SCOTUS Reports

Tag: 2014

  • Steven Yari v. Commissioner of Internal Revenue, 143 T.C. No. 7 (2014): Calculation of Penalties Under I.R.C. § 6707A

    Steven Yari v. Commissioner of Internal Revenue, 143 T. C. No. 7 (2014)

    In Steven Yari v. Commissioner, the U. S. Tax Court ruled on the calculation of penalties under I. R. C. § 6707A for failure to disclose participation in a listed transaction. The court held that the penalty should be based on the tax reported on the original return, not subsequent amended returns. This decision clarifies the method of penalty calculation under the amended statute, impacting how taxpayers and the IRS assess penalties for undisclosed transactions.

    Parties

    Steven Yari (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner was the appellant at the Tax Court level following a collection due process (CDP) hearing.

    Facts

    Steven Yari formed Topaz Global Holdings, LLC, and Faryar, Inc. , an S corporation, which engaged in a management fee transaction. Yari’s Roth IRA acquired Faryar’s stock, resulting in unreported income. The IRS identified this as an abusive Roth IRA transaction and a listed transaction under Notice 2004-8. Yari and his wife filed a joint 2004 tax return without disclosing the transaction, leading to an audit and subsequent notices of deficiency. They settled the deficiency cases and filed amended returns reflecting changes. The IRS assessed a $100,000 penalty under I. R. C. § 6707A for Yari’s failure to disclose the listed transaction. After Congress amended § 6707A, Yari argued the penalty should be recalculated using the amended returns, reducing it to the statutory minimum of $5,000.

    Procedural History

    The IRS assessed the § 6707A penalty on September 11, 2008, and issued a notice of intent to levy on February 9, 2009. Yari requested a CDP hearing, which was suspended in October 2010 due to legislative changes. After the IRS Appeals Office upheld the penalty calculation, Yari petitioned the Tax Court for review. The court had jurisdiction under I. R. C. § 6330(d)(1) to review the penalty, and the standard of review was de novo as the underlying tax liability was at issue.

    Issue(s)

    Whether the penalty under I. R. C. § 6707A for failing to disclose a listed transaction should be calculated based on the tax shown on the original return or on subsequent amended returns?

    Rule(s) of Law

    I. R. C. § 6707A imposes a penalty on any person who fails to include on any return or statement information required under § 6011 regarding a reportable transaction. The penalty for failing to disclose a listed transaction is “75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes). ” I. R. C. § 6707A(b)(1). The statute prescribes minimum and maximum penalties of $5,000 and $100,000 for individuals, respectively.

    Holding

    The Tax Court held that the penalty under I. R. C. § 6707A must be calculated based on the tax shown on the original return, not subsequent amended returns. The court interpreted the statute to mean that the penalty is linked to the tax shown on the return giving rise to the disclosure obligation.

    Reasoning

    The court’s reasoning was based on the plain and unambiguous language of I. R. C. § 6707A, which refers to “the decrease in tax shown on the return. ” The court rejected Yari’s argument that the penalty should be based on the tax savings produced by the transaction as reflected in amended returns. The court found no legislative intent to the contrary and noted that Congress knew how to link penalties to the tax required to be shown but chose not to do so in § 6707A. The court also considered § 6707A a strict liability penalty, and while the result might be harsh in cases of overstated tax, it adhered to the statutory language. The legislative history and related statutes, such as § 6651(a)(2) and (c)(2), further supported the court’s interpretation. The court concluded that the settlement officer did not err in calculating the penalty based on the original return.

    Disposition

    The Tax Court entered a decision for the respondent, upholding the penalty calculation based on the tax shown on the original return.

    Significance/Impact

    The decision in Steven Yari v. Commissioner clarifies the method of calculating penalties under I. R. C. § 6707A for failing to disclose listed transactions. It establishes that the penalty must be based on the tax reported on the original return, which has significant implications for taxpayers and the IRS in assessing and challenging such penalties. This ruling may influence future cases involving similar penalties and underscores the importance of accurate and timely disclosure of reportable transactions. The decision also highlights the strict liability nature of § 6707A penalties, emphasizing the need for taxpayers to comply with disclosure requirements to avoid potential harsh penalties.

  • Barkett v. Commissioner, 143 T.C. 6 (2014): Statute of Limitations in Tax Law

    Barkett v. Commissioner, 143 T. C. 6 (U. S. Tax Court 2014)

    In Barkett v. Commissioner, the U. S. Tax Court upheld the six-year statute of limitations for tax assessments when taxpayers omit more than 25% of their gross income. The court ruled that for investment sales, only the gain, not the total proceeds, counts as gross income for this purpose, aligning with prior decisions and rejecting the taxpayers’ argument to include total proceeds. This decision reaffirms the legal standard for determining gross income in tax deficiency cases, impacting how taxpayers report investment sales.

    Parties

    G. Douglas Barkett and Rita M. Barkett, petitioners, challenged the Commissioner of Internal Revenue, respondent, over a notice of deficiency concerning their federal income tax for the taxable years 2006 to 2009.

    Facts

    The Barketts filed their 2006 and 2007 tax returns on September 17, 2007, and October 2, 2008, respectively. They reported gains from the sale of investments amounting to approximately $123,000 in 2006 and $314,000 in 2007, but the total amounts realized from these sales were more than $7 million and $4 million, respectively. The Commissioner sent a notice of deficiency on September 26, 2012, alleging the Barketts omitted gross income of $629,850 in 2006 and $431,957 in 2007, unrelated to the investment sales. The Barketts contested the notice’s validity, arguing it was sent beyond the three-year statute of limitations under I. R. C. sec. 6501(a). The Commissioner countered that the six-year limitations period under I. R. C. sec. 6501(e) applied due to the Barketts’ omission of more than 25% of their gross income.

    Procedural History

    The Barketts filed a petition with the U. S. Tax Court seeking partial summary judgment. The Tax Court considered the motion under Rule 121(a) of the Tax Court Rules of Practice and Procedure. The court reviewed prior decisions and the statutory framework to determine the applicable limitations period.

    Issue(s)

    Whether the six-year statute of limitations under I. R. C. sec. 6501(e) applies to the Barketts’ 2006 and 2007 tax returns when they omitted gross income exceeding 25% of the gross income stated in their returns, calculated as gains from the sale of investment property rather than the total amounts realized?

    Rule(s) of Law

    Under I. R. C. sec. 6501(a), the IRS must assess tax or send a notice of deficiency within three years after a return is filed. However, I. R. C. sec. 6501(e)(1) extends this period to six years if the taxpayer omits from gross income an amount properly includible therein that exceeds 25% of the gross income stated in the return. I. R. C. sec. 61(a) defines gross income as “all income from whatever source derived,” including “[g]ains derived from dealings in property. “

    Holding

    The Tax Court held that the six-year statute of limitations under I. R. C. sec. 6501(e) applies to the Barketts’ 2006 and 2007 tax returns because the omitted gross income exceeded 25% of the gross income stated in their returns, calculated as the gains from the sale of investment property rather than the total amounts realized.

    Reasoning

    The court reasoned that the Home Concrete & Supply, LLC decision, which invalidated a portion of a regulation concerning omitted gross income, did not affect the calculation of gross income as gains from investment sales. The court cited prior cases, such as Insulglass Corp. v. Commissioner and Schneider v. Commissioner, which established that gross income for the purpose of I. R. C. sec. 6501(e) includes gains, not the total proceeds, from the sale of investment property. The court also noted that the Home Concrete decision’s dictum supported this interpretation, as it explained gross income as the difference between the amount realized and the cost of the property sold. The court rejected the Barketts’ argument that the total proceeds from investment sales should be considered gross income, emphasizing that the exception in I. R. C. sec. 6501(e)(1)(B)(i) for trade or business income did not apply to their investment sales. The court’s analysis focused on statutory interpretation, prior case law, and the specific facts of the Barketts’ case, ultimately upholding the six-year statute of limitations.

    Disposition

    The Tax Court denied the Barketts’ motion for partial summary judgment, affirming that the six-year statute of limitations applied to their 2006 and 2007 tax years, making the Commissioner’s notice of deficiency timely.

    Significance/Impact

    Barkett v. Commissioner reinforces the interpretation of “gross income” under I. R. C. sec. 6501(e) for investment sales, impacting how taxpayers report such income and the IRS assesses deficiencies. The decision clarifies that only gains, not total proceeds, are considered for determining the applicability of the six-year statute of limitations, aligning with prior case law and statutory definitions. This ruling provides guidance for taxpayers and practitioners in calculating gross income for statute of limitations purposes, potentially affecting future tax litigation and compliance strategies.

  • Shankar v. Comm’r, 143 T.C. 140 (2014): IRA Contribution Deductions and Gross Income Inclusion for Non-Cash Awards

    Shankar v. Commissioner, 143 T. C. 140 (U. S. Tax Court 2014)

    In Shankar v. Comm’r, the U. S. Tax Court ruled that the Shankars could not deduct their $11,000 IRA contributions due to exceeding the income limits set by the tax code for active participants in employer-sponsored retirement plans. The court also found that an airline ticket, obtained through redeemed bank reward points, must be included in their gross income. This decision clarifies the tax treatment of IRA deductions and non-cash awards, emphasizing the importance of adhering to statutory income thresholds and the broad interpretation of gross income.

    Parties

    Parimal H. Shankar and Malti S. Trivedi, the petitioners, filed a case against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court. They were represented by themselves (pro se) during the proceedings.

    Facts

    Parimal H. Shankar and Malti S. Trivedi, a married couple residing in New Jersey, filed a joint Federal income tax return for the year 2009. Mr. Shankar was a self-employed consultant, and Ms. Trivedi was employed by University Group Medical Associates, PC, which contributed to her section 403(b) retirement plan. The couple reported an adjusted gross income (AGI) of $243,729 and claimed an $11,000 deduction for contributions to their individual retirement arrangements (IRAs). They also reported alternative minimum taxable income (AMT) of $235,487 and an AMT liability of $2,775. Mr. Shankar had a banking relationship with Citibank, which reported that he redeemed 50,000 “Thank You Points” to purchase an airline ticket valued at $668. This amount was not reported on their tax return as income.

    Procedural History

    The Commissioner of Internal Revenue disallowed the Shankars’ IRA contribution deduction and included the value of the airline ticket in their gross income, resulting in a proposed deficiency of $563 for 2009. The Commissioner later amended the deficiency claim to $6,883 after recalculating the AMT. The Shankars filed a petition with the U. S. Tax Court challenging these adjustments. At trial, the Commissioner presented evidence from Citibank to support the inclusion of the airline ticket’s value in the Shankars’ income. The Shankars argued against the disallowance of their IRA deduction and the inclusion of the airline ticket’s value in their income, also raising constitutional concerns regarding the tax code provisions.

    Issue(s)

    1. Whether the Shankars were entitled to a deduction for their IRA contributions given Ms. Trivedi’s participation in a section 403(b) plan and their combined modified adjusted gross income (modified AGI) exceeding the statutory threshold for deductibility.
    2. Whether the value of the airline ticket received by Mr. Shankar through the redemption of “Thank You Points” should be included in the Shankars’ gross income.
    3. Whether the Shankars were liable for the alternative minimum tax (AMT) as recomputed by the Commissioner.

    Rule(s) of Law

    1. Under section 219(g) of the Internal Revenue Code, a taxpayer’s deduction for IRA contributions is limited or disallowed if the taxpayer or the taxpayer’s spouse is an “active participant” in a qualified retirement plan and their combined modified AGI exceeds certain thresholds.
    2. Section 61(a) of the Internal Revenue Code defines “gross income” to include “all income from whatever source derived,” interpreted broadly to include “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. “
    3. The alternative minimum tax (AMT) is calculated under the Internal Revenue Code, and any computational errors by the Commissioner can be corrected in subsequent proceedings.

    Holding

    1. The court held that the Shankars were not entitled to a deduction for their IRA contributions because Ms. Trivedi was an “active participant” in a section 403(b) retirement plan and their combined modified AGI of $255,397 exceeded the statutory threshold for deductibility.
    2. The court held that the value of the airline ticket, received by Mr. Shankar through the redemption of “Thank You Points,” was properly included in the Shankars’ gross income as an “accession to wealth. “
    3. The court held that the Shankars were liable for the AMT as recomputed by the Commissioner, with any disputes regarding the calculation to be addressed in Rule 155 computations.

    Reasoning

    The court’s reasoning for disallowing the IRA contribution deduction was based on the clear statutory language of section 219(g), which sets income thresholds for deductibility when a taxpayer or spouse is an active participant in a qualified retirement plan. The Shankars’ argument that this provision was unconstitutional was rejected, as the court found that the statutory classification was reasonable and rationally related to the legislative purpose of encouraging retirement savings for those without access to employer-sponsored plans. The court also applied the broad definition of gross income under section 61(a) and found that the airline ticket constituted an “accession to wealth” for Mr. Shankar, despite his denial of receiving the points. The court gave more weight to Citibank’s records than to Mr. Shankar’s testimony. Regarding the AMT, the court found that the Commissioner’s computational error justified the recomputation, and the Shankars provided no evidence to controvert this adjustment.

    Disposition

    The court sustained the Commissioner’s adjustments and entered a decision under Rule 155, directing the parties to submit computations for the correct amount of the deficiency, including the recomputed AMT.

    Significance/Impact

    This case reinforces the strict application of statutory income thresholds for IRA contribution deductions and the broad interpretation of gross income to include non-cash awards. It highlights the importance of accurately reporting all income, including the value of rewards redeemed, and the potential for the IRS to challenge unreported income based on third-party information. The decision also underscores the court’s deference to legislative classifications in tax law and the limited scope for constitutional challenges to such provisions. Subsequent cases have cited Shankar for its treatment of IRA deductions and the taxability of non-cash awards, impacting legal practice in these areas.

  • Shankar v. Commissioner, 143 T.C. 5 (2014): Deductibility of IRA Contributions and Inclusion of Award Points in Gross Income

    Shankar v. Commissioner, 143 T. C. 5 (2014)

    In Shankar v. Commissioner, the U. S. Tax Court ruled that a married couple could not deduct their IRA contributions due to the wife’s active participation in an employer-sponsored retirement plan and their high modified adjusted gross income (AGI). The court also held that the value of an airline ticket, obtained by redeeming bank award points, must be included in the husband’s gross income. The decision clarifies the limits on IRA deductions and the tax treatment of non-cash awards, reinforcing existing tax law principles.

    Parties

    Parimal H. Shankar and Malti S. Trivedi, petitioners, were the taxpayers who filed a joint federal income tax return. The Commissioner of Internal Revenue was the respondent, representing the government in this tax dispute.

    Facts

    Parimal H. Shankar and Malti S. Trivedi, married and filing jointly, resided in New Jersey. In 2009, Shankar was a self-employed consultant, while Trivedi was employed by University Group Medical Associates, PC, which made contributions to her section 403(b) annuity plan. The couple reported an adjusted gross income (AGI) of $243,729 and claimed a deduction of $11,000 for IRA contributions. Additionally, Shankar received an airline ticket by redeeming 50,000 “thank you” points from Citibank, which was reported as $668 in other income on a Form 1099-MISC but not included in their tax return.

    Procedural History

    The Commissioner disallowed the IRA deduction and included the value of the airline ticket in the couple’s gross income, resulting in a deficiency determination of $563. The Commissioner later amended the claim to a deficiency of $6,883 due to a recomputation of the alternative minimum tax (AMT). The case was brought before the U. S. Tax Court, where Shankar and Trivedi represented themselves.

    Issue(s)

    Whether the petitioners were entitled to a deduction for their IRA contributions under section 219 of the Internal Revenue Code, given Trivedi’s active participation in an employer-sponsored retirement plan and their combined modified adjusted gross income?

    Whether the value of the airline ticket received by Shankar through the redemption of “thank you” points should be included in the petitioners’ gross income?

    Rule(s) of Law

    Under section 219 of the Internal Revenue Code, a taxpayer may deduct contributions to an IRA, subject to limitations if the taxpayer or the taxpayer’s spouse is an active participant in a qualified retirement plan. For joint filers, the deduction is phased out when their modified AGI exceeds certain thresholds. Section 61(a) defines gross income to include all income from whatever source derived, interpreted broadly to include non-cash awards.

    Holding

    The Tax Court held that the petitioners were not entitled to a deduction for their IRA contributions because Trivedi was an active participant in a section 403(b) plan and their combined modified AGI exceeded the statutory threshold for such deductions. The court also held that the value of the airline ticket received by Shankar must be included in their gross income as it constituted an accession to wealth.

    Reasoning

    The court applied the statutory framework of section 219, which clearly limits IRA deductions for active participants and their spouses based on modified AGI. The petitioners’ modified AGI of $255,397 exceeded the phaseout ceiling, thus disallowing any IRA deduction. The court rejected the petitioners’ constitutional challenge to section 219, citing prior case law and the rational basis for the statute’s classification. Regarding the airline ticket, the court relied on section 61(a) and the broad interpretation of gross income, finding that Shankar’s receipt of the ticket through the redemption of points constituted a taxable event. The court gave more weight to Citibank’s records over Shankar’s testimony, affirming the inclusion of the ticket’s value in gross income. The court also noted that the AMT calculation needed to be redetermined due to a computational error by the Commissioner.

    Disposition

    The court sustained the Commissioner’s adjustments and directed that a decision be entered under Rule 155, allowing for the computation of the correct AMT.

    Significance/Impact

    Shankar v. Commissioner reinforces the limitations on IRA deductions under section 219, particularly for taxpayers with high incomes and active participation in employer-sponsored plans. It also clarifies the tax treatment of non-cash awards, emphasizing the broad definition of gross income. The decision upholds the constitutionality of section 219’s classifications and provides guidance on the burden of proof in disputes over income reported on information returns. The case has practical implications for taxpayers and tax professionals in planning and reporting income and deductions.

  • Bedrosian v. Commissioner, 143 T.C. 83 (2014): Application of TEFRA Procedures and Jurisdiction Over Partnership Items

    Bedrosian v. Commissioner, 143 T. C. 83 (U. S. Tax Court 2014)

    In Bedrosian v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction over partnership items from a notice of deficiency due to the IRS’s mishandling of TEFRA procedures. The court clarified that the IRS’s use of both TEFRA and deficiency procedures was invalid for partnership items because the IRS had initially determined the case was not subject to TEFRA, but later issued a TEFRA notice. This decision underscores the importance of adhering to the correct procedural framework when auditing partnerships, affecting how future cases involving similar procedural issues may be approached.

    Parties

    John C. Bedrosian and Judith D. Bedrosian (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Bedrosians were the taxpayers at the trial level and appellants at the appellate level, while the Commissioner was the respondent at both stages.

    Facts

    John C. Bedrosian and Judith D. Bedrosian invested in a Son-of-BOSS transaction through a partnership named Stone Canyon Partners. The partnership was subject to the Tax Equity and Fiscal Responsibility Act (TEFRA) procedures due to the presence of passthrough partners. The IRS initially audited the Bedrosians’ individual tax returns for 1999 and 2000, soliciting extensions of the statute of limitations and discussing potential settlements without following TEFRA procedures. Later, the IRS issued a notice of beginning of administrative proceeding (NBAP) and a final partnership administrative adjustment (FPAA) for Stone Canyon Partners, but also issued a notice of deficiency to the Bedrosians, which included the same adjustments as the FPAA plus additional adjustments. The Bedrosians filed a timely petition challenging the notice of deficiency but an untimely petition challenging the FPAA.

    Procedural History

    The IRS issued a notice of deficiency to the Bedrosians on April 19, 2005, and an FPAA to Stone Canyon Partners on April 8, 2005. The Bedrosians timely filed a petition in response to the notice of deficiency on July 5, 2005. The Tax Court dismissed the case for lack of jurisdiction over partnership items included in the notice of deficiency, retaining jurisdiction over nonpartnership items. The Bedrosians also filed an untimely petition in response to the FPAA, which the Tax Court dismissed for lack of jurisdiction due to the late filing. The Court of Appeals for the Ninth Circuit affirmed the Tax Court’s dismissals and held that the notice of deficiency was invalid as to partnership items. The case returned to the Tax Court, where the Bedrosians moved for summary judgment, arguing that the court had jurisdiction over all items in the notice of deficiency due to the IRS’s procedural errors.

    Issue(s)

    Whether the partnership items converted to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA?
    Whether the partnership items converted to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency constituted substantial compliance with procedures for opting out of a TEFRA proceeding?
    Whether the Secretary reasonably determined under section 6231(g)(2) that TEFRA did not apply to the partnership?
    Whether the Tax Court was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency?

    Rule(s) of Law

    Section 6223(e)(2) provides that partnership items automatically convert to nonpartnership items if the TEFRA proceeding has concluded at the time the IRS mails notice to the taxpayer. Section 6223(e)(3) allows a partner to elect to have partnership items converted to nonpartnership items if the TEFRA proceeding is ongoing at the time the IRS mails notice to the taxpayer. Section 6231(g)(2) provides that TEFRA procedures do not apply if the Secretary reasonably determines, on the basis of the partnership’s return, that TEFRA does not apply, even if that determination is erroneous.

    Holding

    The Tax Court held that the partnership items did not convert to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA. The court also held that the partnership items did not convert to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency was not substantial compliance with procedures for opting out of a TEFRA proceeding. Additionally, the court held that the Secretary did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership. Finally, the court held that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Reasoning

    The Tax Court reasoned that section 6223(e)(2) did not apply because the TEFRA proceeding was ongoing when the IRS mailed the FPAA. The court rejected the Bedrosians’ argument that the expiration of the statute of limitations should be considered a conclusion of the TEFRA proceeding. Regarding section 6223(e)(3), the court found that the Bedrosians did not make a timely election to opt out of the TEFRA proceeding and did not substantially comply with the election procedures. The court also found that the IRS did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership because the partnership’s return clearly indicated the presence of passthrough partners, making the partnership subject to TEFRA. The court concluded that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding, which precluded reconsideration of the jurisdiction issue.

    Disposition

    The Tax Court denied the Bedrosians’ motion for summary judgment and upheld its prior decision that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Significance/Impact

    The decision in Bedrosian v. Commissioner clarifies the application of TEFRA procedures and the consequences of the IRS’s failure to follow those procedures correctly. It underscores the importance of adhering to the proper procedural framework when auditing partnerships and the potential jurisdictional consequences of failing to do so. The case also highlights the limitations of the Tax Court’s jurisdiction over partnership items when TEFRA procedures are involved and the impact of appellate court decisions on subsequent proceedings in the same case. The decision may influence how the IRS approaches audits of partnerships and how taxpayers respond to notices issued under different procedural frameworks.

  • Bedrosian v. Commissioner, 143 T.C. No. 4 (2014): Application of TEFRA Procedures and Reasonableness Under Section 6231(g)(2)

    Bedrosian v. Commissioner, 143 T. C. No. 4 (2014)

    The U. S. Tax Court held that the TEFRA partnership audit procedures applied to the Bedrosians’ tax case despite IRS errors, affirming the IRS’s determination that the partnership was subject to TEFRA. The court rejected the taxpayers’ arguments under sections 6223(e) and 6231(g)(2), ruling that they did not convert partnership items to nonpartnership items and that the IRS’s determination to apply TEFRA was reasonable. This decision underscores the complexities of TEFRA and the strict adherence required to its procedures, significantly impacting how partnerships and their items are audited and litigated.

    Parties

    John C. Bedrosian and Judith D. Bedrosian (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Bedrosians were the petitioners at the trial and appeal levels. The Commissioner of Internal Revenue was the respondent throughout the litigation.

    Facts

    John and Judith Bedrosian engaged in a Son-of-BOSS transaction through Stone Canyon Partners, a partnership subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) procedures due to the presence of pass-through entities as partners. The Bedrosians claimed significant losses on their 1999 tax return stemming from this transaction. The IRS initiated an audit focusing on the Bedrosians’ individual income tax returns rather than a TEFRA partnership audit, leading to confusion over the applicable procedures.

    The IRS eventually issued a Notice of Final Partnership Administrative Adjustment (FPAA) for Stone Canyon Partners, which was not timely challenged by the Bedrosians. Subsequently, the IRS issued a Notice of Deficiency (NOD) to the Bedrosians, which included the same adjustments as the FPAA and additional ones. The Bedrosians timely petitioned the Tax Court regarding the NOD but failed to timely challenge the FPAA, resulting in the dismissal of their petition against the FPAA for being untimely.

    Procedural History

    The IRS issued an FPAA to Stone Canyon Partners, followed by an NOD to the Bedrosians. The Bedrosians filed an untimely petition against the FPAA, which was dismissed by the Tax Court and upheld by the Court of Appeals for the Ninth Circuit. They timely petitioned the Tax Court regarding the NOD, which led to the current case. The Tax Court previously dismissed adjustments related to 1999 as partnership items but retained jurisdiction over nonpartnership items for 2000. The Court of Appeals dismissed an appeal from the Tax Court’s partial dismissal due to lack of a final judgment. The Bedrosians then filed a motion for summary judgment in the Tax Court, seeking jurisdiction over all items in the NOD.

    Issue(s)

    Whether the partnership items in the NOD converted to nonpartnership items under section 6223(e)(2) or (e)(3)?

    Whether the IRS reasonably determined under section 6231(g)(2) that TEFRA did not apply to Stone Canyon Partners?

    Rule(s) of Law

    Under section 6223(e)(2), partnership items convert to nonpartnership items if the TEFRA proceeding has concluded when the IRS mails the notice. Under section 6223(e)(3), a partner may elect to have partnership items treated as nonpartnership items if the TEFRA proceeding is ongoing at the time of mailing, but such an election must be made within 45 days and filed with the IRS office that mailed the notice. Section 6231(g)(2) provides that TEFRA does not apply to a partnership if the IRS reasonably but erroneously determines, based on the partnership’s return, that TEFRA does not apply.

    Holding

    The Tax Court held that the partnership items did not convert to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the FPAA was mailed. The court also held that no valid election was made under section 6223(e)(3) as the petition filed by the Bedrosians did not constitute substantial compliance with the election requirements. Finally, the court found that the IRS did not make a reasonable determination under section 6231(g)(2) that TEFRA did not apply to Stone Canyon Partners, as the partnership’s return indicated the presence of pass-through partners, precluding the small partnership exception.

    Reasoning

    The court reasoned that for section 6223(e)(2) to apply, the TEFRA proceeding must have concluded, which was not the case when the FPAA was mailed. Under section 6223(e)(3), the Bedrosians did not make a timely election nor did their petition substantially comply with the election requirements due to lack of intent and procedural deficiencies. Regarding section 6231(g)(2), the court determined that the IRS’s decision to apply TEFRA was based on the partnership’s return, which clearly indicated the presence of pass-through partners, making the application of TEFRA reasonable and necessary. The court rejected the argument that the IRS initially treated the audit as non-TEFRA, emphasizing that the FPAA was the definitive determination of TEFRA applicability. The court also noted that the IRS’s conduct during the audit did not constitute a determination that TEFRA did not apply, and any such determination would have been unreasonable given the partnership’s return.

    Disposition

    The Tax Court denied the Bedrosians’ motion for summary judgment, affirming that it lacked jurisdiction over the partnership items in the NOD due to the ongoing TEFRA proceedings and the lack of a valid election or reasonable determination under the relevant sections of the Code.

    Significance/Impact

    This case highlights the complexity and strict procedural requirements of TEFRA, emphasizing the importance of timely and proper elections and the IRS’s reliance on partnership returns to determine the applicability of TEFRA. It underscores the challenges taxpayers face in navigating these procedures and the potential for significant tax implications based on procedural determinations. The decision reinforces the need for clear and consistent IRS actions in audits and the critical nature of timely responses by taxpayers to IRS notices to preserve their rights to judicial review.

  • RERI Holdings I, LLC v. Comm’r, 143 T.C. 41 (2014): Valuation of Charitable Contributions and Use of Actuarial Tables

    RERI Holdings I, LLC v. Comm’r, 143 T. C. 41 (2014)

    In RERI Holdings I, LLC v. Comm’r, the U. S. Tax Court rejected the IRS’s motion for partial summary judgment, affirming the use of actuarial tables for valuing a charitable contribution of a future interest in a limited liability company (LLC). The court clarified that the LLC’s future interest could be valued using the same tables applied to the underlying real property, despite IRS arguments that the tables were inapplicable. This ruling underscores the importance of adhering to established valuation methods for charitable contributions, impacting how taxpayers and the IRS approach such deductions.

    Parties

    RERI Holdings I, LLC (Petitioner), represented by Randall Gregory Dick and Rebekah E. Schechtman, and Harold Levine, Tax Matters Partner, versus Commissioner of Internal Revenue (Respondent), represented by Travis Vance III, Kristen I. Nygren, John M. Altman, and Leon St. Laurent. The case was heard at the trial level in the U. S. Tax Court and on appeal would lie to the Court of Appeals for the D. C. Circuit.

    Facts

    RERI Holdings I, LLC (RERI) was formed as a Delaware LLC on March 4, 2002, and dissolved on May 11, 2004. RERI contributed a future interest (Successor Member Interest or SMI) in RS Hawthorne Holdings, LLC (Holdings) to the University of Michigan (University) on August 27, 2003. Holdings indirectly owned the Hawthorne property through its wholly-owned subsidiary, RS Hawthorne, LLC (Hawthorne). The SMI was set to become possessory on January 1, 2021, following a term of years interest (TOYS interest) held by Red Sea Tech I, Inc. (Red Sea). RERI claimed a charitable contribution deduction of $33,019,000 for the SMI, which was appraised using actuarial tables under IRC section 7520 by Howard C. Gelbtuch. The IRS challenged the valuation, asserting that the actuarial tables were inapplicable and that RERI failed to substantiate the value with a qualified appraisal.

    Procedural History

    The IRS issued a notice of final partnership administrative adjustment to RERI, challenging the valuation of the charitable contribution and imposing an accuracy-related penalty. RERI filed a petition in the U. S. Tax Court on April 15, 2008, contesting the IRS’s determinations. The IRS moved for partial summary judgment, arguing that the actuarial tables under IRC section 7520 did not apply to the SMI and that RERI’s appraisal did not meet the standards for a qualified appraisal under the regulations. The Tax Court denied the IRS’s motion, finding genuine disputes as to material facts concerning the applicability of the actuarial tables and the qualification of the appraisal.

    Issue(s)

    Whether the actuarial tables under IRC section 7520 apply to value the future interest (SMI) that RERI contributed to the University?
    Whether RERI substantiated the value of its charitable contribution with a qualified appraisal as defined in 26 C. F. R. 1. 170A-13(c)(3)?

    Rule(s) of Law

    IRC section 170(a)(1) allows a deduction for charitable contributions if verified under regulations prescribed by the Secretary. 26 C. F. R. 1. 170A-1(c)(1) states that the amount of a contribution in property is its fair market value at the time of the contribution. IRC section 7520(a) and 26 C. F. R. 1. 7520-1(a)(1) provide that the value of any remainder interest shall be determined using tables prescribed by the Secretary and an interest rate based on the Federal midterm rate. 26 C. F. R. 1. 7520-3(b)(1)(ii) defines a restricted beneficial interest as one subject to a contingency, power, or other restriction, for which standard section 7520 tables may not apply. 26 C. F. R. 1. 170A-13(c)(3) defines a qualified appraisal as one that includes specific information about the donated property and its valuation.

    Holding

    The Tax Court held that the actuarial tables under IRC section 7520 could be used to value the SMI, applying the rationale from Pierre v. Commissioner that disregarded entities under the check-the-box regulations cannot be disregarded for valuation purposes. The court also held that there were unresolved factual issues regarding whether RERI’s appraisal was a qualified appraisal under the regulations, particularly concerning whether the appraisal accurately described the donated property and considered all relevant restrictions and encumbrances.

    Reasoning

    The court reasoned that the SMI was the property transferred to the University, not a hypothetical remainder interest in the Hawthorne property, based on the principle from Pierre v. Commissioner. However, the court allowed for the possibility that the value of the SMI could be equivalent to the value of a hypothetical remainder interest in the Hawthorne property if certain conditions were met, such as no restrictions burdening the SMI. The court found that genuine disputes of material fact existed regarding the impact of the two-year hold-sell requirement imposed on the University, the risk of foreclosure due to the balloon payment on the mortgage, and the applicability of the actuarial tables given these restrictions. The court also considered whether the significant disparity between the appraised value and the actual sale prices of the SMI violated the unrealistic and unreasonable fair market value standard. Regarding the qualified appraisal issue, the court determined that the appraisal’s failure to discuss certain restrictions or encumbrances did not automatically disqualify it as a qualified appraisal under the regulations, but rather depended on whether these omissions affected the donated asset’s value.

    Disposition

    The Tax Court denied the IRS’s motion for partial summary judgment, finding that genuine disputes of material fact precluded a ruling on the applicability of the actuarial tables and the qualification of the appraisal.

    Significance/Impact

    This case is significant for clarifying the application of IRC section 7520 actuarial tables in valuing charitable contributions of future interests in LLCs. It reinforces that such tables can be used for valuation purposes, provided that the donated interest is not subject to restrictions that would render the tables inapplicable. The decision also highlights the importance of ensuring that appraisals for charitable contributions meet the regulatory requirements for qualified appraisals, particularly in describing the donated property and considering all relevant factors affecting its value. The ruling may influence future cases involving the valuation of charitable contributions and the use of actuarial tables, as well as the IRS’s approach to challenging such valuations.

  • RERI Holdings I, LLC v. Commissioner, 143 T.C. No. 3 (2014): Applicability of Actuarial Tables and Qualified Appraisal Requirements for Charitable Contributions

    RERI Holdings I, LLC v. Commissioner, 143 T. C. No. 3 (2014)

    In a significant ruling on charitable contribution valuations, the U. S. Tax Court in RERI Holdings I, LLC v. Commissioner denied the Commissioner’s motion for partial summary judgment, rejecting claims that actuarial tables could not be used to value a successor member interest (SMI) donated to the University of Michigan, and that the appraisal provided was not qualified. The decision underscores the court’s reluctance to summarily rule on complex valuation disputes, particularly when involving novel legal interests like the SMI, and highlights the stringent requirements for qualified appraisals under tax law.

    Parties

    RERI Holdings I, LLC (Petitioner), represented by Harold Levine, Tax Matters Partner, contested the Commissioner of Internal Revenue’s (Respondent) determinations regarding the charitable contribution of a successor member interest in a limited liability company to the University of Michigan.

    Facts

    RERI Holdings I, LLC, a Delaware limited liability company, was formed on March 4, 2002, and dissolved on May 11, 2004. It reported a charitable contribution of $33,019,000 on its 2003 income tax return, related to the transfer of a 100% remainder estate in a membership interest in H. W. Hawthorne Holdings, LLC (Holdings), to the University of Michigan. Holdings indirectly owned the Hawthorne property through RS Hawthorne, LLC (Hawthorne), which was purchased with significant debt. The property was leased to AT&T under a triple net lease. RERI’s principal investor, Stephen M. Ross, pledged a $5 million gift to the University, contingent on the donation of the SMI, which became effective on August 27, 2003. The SMI, a future interest in Holdings, was appraised at $32,935,000 by Howard C. Gelbtuch, using actuarial tables under IRC section 7520. Subsequent sales of the SMI were significantly lower, ranging from $1,610,000 to $3,000,000.

    Procedural History

    The Commissioner moved for partial summary judgment, seeking rulings that the actuarial tables under IRC section 7520 were inapplicable to value the SMI and that RERI failed to substantiate the SMI’s value with a qualified appraisal. Prior motions by both parties were addressed by the court, with the court denying the Commissioner’s motion regarding the reduction of the property’s value by the entire indebtedness due to genuine disputes over material facts.

    Issue(s)

    • Whether the actuarial tables under IRC section 7520 apply to value the successor member interest donated by RERI to the University of Michigan?
    • Whether the appraisal provided by RERI constitutes a qualified appraisal under the regulations governing charitable contribution deductions?

    Rule(s) of Law

    • IRC section 7520 and its regulations provide for the valuation of remainder interests using prescribed tables based on interest rates and, where applicable, mortality components.
    • IRC section 170(a)(1) and related regulations require substantiation of charitable contributions, including a qualified appraisal for contributions over $5,000, as defined in section 1. 170A-13(c)(3), Income Tax Regs.

    Holding

    The court held that the actuarial tables under IRC section 7520 could potentially apply to value the SMI, rejecting the Commissioner’s motion for summary judgment on this issue due to unresolved factual disputes. The court also held that the appraisal provided by RERI could potentially constitute a qualified appraisal, again denying the Commissioner’s motion due to unresolved factual disputes regarding the appraisal’s compliance with the requirements for a qualified appraisal.

    Reasoning

    The court’s reasoning focused on several key points:

    • The applicability of the section 7520 tables to the SMI turned on unresolved issues of fact regarding the preservation and protection of the underlying property and whether the SMI constituted a restricted beneficial interest due to a two-year hold-sell requirement.
    • The court applied the rationale from Pierre v. Commissioner, which held that a disregarded entity’s value could not be determined solely by its underlying assets for tax purposes, but found unresolved factual issues as to whether the appraised remainder interest in the Hawthorne property could serve as a proxy for the SMI.
    • On the qualified appraisal issue, the court found that the appraisal’s failure to consider certain restrictions and encumbrances, such as the two-year hold-sell requirement, raised unresolved factual disputes about its compliance with the regulatory requirements.
    • The court emphasized that gross overvaluation or the appraisal of the “wrong” property did not automatically disqualify an appraisal, provided the appraisal could be shown to substantially comply with the regulations.

    Disposition

    The court denied the Commissioner’s motion for partial summary judgment, finding genuine disputes as to material facts that precluded summary adjudication on both the applicability of the section 7520 tables and the qualification of the appraisal provided by RERI.

    Significance/Impact

    The RERI Holdings I, LLC decision underscores the complexity of valuing novel legal interests like the SMI for charitable contribution purposes and the stringent requirements for qualified appraisals. It highlights the court’s reluctance to summarily resolve such disputes without a full factual record. The case’s significance lies in its clarification that even significant discrepancies in valuation or the appraisal of related but not identical property interests may not necessarily disqualify an appraisal if substantial compliance with the regulations can be demonstrated. This ruling has practical implications for taxpayers and practitioners in planning and substantiating charitable contributions of complex interests, emphasizing the need for detailed and accurate appraisals that address all relevant restrictions and encumbrances.

  • Eichler v. Commissioner, 143 T.C. 30 (2014): Validity of Notices of Intent to Levy and Installment Agreement Conditions

    Eichler v. Commissioner, 143 T. C. 30, 2014 U. S. Tax Ct. LEXIS 32, 143 T. C. No. 2 (T. C. 2014)

    In Eichler v. Commissioner, the U. S. Tax Court upheld the IRS’s issuance of notices of intent to levy during a pending installment agreement request, clarifying that such notices are not prohibited by law. The court remanded the case for further review on the IRS’s requirement of an $8,520 downpayment for the installment agreement, citing potential economic hardship and factual disputes. This ruling provides critical guidance on the IRS’s collection practices and the procedural rights of taxpayers.

    Parties

    Renald Eichler, the Petitioner, filed a case against the Commissioner of Internal Revenue, the Respondent, in the United States Tax Court.

    Facts

    Renald Eichler was assessed trust fund recovery penalties for the fourth quarter of 2008, the first and second quarters of 2009, amounting to $89,760, $82,725, and $16,889, respectively. On April 11, 2011, Eichler’s representative submitted a request for a partial pay installment agreement of $350 per month, accompanied by a completed Form 433-A and supporting financial documentation. The IRS received this request on April 28, 2011. Despite the IRS’s obligation to input the request into its system within 24 hours, it was not entered until June 6, 2011. On May 9, 2011, the IRS sent Eichler three Letters CP 90, notices of intent to levy, for the unpaid penalties. Eichler timely requested a collection due process (CDP) hearing, seeking withdrawal of the notices and approval of his installment agreement. During the CDP hearing, the IRS settlement officer proposed an installment agreement requiring an $8,520 downpayment, which Eichler rejected due to potential economic hardship. The IRS’s final determination sustained the proposed levy and rejected Eichler’s request to withdraw the notices of intent to levy.

    Procedural History

    Eichler sought review of the IRS’s determination in the U. S. Tax Court under section 6330(d). The case was presented on cross-motions for summary judgment. The Tax Court reviewed whether the IRS abused its discretion in refusing to rescind the notices of intent to levy and in requiring the $8,520 downpayment as a condition of the installment agreement.

    Issue(s)

    Whether section 6331(k)(2) precludes the IRS from issuing notices of intent to levy after a taxpayer submits an offer for an installment agreement?

    Whether the IRS abused its discretion in determining that Eichler should make an $8,520 downpayment as a condition of his installment agreement?

    Rule(s) of Law

    Section 6331(k)(2) states that “No levy may be made under subsection (a) on the property or rights to property of any person with respect to any unpaid tax. . . during the period that an offer by such person for an installment agreement under section 6159 for payment of such unpaid tax is pending with the Secretary. “

    Section 301. 6331-4(b)(1) of the regulations provides that while levy is prohibited, “The IRS may take actions other than levy to protect the interests of the Government. “

    Section 6159 authorizes the Secretary to enter into an installment agreement upon determining that it would facilitate full or partial collection of the tax liability.

    Holding

    The Tax Court held that section 6331(k)(2) did not preclude the IRS from issuing the notices of intent to levy after Eichler submitted his offer for an installment agreement. The court further held that the IRS’s determination not to rescind the notices of intent to levy was not an abuse of discretion. However, the court remanded the case for further proceedings regarding the appropriateness of the $8,520 downpayment as a condition of the installment agreement, due to the lack of clarity on the economic hardship issue.

    Reasoning

    The court reasoned that section 6331(k)(2) specifically prohibits the IRS from making a levy during the pendency of an installment agreement offer, but it does not bar the issuance of notices of intent to levy. The court cited the regulations under section 301. 6331-4(b)(1), which allow the IRS to take actions other than levy to protect its interests, indicating that a notice of intent to levy is preliminary to a collection action and not barred by the statute. The court also considered the Internal Revenue Manual (IRM) provisions, noting that while the IRM directs the Collection Division to rescind notices in certain circumstances, it does not require Appeals to do so, and thus, the IRS did not abuse its discretion by following the IRM provisions applicable to Appeals.

    Regarding the $8,520 downpayment, the court found that the record did not allow for meaningful review of the IRS’s determination. The court noted that Eichler’s representative had asserted potential economic hardship due to the couple’s age and limited financial resources. The court concluded that the IRS’s failure to expressly consider these issues warranted a remand for further clarification and consideration of any new collection alternatives Eichler might propose.

    Disposition

    The Tax Court denied the parties’ cross-motions for summary judgment and remanded the case to the IRS Appeals for further proceedings concerning the $8,520 downpayment condition of the installment agreement.

    Significance/Impact

    Eichler v. Commissioner provides important guidance on the IRS’s collection practices, particularly the issuance of notices of intent to levy during pending installment agreement requests. The decision clarifies that such notices are not prohibited by law, distinguishing them from actual levies. The remand on the issue of the downpayment condition emphasizes the importance of considering potential economic hardship in determining installment agreement terms. This case may influence future IRS practices in handling similar taxpayer requests and could impact how taxpayers negotiate installment agreements to avoid economic hardship.

  • Eichler v. Commissioner, 143 T.C. No. 2 (2014): IRS Levy Notices and Installment Agreements

    Eichler v. Commissioner, 143 T. C. No. 2 (U. S. Tax Court 2014)

    In Eichler v. Commissioner, the U. S. Tax Court ruled that the IRS was not prohibited from issuing notices of intent to levy while a taxpayer’s request for an installment agreement was pending. The court held that the IRS did not abuse its discretion in refusing to rescind these notices. However, the court remanded the case for further review of the IRS’s determination to require a significant downpayment as a condition of an installment agreement, citing insufficient evidence to assess potential economic hardship on the taxpayer.

    Parties

    Renald Eichler was the petitioner, represented by Mark Harrington Westlake. The respondent was the Commissioner of Internal Revenue, represented by John R. Bampfield.

    Facts

    Renald Eichler requested a partial payment installment agreement from the IRS to address assessed trust fund recovery penalties totaling $189,374 for the last quarter of 2008 and the first two quarters of 2009. Before the IRS processed Eichler’s request, it sent him three Letters CP 90, which were Final Notices of Intent to Levy and Notices of Your Right to a Hearing. Eichler timely requested a Collection Due Process (CDP) hearing, where he renewed his installment agreement request and argued that the Letters CP 90 should be withdrawn as invalid. During the CDP hearing, the IRS settlement officer proposed an installment agreement contingent on Eichler making an $8,520 downpayment, which Eichler rejected due to potential economic hardship.

    Procedural History

    The IRS assessed trust fund recovery penalties against Eichler in December 2010. In April 2011, Eichler requested an installment agreement, which the IRS received but did not process promptly. The IRS sent Letters CP 90 in May 2011. Eichler filed a timely request for a CDP hearing, which occurred in October 2011. The IRS settlement officer’s final determination sustained the proposed levy and rejected Eichler’s request to withdraw the Letters CP 90. Eichler sought review in the U. S. Tax Court, where both parties moved for summary judgment.

    Issue(s)

    Whether I. R. C. sec. 6331(k)(2) precludes the IRS from issuing a notice of intent to levy while a taxpayer’s offer for an installment agreement is pending?

    Whether the IRS abused its discretion by not rescinding the Letters CP 90 under relevant provisions of the Internal Revenue Manual?

    Whether the IRS’s determination requiring an $8,520 downpayment as a condition of an installment agreement was an abuse of discretion?

    Rule(s) of Law

    I. R. C. sec. 6331(k)(2) states that “No levy may be made under subsection (a) on the property or rights to property of any person with respect to any unpaid tax” during the pendency of an offer for an installment agreement under section 6159. Section 6330(d) allows for judicial review of the IRS’s determination in a CDP hearing. The Internal Revenue Manual (IRM) provides guidance on IRS procedures but does not confer rights on taxpayers.

    Holding

    The Tax Court held that I. R. C. sec. 6331(k)(2) does not prohibit the IRS from issuing notices of intent to levy while an installment agreement offer is pending. The court further held that the IRS’s determination not to rescind the Letters CP 90 was not an abuse of discretion. However, the court found that the record did not allow for meaningful review of the IRS’s determination regarding the appropriateness of the $8,520 downpayment, and thus remanded the case for further proceedings on this issue.

    Reasoning

    The court reasoned that the plain language of I. R. C. sec. 6331(k)(2) prohibits the IRS from making a levy, but not from issuing notices of intent to levy. The court cited regulations under section 301. 6331-4(b)(1) that allow the IRS to take actions other than levy to protect government interests, such as issuing notices of intent to levy. The court also addressed the IRM provisions, noting that while the Collection Division is directed to rescind notices under certain circumstances, Appeals is not required to do so when an installment agreement is pending. The court found no abuse of discretion in the IRS’s application of these provisions. Regarding the downpayment, the court noted the lack of evidence in the record about the IRS’s consideration of Eichler’s economic hardship claims, necessitating remand for further review.

    Disposition

    The Tax Court denied the parties’ cross-motions for summary judgment and remanded the case for further proceedings on the issue of the appropriateness of the $8,520 downpayment.

    Significance/Impact

    Eichler v. Commissioner clarifies that the IRS can issue notices of intent to levy while an installment agreement request is pending, which has implications for taxpayer rights and IRS collection practices. The case also underscores the importance of the IRS providing clear reasoning for its determinations, particularly when imposing conditions that could cause economic hardship. This ruling may influence future IRS practices in handling installment agreements and levies, emphasizing the need for thorough documentation and consideration of taxpayer circumstances.