SCOTUS Reports

Tag: 2017

  • Jacobs v. Comm’r, 148 T.C. 24 (2017): De Minimis Fringe Benefits in Tax Deductions

    Jacobs v. Commissioner, 148 T. C. 24 (2017)

    In Jacobs v. Commissioner, the U. S. Tax Court ruled that pregame meals provided by the Boston Bruins to team personnel at away city hotels qualified as de minimis fringe benefits, allowing full tax deductions. The decision hinges on the meals being essential for team preparation and performance, setting a precedent for how sports teams can deduct travel-related expenses without the 50% limitation typically applied to meal costs.

    Parties

    Jeremy M. Jacobs and Margaret J. Jacobs, as petitioners, filed against the Commissioner of Internal Revenue, as respondent, in the United States Tax Court.

    Facts

    Jeremy and Margaret Jacobs, through their ownership of Deeridge Farms Hockey Association, Manor House Hockey Association, and the Boston Professional Hockey Association, operate the Boston Bruins, a National Hockey League (NHL) team based in Boston, Massachusetts. The Bruins play half their games away from their home arena, necessitating travel to various cities in the U. S. and Canada. During these trips, the team contracts with hotels to provide pregame meals to players and staff, designed to meet specific nutritional guidelines to optimize performance. The meals are served in private hotel rooms and are mandatory for players. The Jacobs deducted the full cost of these meals in their tax returns for the years 2009 and 2010.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to the Jacobs, disallowing 50% of the claimed deductions for the pregame meals, asserting that the costs were subject to the 50% limitation under I. R. C. sec. 274(n)(1). The Jacobs contested this determination and filed a petition in the U. S. Tax Court. The court heard the case and issued its opinion on June 26, 2017.

    Issue(s)

    Whether the pregame meals provided by the Boston Bruins to their traveling hockey employees at away city hotels qualify as a de minimis fringe benefit under I. R. C. sec. 274(n)(2)(B), thereby exempting the cost of such meals from the 50% deduction limitation of I. R. C. sec. 274(n)(1)?

    Rule(s) of Law

    Under I. R. C. sec. 274(n)(1), the deduction for meal and entertainment expenses is limited to 50% of the cost. However, I. R. C. sec. 274(n)(2)(B) provides an exception for meals that qualify as de minimis fringe benefits under I. R. C. sec. 132(e). For meals to qualify as a de minimis fringe, they must be provided in a nondiscriminatory manner, at an employer-operated eating facility on or near the business premises, during or immediately before or after the workday, and the annual revenue derived from the facility must equal or exceed its direct operating costs.

    Holding

    The U. S. Tax Court held that the pregame meals provided by the Boston Bruins to their traveling hockey employees at away city hotels qualify as a de minimis fringe benefit under I. R. C. sec. 274(n)(2)(B). Consequently, the full cost of these meals is deductible without the 50% limitation imposed by I. R. C. sec. 274(n)(1).

    Reasoning

    The court’s reasoning focused on the specific criteria for de minimis fringe benefits under I. R. C. sec. 132(e). It found that the away city hotels constituted the Bruins’ business premises because significant business activities, essential to the team’s operation and performance, occurred there. The court acknowledged that the nature of the NHL requires teams to travel extensively, and the hotels were crucial for team preparation, including rest, nutrition, strategy sessions, and medical treatments. The meals were provided in a nondiscriminatory manner to all traveling employees, and the court deemed the contractual agreements with hotels as leases for the use of meal rooms, thus satisfying the requirement that the eating facility be operated by the employer. The meals were also provided for the convenience of the employer, meeting nutritional and performance needs, and were served during the workday. The court rejected the Commissioner’s arguments regarding the qualitative and quantitative significance of activities at the hotels, emphasizing the functional necessity of the hotels to the team’s operations.

    Disposition

    The Tax Court denied the Commissioner’s motion and entered a decision for the Jacobs, allowing them to deduct the full cost of the pregame meals without the 50% limitation.

    Significance/Impact

    This case sets a precedent for how professional sports teams can structure their travel and meal arrangements to qualify for full tax deductions under the de minimis fringe benefit exception. It highlights the importance of considering the specific nature of an employer’s business when determining what constitutes business premises. Subsequent cases have referenced Jacobs v. Commissioner to support similar deductions for travel-related expenses in other industries. The ruling also underscores the necessity of detailed contractual agreements and operational control to meet the criteria for de minimis fringe benefits, impacting how businesses approach tax planning for employee benefits.

  • McNeill v. Commissioner, 148 T.C. 23 (2017): Jurisdiction in Collection Due Process Cases Involving Partnership Penalties

    McNeill v. Commissioner, 148 T. C. 23 (U. S. Tax Ct. 2017)

    In McNeill v. Commissioner, the U. S. Tax Court ruled that it has jurisdiction to review a Collection Due Process (CDP) determination concerning penalties related to partnership items, despite these penalties being excluded from the court’s deficiency jurisdiction under TEFRA. This decision clarifies the Tax Court’s authority in CDP cases post-amendment by the Pension Protection Act of 2006, ensuring taxpayers can contest collection actions for such penalties in the Tax Court, which is significant for those involved in partnership tax disputes.

    Parties

    Corbin A. McNeill and Dorice S. McNeill, as Petitioners, v. Commissioner of Internal Revenue, as Respondent.

    Facts

    In 2003, Corbin A. McNeill, after retiring, invested in a distressed asset/debt (DAD) transaction by purchasing an 89. 1% interest in GUISAN, LLC, which held Brazilian consumer debt. GUISAN contributed this debt to LABAITE, LLC, another partnership. A subsequent sale of these receivables by LABAITE resulted in a claimed loss, which the McNeills reported on their 2003 joint federal income tax return. The IRS issued a notice of final partnership administrative adjustment (FPAA) to LABAITE’s partners, disallowing the loss and asserting an accuracy-related penalty under I. R. C. section 6662. The McNeills paid the tax liability and interest but not the penalty. After the IRS assessed the penalty and initiated collection procedures, the McNeills requested a CDP hearing, challenging the penalty’s assessment. The IRS Appeals officer issued a notice sustaining the collection action, asserting that the McNeills could not raise the issue of their underlying tax liability.

    Procedural History

    The McNeills, as GUISAN’s tax matters partner, filed a complaint in the U. S. District Court for the District of Connecticut for judicial review of the 2003 FPAA. They made an estimated deposit to satisfy jurisdictional requirements but not the section 6662 penalty. The case was voluntarily dismissed with prejudice by the McNeills, and the District Court deemed the FPAA correct without adjudicating partner-level defenses. Following the IRS’s assessment of the penalty and subsequent collection notices, the McNeills requested a CDP hearing, which resulted in a notice of determination sustaining the collection action. The McNeills timely filed a petition with the Tax Court, challenging the Tax Court’s jurisdiction over the case due to the penalty’s exclusion from deficiency procedures under I. R. C. section 6230(a)(2)(A)(i).

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under I. R. C. section 6330(d)(1), as amended by the Pension Protection Act of 2006, to review a CDP determination when the underlying tax liability consists solely of a penalty that relates to an adjustment to a partnership item excluded from deficiency procedures by I. R. C. section 6230(a)(2)(A)(i)?

    Rule(s) of Law

    I. R. C. section 6330(d)(1) provides the Tax Court with jurisdiction to review a notice of determination issued pursuant to a CDP hearing. This jurisdiction was expanded by the Pension Protection Act of 2006 to include all such notices, regardless of the underlying liability’s type. I. R. C. section 6221 mandates that the tax treatment of partnership items and related penalties be determined at the partnership level. I. R. C. section 6230(a)(2)(A)(i) excludes penalties relating to partnership item adjustments from deficiency procedures.

    Holding

    The U. S. Tax Court holds that it has jurisdiction to review the Commissioner’s determination in the CDP case concerning the asserted I. R. C. section 6662(a) penalty, despite the penalty being excluded from the Tax Court’s deficiency jurisdiction under I. R. C. sections 6221 and 6230.

    Reasoning

    The Tax Court’s jurisdiction in CDP cases is governed by I. R. C. section 6330(d)(1), which was amended in 2006 to grant the Tax Court exclusive jurisdiction over all CDP determinations. The amendment aimed to provide taxpayers with a single venue for contesting collection actions. The court noted that prior to the amendment, it lacked jurisdiction over penalties not subject to deficiency proceedings, such as those under I. R. C. section 6662 related to partnership items. However, the 2006 amendment intended to expand the court’s jurisdiction to include review of all collection determinations, regardless of the type of underlying liability. The court cited cases like Yari v. Commissioner, Mason v. Commissioner, and Callahan v. Commissioner, which upheld the Tax Court’s jurisdiction in similar situations. The court reasoned that the legislative intent behind the amendment was to ensure that taxpayers could contest collection actions for all types of liabilities in the Tax Court, thereby overriding the exclusion of certain penalties from deficiency jurisdiction in the context of CDP review.

    Disposition

    The U. S. Tax Court asserts jurisdiction over the case and will proceed to address the remaining issues in a separate opinion.

    Significance/Impact

    The McNeill decision is doctrinally significant as it clarifies the Tax Court’s jurisdiction in CDP cases involving penalties related to partnership items post-Pension Protection Act of 2006. This ruling ensures that taxpayers can challenge collection actions for such penalties in the Tax Court, which is crucial for those involved in partnership tax disputes. The decision aligns with the legislative intent to streamline the review process for collection actions and provides a clearer path for taxpayers to contest IRS determinations without the necessity of separate refund litigation for partner-level defenses. Subsequent courts have treated this ruling as authoritative in determining the scope of the Tax Court’s jurisdiction in similar cases, impacting legal practice by offering a more unified approach to resolving disputes over penalties related to partnership items.

  • Petersen v. Commissioner, 148 T.C. No. 22 (2017): Accrued Expense Deductions and Constructive Ownership under I.R.C. § 267

    Petersen v. Commissioner, 148 T. C. No. 22 (2017)

    In Petersen v. Commissioner, the U. S. Tax Court ruled that accrued payroll expenses of an S corporation must be deferred until paid to employees who are ESOP participants, deemed related under I. R. C. § 267. This decision clarifies that ESOP participants are considered beneficiaries of a trust, impacting how deductions for accrued expenses are claimed by S corporations.

    Parties

    Steven M. Petersen and Pauline Petersen, along with John E. Johnstun and Larue A. Johnstun, were the petitioners. The Commissioner of Internal Revenue was the respondent. The case was heard at the trial level in the United States Tax Court.

    Facts

    Petersen, Inc. , an S corporation, established an Employee Stock Ownership Plan (ESOP) in 2001, transferring cash and stock to the related ESOP trust. During the years 2009 and 2010, Petersen accrued but did not pay certain payroll expenses, including wages and vacation pay, to its employees, many of whom were ESOP participants. The ESOP trust owned 20. 4% of Petersen’s stock until October 1, 2010, when it acquired the remaining shares from the Petersens, becoming the sole shareholder. Petersen claimed deductions for these accrued expenses on its tax returns for 2009 and 2010, and the Petersens and Johnstuns, as shareholders, claimed flowthrough deductions on their individual returns.

    Procedural History

    The IRS audited Petersen’s tax returns for 2009 and 2010 and disallowed the deductions for accrued but unpaid payroll expenses attributed to ESOP participants, invoking I. R. C. § 267. Subsequently, the IRS adjusted the individual returns of the Petersens and Johnstuns, resulting in deficiencies for 2009 and overpayments for 2010. The taxpayers petitioned the U. S. Tax Court, which consolidated the cases. The parties submitted the cases for decision without trial under Rule 122 of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether, under I. R. C. § 267, an S corporation’s deductions for accrued but unpaid payroll expenses to ESOP participants must be deferred until the year the payments are includible in the participants’ gross income?

    Rule(s) of Law

    I. R. C. § 267(a)(2) defers deductions for expenses paid by a taxpayer to a related person until the payments are includible in the related person’s gross income. I. R. C. § 267(b) defines the relationships that trigger the application of this section. I. R. C. § 267(e) provides that an S corporation and any person who owns (directly or indirectly) any of its stock are treated as related persons for the purposes of § 267(b). I. R. C. § 267(c) attributes stock ownership to beneficiaries of a trust.

    Holding

    The Tax Court held that the ESOP trust constituted a “trust” under I. R. C. § 267(c), and thus the ESOP participants, as beneficiaries, were deemed to constructively own Petersen’s stock. Consequently, Petersen and the ESOP participants were “related persons” under I. R. C. § 267(b) as modified by § 267(e), requiring the deferral of deductions for accrued but unpaid payroll expenses until the year such payments were received by the ESOP participants and includible in their gross income.

    Reasoning

    The Court reasoned that the ESOP trust satisfied the statutory definition of a “trust” under I. R. C. § 267(c)(1), as it was established to hold and conserve property for the benefit of the ESOP participants. The trust was distinct from the plan, and its creation was consistent with the requirements for tax-exempt status under ERISA and the Internal Revenue Code. The Court rejected the taxpayers’ arguments that the ESOP trust did not qualify as a trust for the purposes of § 267(c), noting that Congress did not limit the term “trust” in this section as it had in other sections of the Code. The Court further reasoned that I. R. C. § 267(e) clearly deems S corporations and their shareholders to be related persons, regardless of the percentage of stock owned, and this relationship extended to the ESOP participants who constructively owned Petersen’s stock through the ESOP trust.

    Disposition

    The Tax Court entered decisions for the Commissioner regarding the deficiencies for 2009 and for the petitioners regarding the penalties.

    Significance/Impact

    This decision clarifies the application of I. R. C. § 267 to S corporations with ESOPs, establishing that ESOP participants are deemed related to the corporation for the purposes of this section. It impacts the timing of deductions for accrued expenses and may influence the tax planning strategies of S corporations with ESOPs. The ruling underscores the broad application of the constructive ownership rules in § 267(c) and the related person provisions in § 267(e), potentially affecting how deductions are claimed by similar entities.

  • Smith v. Comm’r, 148 T.C. 21 (2017): Interpretation of ‘Amounts in Dispute’ Under IRC § 7623(b)

    Smith v. Commissioner of Internal Revenue, 148 T. C. 21, 2017 U. S. Tax Ct. LEXIS 23 (2017)

    In Smith v. Comm’r, the U. S. Tax Court clarified that ‘amounts in dispute’ under IRC § 7623(b)(5)(B) include the total liability proposed during an IRS examination initiated by a whistleblower’s information, not just the portion directly attributable to that information. This ruling significantly impacts the eligibility for nondiscretionary whistleblower awards, as it expands the threshold to encompass the entire tax dispute, potentially encouraging more whistleblower claims in large tax cases.

    Parties

    Ian D. Smith was the petitioner in this case, while the Commissioner of Internal Revenue served as the respondent. Smith filed his whistleblower claim at the trial level, and both parties proceeded to the U. S. Tax Court after the Commissioner’s determination of the award amount.

    Facts

    Ian D. Smith filed a whistleblower claim with the IRS, alleging that a business was improperly handling barter transactions and employee compensation through gift certificates. This information led the IRS to initiate both employment and income tax examinations of the business. The employment tax examination resulted in the assessment and collection of $3,094,188. 12 in taxes and $618,837. 64 in penalties for the years 2006 through 2009. The income tax examination led to adjustments and collections totaling $14,543,098, with $1,593,024 directly attributed to disallowed barter-related expenses. The IRS attributed $1,771,911. 77 of the total collected proceeds to Smith’s whistleblower information and awarded him $198,005. 52 under IRC § 7623(a), which allows for discretionary awards. Smith contested this determination, arguing that the total ‘amounts in dispute’ exceeded the $2 million threshold required for a nondiscretionary award under IRC § 7623(b).

    Procedural History

    Smith filed a petition with the U. S. Tax Court under IRC § 7623(b)(4), challenging the IRS’s determination to apply the discretionary award provisions of IRC § 7623(a) instead of the nondiscretionary provisions of IRC § 7623(b). Both parties moved for summary judgment, with the court applying the standard of review for legal questions since the facts were undisputed. The court granted Smith’s motion for summary judgment in part, holding that the IRS should have used IRC § 7623(b) to compute the award.

    Issue(s)

    Whether the phrase ‘amounts in dispute’ in IRC § 7623(b)(5)(B) includes the total amount of liability proposed by the IRS during an examination initiated by a whistleblower’s information, or whether it is limited to the portion of ‘collected proceeds’ directly attributable to that information?

    Rule(s) of Law

    The controlling legal principle is found in IRC § 7623(b)(5)(B), which states that the nondiscretionary award regime applies if ‘the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000. ‘ The applicable regulation, 26 C. F. R. § 301. 7623-2(e)(2)(i), defines ‘amount in dispute’ as ‘the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s). ‘

    Holding

    The U. S. Tax Court held that ‘amounts in dispute’ under IRC § 7623(b)(5)(B) include the total amount of liability proposed by the IRS during an examination initiated by a whistleblower’s information, not just the portion directly attributable to that information. Therefore, the $2 million threshold was met in Smith’s case, and the IRS erred in applying the discretionary provisions of IRC § 7623(a) instead of the nondiscretionary provisions of IRC § 7623(b).

    Reasoning

    The court’s reasoning focused on the plain language of IRC § 7623(b)(5)(B) and the purpose of the statute. The court noted that the phrase ‘amounts in dispute’ is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower’s information. The court rejected the IRS’s argument that the term ‘action’ in IRC § 7623(b)(1) and (2) should be used to limit the ‘amounts in dispute’ under IRC § 7623(b)(5)(B), as the term ‘action’ is used differently in each subsection. The court also considered the legislative history and purpose of IRC § 7623(b), which was enacted to encourage whistleblowers to come forward in large tax cases. The court found that the IRS’s interpretation would lead to anomalous results, as it would exclude significant tax collections from the nondiscretionary award regime. The court’s interpretation aligns with the regulation at 26 C. F. R. § 301. 7623-2(e)(2)(i), which supports a broader definition of ‘amount in dispute. ‘

    Disposition

    The court granted Smith’s motion for summary judgment in part, holding that the IRS should have used IRC § 7623(b) to compute the whistleblower award. The court did not decide the specific award amount, as that issue was rendered moot by the holding that IRC § 7623(b) applies.

    Significance/Impact

    The Smith decision significantly expands the scope of ‘amounts in dispute’ under IRC § 7623(b)(5)(B), potentially increasing the number of cases eligible for nondiscretionary whistleblower awards. This ruling clarifies that the threshold is based on the total liability proposed during an IRS examination, rather than the portion directly attributable to the whistleblower’s information. The decision may encourage more whistleblower claims, particularly in large tax cases, as it increases the potential for higher awards under the nondiscretionary regime. The ruling also underscores the importance of the statutory language and purpose in interpreting the whistleblower provisions, and it may influence future cases involving the interpretation of IRC § 7623.

  • Myers v. Comm’r, 148 T.C. No. 20 (2017): Timeliness of Whistleblower Award Appeals

    Myers v. Commissioner, 148 T. C. No. 20 (2017)

    In Myers v. Commissioner, the U. S. Tax Court dismissed a whistleblower’s appeal for lack of jurisdiction due to untimely filing. David T. Myers, denied a whistleblower award by the IRS, failed to file his petition within 30 days of receiving actual notice of the denial. The court ruled that each IRS communication denying the claim constituted an appealable determination, and Myers’ delay in filing, despite receiving the notices, rendered his petition untimely. This case underscores the strict 30-day filing requirement for whistleblower award appeals under I. R. C. sec. 7623(b)(4).

    Parties

    David T. Myers, the petitioner, filed pro se in the U. S. Tax Court against the Commissioner of Internal Revenue, the respondent. The case was designated as Docket No. 2181-15W.

    Facts

    David T. Myers filed a Form 211 with the IRS Whistleblower Office on August 17, 2009, alleging tax violations by his former employer due to misclassification of employees as independent contractors. After frequent communication with the Whistleblower Office, his claim was denied by a letter dated March 13, 2013, stating that no additional tax proceeds resulted from his information, making him ineligible for an award. Despite ongoing correspondence throughout 2013 and 2014, subsequent letters from the Whistleblower Office reiterated the denial. Myers continued to submit additional material but did not appeal until January 26, 2015, after receiving the final denial letter on March 6, 2014.

    Procedural History

    Myers filed his petition with the U. S. Tax Court on January 26, 2015, following the Whistleblower Office’s final denial letter dated March 6, 2014. The Commissioner moved to dismiss the case for lack of jurisdiction, asserting that Myers failed to file his petition within the 30-day period mandated by I. R. C. sec. 7623(b)(4). The court heard the motion and, after consideration of the parties’ filings and testimony, took the matter under advisement.

    Issue(s)

    Whether each letter from the IRS Whistleblower Office constitutes an appealable determination under I. R. C. sec. 7623(b)(4)?

    Whether the receipt of actual notice of the IRS’s determinations by Myers, without prejudicial delay, starts the 30-day period for filing a petition under I. R. C. sec. 7623(b)(4)?

    Rule(s) of Law

    I. R. C. sec. 7623(b)(4) provides that an appeal to the Tax Court from a whistleblower award determination must be filed within 30 days of such determination. The court has jurisdiction over such appeals provided the IRS makes a determination under I. R. C. sec. 7623(b)(1), (2), or (3), and the appeal is timely filed. A determination is broadly defined and does not require formalities; a written notice that the IRS has considered the information and decided on the eligibility for an award is generally sufficient.

    Holding

    The court held that each of the five letters from the IRS Whistleblower Office to Myers constituted an appealable determination under I. R. C. sec. 7623(b)(4). Furthermore, the court found that Myers received actual notice of these determinations without prejudicial delay and had ample opportunity to file a timely petition. Since Myers failed to file his petition within 30 days of receiving any of the determinations, the court lacked jurisdiction and dismissed the case.

    Reasoning

    The court reasoned that the Whistleblower Office’s letters to Myers met the broad standard for a determination as established in previous case law. The court noted that despite the lack of formal requirements, a determination is appealable if it informs the claimant of the IRS’s decision on their claim’s eligibility for an award. The court applied principles from deficiency jurisprudence, which state that the 30-day period for filing an appeal starts upon receipt of actual notice. The court found direct evidence of Myers’ receipt of the letters and his subsequent actions, such as sending a facsimile and continuing to correspond with the IRS, indicating timely receipt. The court rejected Myers’ argument for equitable relief based on the Whistleblower Office’s failure to use certified mail, as the Internal Revenue Manual’s provisions are discretionary and do not create enforceable rights. The court also considered the lack of prejudice due to the IRS’s non-compliance with the manual’s mailing directive, as Myers had received and acknowledged the letters without delay.

    Disposition

    The U. S. Tax Court dismissed the case for lack of jurisdiction due to Myers’ failure to file his petition within the 30-day period following receipt of the IRS’s determinations.

    Significance/Impact

    The Myers decision reinforces the strict application of the 30-day filing rule under I. R. C. sec. 7623(b)(4) and clarifies that each communication from the IRS regarding a whistleblower claim can be considered an appealable determination. It emphasizes the importance of timely filing upon receipt of actual notice and highlights the discretionary nature of the Internal Revenue Manual’s provisions. This ruling may impact how whistleblowers approach their appeals, stressing the need for prompt action upon receiving any form of denial from the IRS. Subsequent cases have cited Myers to support the principle that the 30-day period commences upon actual notice, even without formal notification methods.

  • Whistleblower 4496-15W v. Commissioner, 148 T.C. 19 (2017): Validity of Waiver of Judicial Review in Tax Whistleblower Awards

    Whistleblower 4496-15W v. Commissioner, 148 T. C. 19 (U. S. Tax Ct. 2017)

    In Whistleblower 4496-15W v. Commissioner, the U. S. Tax Court upheld the validity of a whistleblower’s waiver of judicial review rights in exchange for prompt payment of an award reduced by a sequester. The court determined that the issuance of the award check constituted the IRS’s final determination, and the whistleblower’s petition was timely filed. However, the court found the waiver binding, denying the whistleblower’s challenge to the sequester reduction. This ruling reinforces the enforceability of waivers in administrative settlements and clarifies the timing of IRS determinations in whistleblower cases.

    Parties

    Whistleblower 4496-15W (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner was represented by Thomas C. Pliske and Shine Lin. Respondent was represented by John T. Arthur, Patricia P. Davis, and Richard L. Hatfield.

    Facts

    In December 2008, Petitioner filed Form 211 with the IRS Whistleblower Office (Office), seeking an award for information provided regarding certain taxpayers. The IRS collected proceeds from these taxpayers, and on December 1, 2014, the Office sent Petitioner a preliminary award letter recommending an award of $2,954,933, which was reduced by 7. 3% due to the Budget Control Act of 2011’s sequester. Petitioner accepted this award on December 15, 2014, waiving all administrative and judicial appeal rights, including the right to petition the U. S. Tax Court. Subsequently, on January 15, 2015, the Office issued a check to Petitioner in the amount of $2,135,826, representing the award less federal income tax withholding. After cashing the check, Petitioner filed a petition on February 11, 2015, challenging the sequester reduction.

    Procedural History

    Following the IRS’s issuance of the award check on January 15, 2015, Petitioner filed a petition with the U. S. Tax Court on February 11, 2015, contesting the 7. 3% sequester reduction. The Commissioner moved to dismiss for lack of jurisdiction, arguing that the petition was untimely. The Tax Court held that the issuance of the check constituted the IRS’s final determination, thus the petition was timely filed within 30 days of the check’s mailing. However, the court treated the Commissioner’s motion to dismiss as a motion for summary judgment and granted it, holding that Petitioner’s waiver of judicial appeal rights was valid and binding.

    Issue(s)

    Whether the issuance of the award check by the IRS Whistleblower Office constituted its final determination, thereby triggering the 30-day period for filing a petition in the U. S. Tax Court?

    Whether Petitioner’s waiver of judicial appeal rights in exchange for prompt payment of the award was valid and binding?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b)(4), any determination regarding an award may be appealed to the Tax Court within 30 days of such determination. The court has jurisdiction over such matters. The regulations at 26 C. F. R. sec. 301. 7623-3 provide that if a whistleblower agrees to an award and waives the right to appeal, the IRS will not send a determination letter and will make payment as promptly as possible.

    Settlement agreements in tax disputes, outside the scope of I. R. C. sec. 7121 or 7122, are governed by general principles of contract law and are enforceable if there is a clear waiver of judicial review rights.

    Holding

    The Tax Court held that the IRS’s issuance of the award check constituted its final determination under I. R. C. sec. 7623(b)(4), and thus Petitioner’s petition was timely filed within 30 days of the check’s mailing. The court further held that Petitioner’s explicit waiver of judicial appeal rights in exchange for prompt payment of the award was valid and binding, precluding him from challenging the sequester reduction.

    Reasoning

    The court reasoned that the preliminary award letter explicitly stated it was not a final determination, and the award remained uncertain until the check was issued. The IRS’s regulations under 26 C. F. R. sec. 301. 7623-3 support this conclusion, providing that no determination letter is sent when a whistleblower agrees to an award and waives appeal rights. The court emphasized that the IRS’s issuance of the check was the final notice of determination, triggering the 30-day filing period.

    Regarding the validity of the waiver, the court applied general contract principles, noting that settlements are generally upheld absent fraud or mutual mistake. Petitioner’s waiver was clear and unambiguous, explicitly waiving judicial appeal rights in exchange for immediate payment. The court rejected Petitioner’s arguments that the agreement was ambiguous or that the IRS breached the contract by withholding taxes, finding no basis to invalidate the waiver.

    The court also addressed policy considerations, noting that allowing Petitioner to challenge the award after waiving appeal rights would undermine the finality of settlements and the regulatory framework designed to encourage prompt resolution of whistleblower claims.

    Disposition

    The Tax Court denied the Commissioner’s motion to dismiss for lack of jurisdiction but granted summary judgment for the Commissioner, sustaining the IRS’s determination and enforcing Petitioner’s waiver of judicial review rights.

    Significance/Impact

    This case reinforces the enforceability of waivers in administrative settlements, particularly in the context of tax whistleblower awards. It clarifies that the issuance of a payment check can constitute the IRS’s final determination under I. R. C. sec. 7623(b)(4), affecting the timing of judicial review. The decision underscores the importance of clear communication and understanding of rights and obligations in settlement agreements, impacting how whistleblowers and the IRS negotiate and finalize award agreements. Subsequent cases may reference this ruling when addressing the validity of waivers and the finality of IRS determinations in whistleblower matters.

  • Estate of Powell v. Comm’r, 148 T.C. No. 18 (2017): Application of Sections 2036 and 2043 in Estate Taxation of Family Limited Partnerships

    Estate of Nancy H. Powell, Deceased, Jeffrey J. Powell, Executor v. Commissioner of Internal Revenue, 148 T. C. No. 18 (2017)

    The U. S. Tax Court ruled that the value of assets transferred to a family limited partnership (FLP) must be included in the decedent’s estate under Sections 2036(a)(2) and 2043(a) of the Internal Revenue Code, but only to the extent they exceeded the value of the partnership interest received. The decision clarifies the application of estate tax rules to FLPs, emphasizing that retained control over the partnership’s dissolution can trigger estate tax inclusion, while also limiting the extent of inclusion to prevent double taxation.

    Parties

    The petitioner was the Estate of Nancy H. Powell, represented by Jeffrey J. Powell as executor. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    On August 8, 2008, Jeffrey Powell, acting under a power of attorney on behalf of his mother Nancy H. Powell, transferred cash and securities valued at $10,000,752 from her revocable trust to NHP Enterprises LP (NHP), a limited partnership, in exchange for a 99% limited partner interest. NHP’s partnership agreement allowed for its dissolution with the consent of all partners. On the same day, Jeffrey Powell transferred Nancy Powell’s 99% interest in NHP to a charitable lead annuity trust (CLAT), which was to provide an annuity to the Nancy H. Powell Foundation for the remainder of her life, with the remaining assets to be divided between her two sons upon her death. Nancy Powell died on August 15, 2008, one week after the transfer.

    Procedural History

    The Commissioner of Internal Revenue issued notices of deficiency for a $5,870,226 estate tax deficiency and a $2,961,366 gift tax deficiency. The estate moved for summary judgment on both deficiencies, while the Commissioner moved for partial summary judgment on the estate tax deficiency. The Tax Court granted the Commissioner’s motion regarding the estate tax deficiency but denied the estate’s motion for summary judgment on that issue. The estate’s motion for summary judgment on the gift tax deficiency was granted.

    Issue(s)

    Whether the transfer of cash and securities to NHP was subject to a retained right to designate the persons who shall possess or enjoy the property or the income therefrom under Section 2036(a)(2)?
    Whether the value of the assets transferred to NHP should be included in the decedent’s gross estate under Section 2036(a)(2) as limited by Section 2043(a)?
    Whether the transfer of the decedent’s 99% limited partner interest in NHP to the CLAT was valid under California law, and if not, whether it should be included in her gross estate under Sections 2033 or 2038(a)?

    Rule(s) of Law

    Section 2036(a)(2) of the Internal Revenue Code includes in the gross estate the value of transferred property if the decedent retained the right to designate the persons who shall possess or enjoy the property or the income from it.
    Section 2043(a) limits the amount includible in the gross estate under Section 2036(a)(2) to the excess of the fair market value of the transferred property at the time of death over the value of the consideration received by the decedent.
    Section 2033 includes in the gross estate the value of all property to the extent of the decedent’s interest at the time of death.
    Section 2038(a) includes in the gross estate the value of property transferred if the enjoyment thereof was subject at the date of death to any change through the exercise of a power to alter, amend, revoke, or terminate.

    Holding

    The Tax Court held that the transfer of cash and securities to NHP was subject to a retained right under Section 2036(a)(2) due to the decedent’s ability to dissolve the partnership with her sons’ consent. However, the value includible in the decedent’s gross estate under Section 2036(a)(2), as limited by Section 2043(a), was only the excess of the fair market value of the transferred assets at the time of her death over the value of the 99% limited partner interest received. The court also held that the transfer of the decedent’s 99% interest in NHP to the CLAT was either void or revocable under California law because Jeffrey Powell did not have the authority to make gifts in excess of the annual federal gift tax exclusion, and thus, the value of the 99% interest was includible in the gross estate under either Section 2033 or Section 2038(a).

    Reasoning

    The court reasoned that the decedent’s ability to dissolve NHP with the consent of her sons constituted a retained right under Section 2036(a)(2) to designate the beneficiaries of the transferred assets. This right was likened to the situation in Estate of Strangi v. Commissioner, where a similar right to dissolve a family limited partnership was held to trigger Section 2036(a)(2). The court also considered the decedent’s indirect control over partnership distributions through her son, who was both the general partner and her attorney-in-fact, but deemed any fiduciary duties limiting this control as “illusory. “
    The application of Section 2043(a) was necessary to prevent double taxation of the same economic interest. The court interpreted Section 2043(a) to limit the inclusion under Section 2036(a)(2) to the amount by which the transfer depleted the decedent’s estate, i. e. , the value of the transferred assets minus the value of the partnership interest received.
    The court found that the transfer of the decedent’s NHP interest to the CLAT exceeded the authority granted to Jeffrey Powell under the power of attorney, which only authorized gifts within the annual federal gift tax exclusion. Therefore, under California law, the transfer was either void or revocable, resulting in the inclusion of the value of the 99% interest in the gross estate under either Section 2033 or Section 2038(a).
    The court rejected the estate’s arguments that the general authority to convey property included the power to make gifts, citing California case law and statute that require an express grant of authority to make gifts. The court also dismissed the estate’s reliance on the power of attorney’s ratification provision, as it could not be read to authorize acts beyond the granted authority.
    The concurring opinion agreed with the result but disagreed with the majority’s reliance on Section 2043(a), arguing that Section 2036(a)(2) should be read to include the full value of the transferred assets without the need for Section 2043(a) to prevent double inclusion.

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment on the estate tax deficiency and denied the estate’s motion for summary judgment on that issue. The estate’s motion for summary judgment on the gift tax deficiency was granted.

    Significance/Impact

    This decision clarifies the application of Sections 2036(a)(2) and 2043(a) to family limited partnerships, emphasizing that retained control over dissolution can trigger estate tax inclusion, but the inclusion is limited to prevent double taxation. The case also reinforces the principle that an attorney-in-fact’s authority to make gifts must be expressly granted under California law. The decision may impact estate planning involving FLPs, as it highlights the importance of structuring partnerships to avoid triggering Section 2036(a)(2) and ensuring that powers of attorney clearly delineate the authority to make gifts.

  • First Rock Baptist Church Child Dev. Ctr. v. Comm’r, 148 T.C. 17 (2017): Jurisdiction and Mootness in Collection Due Process Hearings

    First Rock Baptist Church Child Development Center and First Rock Baptist Church v. Commissioner of Internal Revenue, 148 T. C. 17 (2017)

    The U. S. Tax Court upheld its jurisdiction in a case involving First Rock Baptist Church Child Development Center’s challenge to the IRS’s rejection of its proposed installment agreement for unpaid employment taxes. Despite the IRS withdrawing the Notice of Federal Tax Lien (NFTL) as requested, the court found the case not moot because the dispute over the installment agreement remained unresolved. The court’s decision clarifies that jurisdiction is retained over issues addressed in a notice of determination, even if part of the relief sought is granted, and emphasizes the requirement for taxpayers to raise challenges to underlying liabilities during CDP hearings.

    Parties

    First Rock Baptist Church Child Development Center (Petitioner) and First Rock Baptist Church (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case originated in the U. S. Tax Court, Docket No. 16724-14L.

    Facts

    First Rock Baptist Church Child Development Center (the Center) incurred employment tax liabilities for the years 2007-2010, totaling $438,381, including additions to tax and interest. The IRS issued a Notice of Federal Tax Lien (NFTL) to the Center but mistakenly listed First Rock Baptist Church (the Church) as the addressee. Both the Center and the Church requested a collection due process (CDP) hearing. During the hearing, the Center proposed an installment agreement, which was rejected. After a remand, a new settlement officer (SO2) withdrew the NFTL but again rejected the installment agreement because the Center had not complied with its ongoing tax return filing obligations.

    Procedural History

    The IRS issued the NFTL to collect the Center’s employment tax liabilities. The Center and the Church requested a CDP hearing, during which the Center’s proposed installment agreement was rejected. The case was petitioned to the U. S. Tax Court, which remanded it to the IRS Appeals Office. Upon remand, SO2 withdrew the NFTL but denied the installment agreement. The Tax Court subsequently reviewed SO2’s determination under the standard of abuse of discretion.

    Issue(s)

    1. Whether the Tax Court has jurisdiction to review the IRS’s determination concerning the Center’s proposed installment agreement despite the withdrawal of the NFTL.
    2. Whether the case is moot given the withdrawal of the NFTL.
    3. Whether the Tax Court can consider the Center’s challenge to its underlying tax liabilities.
    4. Whether SO2 abused his discretion in denying the Center’s request for an installment agreement.

    Rule(s) of Law

    1. Under I. R. C. § 6330(d)(1), the Tax Court has jurisdiction to review determinations made by the IRS in a CDP hearing.
    2. A case is not moot if there remains a live controversy between the parties, even if part of the requested relief is granted.
    3. Challenges to underlying tax liabilities must be raised during the CDP hearing to be considered by the Tax Court.
    4. The IRS may reject a proposed installment agreement if the taxpayer is not in compliance with all filing and payment requirements. Internal Revenue Manual (IRM) pt. 5. 14. 1. 4. 2(3).

    Holding

    1. The Tax Court has jurisdiction to review the IRS’s determination regarding the Center’s proposed installment agreement because the notice of determination addressed this issue and was sent to the Center.
    2. The case is not moot because there remains a live controversy over the installment agreement despite the withdrawal of the NFTL.
    3. The Tax Court cannot consider the Center’s challenge to its underlying tax liabilities because the Center did not raise this issue during the CDP hearing.
    4. SO2 did not abuse his discretion in denying the Center’s request for an installment agreement because the Center was not in compliance with its ongoing tax return filing obligations.

    Reasoning

    The Tax Court’s jurisdiction hinges on the issuance of a valid notice of determination and a timely petition for review. The notice sent to the Center, despite the error in naming the Church as the addressee, sufficiently identified the Center’s tax liabilities and the collection action, thus conferring jurisdiction over the installment agreement issue. The court rejected the IRS’s argument that the case was moot because the withdrawal of the NFTL did not resolve all issues, particularly the unresolved dispute over the installment agreement. The court also noted that the Center failed to raise its challenges to the underlying tax liabilities during the CDP hearing, thus precluding judicial review on those grounds. Finally, the court upheld SO2’s decision to deny the installment agreement, as the Center was not in compliance with its filing obligations at the time of the determination, in line with the IRM’s requirement for such agreements.

    Disposition

    The Tax Court granted summary judgment in favor of the Commissioner of Internal Revenue, sustaining the collection action set forth in the supplemental notice of determination, which withdrew the NFTL but rejected the proposed installment agreement.

    Significance/Impact

    This case clarifies the scope of the Tax Court’s jurisdiction in CDP hearings, affirming that jurisdiction is maintained over issues addressed in a notice of determination, even if some relief is granted. It underscores the necessity for taxpayers to raise challenges to underlying liabilities during CDP hearings to preserve them for judicial review. The decision also reinforces the IRS’s authority to deny installment agreements based on noncompliance with filing obligations, as per the Internal Revenue Manual. The ruling may impact how taxpayers approach CDP hearings and the strategic considerations in challenging IRS collection actions.

  • Malone v. Comm’r, 148 T.C. 16 (2017): Application of Deficiency Procedures to Partnership-Related Penalties

    Malone v. Commissioner, 148 T. C. 16 (2017)

    In Malone v. Comm’r, the U. S. Tax Court ruled that deficiency procedures apply to a negligence penalty asserted against taxpayers Bernard and Mary Ellen Malone for failing to report partnership items, even though the penalty was related to partnership items. The court clarified that such penalties are subject to deficiency procedures when no adjustments are made to the partnership items themselves. This decision underscores the procedural nuances of the Tax Equity and Fiscal Responsibility Act (TEFRA) and its impact on the assessment of penalties linked to partnership tax reporting.

    Parties

    Bernard P. Malone and Mary Ellen Malone, Petitioners, v. Commissioner of Internal Revenue, Respondent. The Malones were the taxpayers and petitioners at both the trial and appeal levels, while the Commissioner of Internal Revenue was the respondent throughout the litigation.

    Facts

    Bernard Malone was a partner in MBJ Mortgage Services America, Ltd. , a partnership subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act (TEFRA). In 2005, MBJ reported installment sales of partnership assets, with Malone’s distributive share being $3,200,748 of ordinary income and $3,547,326 of net long-term capital gain. However, on their joint 2005 Form 1040, the Malones did not report these partnership items but instead reported $4,526,897 of long-term capital gain from the sale of Malone’s partnership interest in MBJ, which did not occur in 2005. The Malones did not file a notice of inconsistent treatment with the IRS. The Commissioner subsequently adjusted the Malones’ return to include the partnership items as reported by MBJ and asserted a negligence penalty under IRC section 6662(a) for the Malones’ failure to report these items.

    Procedural History

    The Commissioner issued a notice of deficiency to the Malones, leading them to file a petition with the U. S. Tax Court. The Commissioner moved to dismiss for lack of jurisdiction over partnership items, which the court granted on June 5, 2012, but explicitly reserved the jurisdictional issue regarding the applicability of the section 6662(a) penalty. The Commissioner later clarified that the penalty was asserted solely due to the Malones’ failure to report their distributive share of partnership items. The court then ordered supplemental briefing on this jurisdictional question.

    Issue(s)

    Whether the deficiency procedures apply to a negligence penalty under IRC section 6662(a) when the penalty is asserted due to a partner’s failure to report partnership items consistently with the partnership’s return, and no adjustments are made to the partnership items themselves?

    Rule(s) of Law

    IRC section 6221 states that the tax treatment of partnership items and the applicability of penalties related to adjustments to those items are determined at the partnership level. IRC section 6230(a)(2)(A)(i) excludes from deficiency procedures penalties related to adjustments to partnership items. IRC section 6222(a) requires partners to report partnership items consistently with the partnership’s return, and section 6222(d) references penalties for disregard of this requirement, including the negligence penalty under section 6662(a) and (b)(1).

    Holding

    The U. S. Tax Court held that deficiency procedures apply to the negligence penalty asserted against the Malones under IRC section 6662(a) because no adjustments were made to the partnership items reported by MBJ. The court determined that the penalty was not related to any adjustments to partnership items but rather to the Malones’ failure to report those items consistently.

    Reasoning

    The court’s reasoning focused on the procedural implications of TEFRA and the specific circumstances of the case. It noted that penalties are generally factual affected items subject to deficiency procedures unless they relate to adjustments to partnership items, as per the 1997 Taxpayer Relief Act amendments to IRC sections 6221 and 6230. The court emphasized that the adjustments made to the Malones’ tax liability were computational adjustments reflecting the partnership items as originally reported by MBJ, not adjustments to the partnership items themselves. Therefore, the exclusion from deficiency procedures under section 6230(a)(2)(A)(i) did not apply, and the court retained jurisdiction over the penalty determination. The court also addressed the Malones’ argument that their inconsistently reported partnership items were “adjusted,” concluding that no such adjustments occurred since the items were accepted as reported by MBJ.

    Disposition

    The court denied the Malones’ motion to dismiss for lack of jurisdiction over the section 6662(a) penalty, affirming that deficiency procedures apply to the determination of the penalty in question.

    Significance/Impact

    The Malone decision clarifies the application of deficiency procedures to penalties related to partnership items under TEFRA when no adjustments are made to those items. It highlights the importance of distinguishing between adjustments to partnership items and computational adjustments to a partner’s tax liability based on those items. This ruling has practical implications for taxpayers and the IRS in handling penalties for inconsistent reporting of partnership items, ensuring that such penalties are subject to the procedural protections of deficiency procedures when no partnership-level adjustments are at issue. The decision also reaffirms the court’s jurisdiction over penalties that are not directly tied to adjustments to partnership items, providing guidance on the scope of TEFRA’s procedural framework.

  • Skaggs v. Comm’r, 148 T.C. No. 15 (2017): Definition of ‘Inmate’ and ‘Penal Institution’ for Earned Income Tax Credit

    Skaggs v. Commissioner, 148 T. C. No. 15 (U. S. Tax Ct. 2017)

    In Skaggs v. Commissioner, the U. S. Tax Court ruled that income earned by a prisoner while confined in a state hospital is excluded from eligibility for the Earned Income Tax Credit (EITC). Kevin Skaggs, serving a sentence and receiving mental health treatment at the Larned State Hospital, argued he was not an inmate in a penal institution. The court disagreed, defining an inmate as anyone confined, including in hospitals, and the state hospital as a penal institution due to its role in holding inmates during their sentences. This decision clarifies the scope of the EITC for incarcerated individuals.

    Parties

    Kevin Dewitt Skaggs, Petitioner, pro se, versus Commissioner of Internal Revenue, Respondent, represented by Douglas S. Polsky and Randall L. Eager, Jr.

    Facts

    In 2008, Kevin Skaggs was sentenced to 310 months in prison after being convicted of several felony offenses. He was taken into the custody of the Kansas Department of Corrections and later transferred to the Larned State Hospital from mid-2012 to mid-2016 for mental health treatment. During 2015, while residing at the Larned State Hospital, Skaggs earned income from part-time custodial work. He filed a 2015 tax return claiming the Earned Income Tax Credit (EITC) based on this income. The Commissioner of Internal Revenue issued a notice of deficiency, disallowing the EITC, asserting that Skaggs was an inmate in a penal institution throughout 2015, and thus his income was excluded from EITC eligibility.

    Procedural History

    Skaggs timely filed a petition with the U. S. Tax Court challenging the Commissioner’s determination. The Commissioner moved for summary judgment under Rule 121 of the Tax Court Rules of Practice and Procedure, arguing there were no genuine disputes of material fact and that he should prevail as a matter of law. Skaggs responded to the motion, arguing he was a patient, not an inmate, and that the Larned State Hospital was not a penal institution.

    Issue(s)

    Whether income earned by an individual confined to a state hospital, established for the treatment and custody of mentally ill inmates, is excluded from the calculation of the Earned Income Tax Credit under I. R. C. sec. 32(c)(2)(B)(iv)?

    Rule(s) of Law

    Under I. R. C. sec. 32(c)(2)(B)(iv), income earned while an inmate in a penal institution is not included for the purpose of determining eligibility for the Earned Income Tax Credit. The term “inmate” is understood to include individuals confined in a prison or hospital, and a “penal institution” includes facilities that hold convicted criminals, even if they also provide medical treatment.

    Holding

    The U. S. Tax Court held that Skaggs was an inmate during the time he was confined to the Larned State Hospital and that the hospital was a penal institution. Consequently, his income earned in 2015 was not to be taken into account for the purpose of determining his eligibility for the EITC.

    Reasoning

    The court reasoned that neither the statute nor the regulations define “inmate” or “penal institution” for EITC purposes. Relying on dictionary definitions, the court concluded that an “inmate” includes anyone confined in a prison or hospital, and a “penal institution” includes facilities that hold convicted criminals, which aligns with the purpose of the Larned State Hospital’s State security hospital. The court rejected Skaggs’ arguments that his treatment and wage handling differed from typical inmates, stating these distinctions did not alter his status as an inmate or the hospital’s role as a penal institution. The court also referenced prior cases to support the irrelevance of the source of income in determining EITC eligibility. The court’s analysis was grounded in statutory interpretation and dictionary definitions to determine the ordinary meanings of “inmate” and “penal institution,” emphasizing the continuity of Skaggs’ sentence during his time at the hospital and the hospital’s role in holding inmates for treatment.

    Disposition

    The court granted the Commissioner’s motion for summary judgment, determining that Skaggs’ income from 2015 is not taken into account for the purpose of determining his eligibility for the EITC.

    Significance/Impact

    This decision clarifies the scope of the EITC exclusion for inmates, extending it to include those receiving medical treatment in state hospitals that serve as penal institutions. It underscores the importance of the legal status of confinement over the nature of the facility or treatment received. The ruling may impact other cases involving inmates receiving treatment outside traditional correctional facilities, potentially affecting their tax credit eligibility. It also reinforces the statutory interpretation approach to defining terms not explicitly defined in tax law, relying on dictionary meanings and legislative purpose.