisit the deductibility of alimony at a later date.  If this occurs, taxpayers who have health care cafeteria plans and who pay alimony may want to remember the Leyh decision, which is taxpayer favorable.

Suzanne Jean McCrory v. Comm’r, T.C. Memorandum 2021-116| October 4, 2021 | Jones, J. | Dkt. Nos. 11798-18W, 12956-18W.

Short SummaryThe case analyzed whether the IRS abused its discretion when rejecting whistleblower’s claims under section 7623(b)(4). The Court ruled that the IRS did not abuse its discretion when rejecting the claims for awards when the IRS’ rejects such claims on the basis that the information provided was speculative.

Ms. McCrory (the petitioner) submitted 19 Applications for Awards for Original Information (claims for awards) under section 7623(b)(4), alleging that certain individuals may not have reported their taxable income from settlements or jury awards. The allegations were based on a hypothesis and were supported by public information.

The Whistleblower Office of the IRS processed the claims, one of the IRS’ employees prepared the respective Award Recommendation Memorandums (ARM) for each claim. The ARM includes a section for the “basis for the recommendation”, under which the IRS stated the various reasons that supported the recommendation, including that the claim failed to include specific and credible information or for some claims, that the claim was speculative. None of the ARMs recommendation was based on the publicly available information. The ARM recommended to reject the claim.

The Court, ruling under Rule 122, sustained the IRS’ determinations.

Key Issues: Whether the IRS abuses its discretion when it rejects a claim under section 7623(a) when the determination made by the IRS states that the information provided is speculative?

Primary Holdings: The IRS does not abuse its discretion when it rejects a claim on its face under section 7623(a) on the basis that the information provided is speculative.

Key Points of Law:

  • Section 7623(a) allows individuals to receive an award for providing the IRS with information leading to the detection of underpayments of tax or the detection and bringing to trial and punishment persons guilty of violating the tax laws. The award requires that the IRS initiates an administrative or judicial action and collects tax proceeds. See Cohen v. Commissioner, 139 T.C. 299 , 302 (2012), aff’d per curiam, 550 F. App’x 10 (D.C. Cir. 2014); Cooper v. Commissioner, 136 T.C. 597 , 600 (2011).
  • The applicable standard to review the IRS determination is abuse of discretion. See Van Bemmelen v. Commissioner, 155 T.C. at 78 ; see also Kasper v. Commissioner, 150 T.C. 8 , 22 (2018).
  • As indicated by Section 7623, the WBO performs an initial evaluation of the claim. A rejection occurs when the claim is insufficient on its face because it fails to meet certain requirements such as containing credible information, specific information or does provide speculative information. See Lacey v. Commissioner, 153 T.C. at 160 (quoting section 301.7623-1(c)(1) and (4), Proced. & Admin. Regs.).
  • In this case, the IRS recommended rejection because the allegations were speculative, because the information provided was speculative or did not provide specific information regarding tax underpayments. The Court when analyzing the rejection, does not substitute the IRS reasonable judgment, only limits its review for abuse of discretion. See Lacey v. Commissioner, 153 T.C. at 164. The Court, accordingly, ruled that the IRS evaluated each claim and used reasonable judgment when stating that the information was speculative, thus no abuse of discretion was found.
  • Petitioner argued that the rejection was improper because it was based on her allegation that the information was publicly available. The Court ruled that the IRS’ determinations were not premised on such basis, emphasizing that the Internal Revenue Manual guidelines (which prohibit the IRS from rejecting claims on the basis that the information is publicly available) are only instructive but do not carry any legal force. See Van Bemmelen v. Commissioner, 155 T.C. at 85 n.15; Eichler v. Commissioner, 143 T.C. 30 , 39 (2014) (citing Fargo v. Comm’r, 447 F.3d 706 , 713 (9th Cir. 2006), aff’g T.C. Memo. 2004-13 ). Therefore, even if the IRS acted against the IRM, such action is not unlawful.
  • As to Petitioner’s argument that the claims should have been denied rather than rejected, the Court stated the distinction between such actions. A rejection is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower, whereas a denial is a determination that relates to or implicates taxpayer information, including cases in which the IRS does not proceed or collect proceeds on the basis of the whistleblower’s information. Treas. Reg. 301.7623-3(c)(7). The distinction is helpful in those cases where the IRS makes an ambiguous determination, and the Court usually looks at the administrative record to make the appropriate determination. See Rogers v. Commissioner, 157 T.C. at ___, [2021 BL 289660], 2021 U.S. Tax Ct. LEXIS 55 (slip op. at 28 ); Worthington v. Commissioner, at *24. Here, however, there was no ambiguity, because the IRS clearly stated that the claims lacked the requirements of providing credible information, among others. Thus, this argument was rejected by the Court.
  • Finally, Petitioner argued that the award was mandatory because the claim alleged that the amount of tax in dispute exceeded $2M USD. Sec. 7623(b)(5)(B). However, the Court has ruled that the whistleblower’s description of the amount owed by the target taxpayer is not determinative. See Van Bemmelen v. Commissioner, 155 T.C. at 85. If the claim is speculative, even if the alleged amount exceeds the $2M USD, it will still be considered not a mandatory award (ruled by Section 7623(a) not 7623(b)). Here, the IRS stated that the allegations were speculative and thus, even if the claim argued that it exceeded the amount threshold to be analyzed under 7623(b), such error is harmless. Thus, no abuse of discretion exists.

Insight:  This case outlines the basic scheme for whistleblower claims. More importantly, it clearly shows that such claims must provide credible or not speculative information to not be rejected on its face. Failure to meet such requirements will almost result in the claims to be rejected, and in ambiguous cases, to a denial.

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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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