SCOTUS Reports

Tag: 2020

  • Sun River Financial Trust v. Commissioner, T.C. Memo. 2020-30: Abuse of Discretion in Collection Due Process Hearings

    Sun River Financial Trust v. Commissioner, T. C. Memo. 2020-30 (U. S. Tax Court 2020)

    In a significant ruling on collection due process (CDP) hearings, the U. S. Tax Court upheld the IRS’s decision to proceed with a levy and filing of a federal tax lien against Sun River Financial Trust for unpaid frivolous return penalties under Section 6702. The court found no abuse of discretion by the IRS, emphasizing that the taxpayer’s challenge to the reliability of IRS computer systems was insufficient to contest the underlying liability or the collection actions. This decision underscores the importance of raising meaningful challenges during CDP hearings and the deference given to IRS determinations in such cases.

    Parties

    Sun River Financial Trust, with Jay A. Greek as Trustee, was the petitioner in this case. The respondent was the Commissioner of Internal Revenue. The case was heard in the U. S. Tax Court under docket number 20735-16L.

    Facts

    Sun River Financial Trust filed delinquent tax returns for the years 2010 and 2011, reporting taxable incomes of $42,371 and $53,888 respectively, and claiming full refunds despite tax withholdings. The returns included Forms 1099-A, 1099-B, and 1099-OID, which the IRS deemed frivolous. After notifying the Trust of the frivolous nature of its returns and offering a chance to amend, the IRS assessed $5,000 penalties under Section 6702 for each year. The Trust did not amend its returns and instead submitted correspondence arguing the unreliability of IRS computer systems, based on GAO reports, without contesting the penalties’ merits. The IRS proceeded with notices of intent to levy and file a federal tax lien, leading to a CDP hearing.

    Procedural History

    The IRS issued a Final Notice of Intent to Levy and a Notice of Federal Tax Lien Filing in 2016, to which the Trust responded with requests for CDP hearings. The Settlement Officer (SO) reviewed the case, confirmed the assessments, and upheld the collection actions after the Trust failed to present evidence connecting the GAO reports to the assessments. The Trust then sought review in the U. S. Tax Court, which denied a motion to dismiss and upheld the IRS’s decision, finding no abuse of discretion.

    Issue(s)

    Whether the IRS abused its discretion in sustaining the proposed levy and the filing of a federal tax lien against Sun River Financial Trust for the collection of Section 6702 penalties for the years 2010 and 2011.

    Rule(s) of Law

    Section 6330(c)(3) of the Internal Revenue Code requires the SO to consider whether applicable legal and administrative requirements have been met, issues raised by the taxpayer, and the balance between efficient tax collection and the taxpayer’s concerns about the intrusiveness of collection actions. The standard of review in CDP cases is for abuse of discretion, except when the underlying tax liability is properly contested, in which case the review is de novo.

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in sustaining the proposed levy and the filing of the federal tax lien against Sun River Financial Trust for the collection of Section 6702 penalties for 2010 and 2011.

    Reasoning

    The court’s reasoning focused on the adequacy of the Trust’s challenge during the CDP hearing. The Trust’s argument centered on the unreliability of IRS computer systems, based on GAO reports, but failed to connect these reports to the specific assessments of the Section 6702 penalties. The court noted that without a meaningful challenge to the penalties themselves, the Trust did not properly raise its underlying liability. Furthermore, the court found that the SO adhered to statutory and administrative guidelines, relying on TXMODA transcripts to verify the assessments, which is permissible absent evidence of irregularity in the assessment procedure. The court emphasized that the SO considered all required elements under Section 6330(c)(3), including the verification of legal and administrative compliance, the issues raised by the Trust, and the balance between collection efficiency and taxpayer concerns. The court concluded that the SO’s decision was reasoned and balanced, and thus not an abuse of discretion.

    Disposition

    The U. S. Tax Court sustained the IRS’s decision to proceed with the proposed levy and the filing of the federal tax lien against Sun River Financial Trust.

    Significance/Impact

    This case reinforces the importance of taxpayers raising substantive challenges to their underlying liabilities during CDP hearings. It clarifies that general allegations about the IRS’s systems, without specific connections to the assessments in question, are insufficient to contest liability. The decision also upholds the deference given to IRS determinations in CDP cases, emphasizing that the court will not substitute its judgment for that of the SO unless there is clear evidence of abuse of discretion. This ruling has practical implications for legal practice, particularly in advising clients on how to effectively challenge IRS collection actions and the necessity of providing concrete evidence and arguments during CDP hearings.

  • Pulcine v. Commissioner, T.C. Memo. 2020-29: Whistleblower Award Requirements under Section 7623

    Pulcine v. Commissioner, T. C. Memo. 2020-29 (U. S. Tax Court 2020)

    In Pulcine v. Commissioner, the U. S. Tax Court upheld the IRS Whistleblower Office’s denial of a whistleblower award to Charles Stuart Pulcine. The court ruled that since no additional tax, penalties, interest, or other amounts were collected from the taxpayer based on Pulcine’s information, he was not entitled to an award under Section 7623(b). This decision underscores the necessity of collected proceeds for whistleblower awards and clarifies the court’s limited review scope over IRS tax liability determinations.

    Parties

    Charles Stuart Pulcine, the petitioner, filed a pro se whistleblower award claim against the Commissioner of Internal Revenue, the respondent, represented by Richard Hatfield.

    Facts

    Charles Stuart Pulcine submitted a Form 211 to the IRS Whistleblower Office on September 16, 2013, alleging that a corporate taxpayer had failed to file certain Forms 1120 and pay income tax. He claimed that $4 million in expenses should have been capitalized rather than deducted. The Whistleblower Office referred Pulcine’s claim to the IRS Large Business & International (LB&I) Division, which conducted an examination. Meanwhile, the taxpayer filed delinquent returns and made payments. The LB&I team found that the expenses in question were properly deducted, and no audit adjustments were warranted, except for a $9,966 refund issued after an amended return. The Whistleblower Office subsequently denied Pulcine’s claim for an award, stating that his information did not result in any additional tax, penalties, interest, or amounts.

    Procedural History

    Pulcine timely filed a petition with the U. S. Tax Court after receiving the final determination letter from the Whistleblower Office. Both parties filed motions for summary judgment. The court reviewed the motions under the standard of no genuine dispute as to any material fact and entitlement to judgment as a matter of law, as outlined in Rule 121(b) of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether the IRS abused its discretion in denying Charles Stuart Pulcine a whistleblower award under Section 7623(b) when no additional tax, penalties, interest, or other amounts were collected based on his information.

    Rule(s) of Law

    Under Section 7623(a), the Secretary has discretion to pay an award for detecting underpayments of tax or violations of internal revenue laws. Section 7623(b) mandates an award if the Secretary proceeds with an administrative or judicial action based on the whistleblower’s information and collects proceeds. The award ranges from 15% to 30% of collected proceeds. The court reviews the Secretary’s determination under an abuse-of-discretion standard, as established in Kasper v. Commissioner, 150 T. C. 8 (2018).

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in denying Charles Stuart Pulcine a whistleblower award under Section 7623(b) because no additional tax, penalties, interest, or other amounts were collected based on his information.

    Reasoning

    The court reasoned that for a whistleblower to qualify for an award under Section 7623(b), the IRS must proceed with an action based on the whistleblower’s information and collect proceeds from that action. In this case, the IRS examined the specific expenses Pulcine identified and determined they were properly substantiated and deducted, resulting in no additional tax liability. The court emphasized that it lacked jurisdiction to review the IRS’s determinations of tax liability or to direct the IRS to proceed with further actions, as established in Cohen v. Commissioner, 139 T. C. 299 (2012) and Cooper v. Commissioner, 136 T. C. 597 (2011). The court found no abuse of discretion by the IRS, as the decision to deny the award was based on a sound factual and legal basis.

    Disposition

    The court granted the Commissioner’s motion for summary judgment and denied Pulcine’s motion for summary judgment.

    Significance/Impact

    Pulcine v. Commissioner reinforces the requirement that collected proceeds are necessary for a whistleblower to receive an award under Section 7623(b). It also clarifies the limited scope of judicial review over IRS determinations regarding tax liability and the discretion afforded to the IRS in handling whistleblower claims. This decision may affect future whistleblower claims by emphasizing the importance of tangible results from the information provided.

  • Pierson M. Grieve v. Commissioner of Internal Revenue, T.C. Memo. 2020-28: Valuation of Noncontrolling Interests in Family Investment Entities

    Pierson M. Grieve v. Commissioner of Internal Revenue, T. C. Memo. 2020-28 (United States Tax Court, 2020)

    In a dispute over gift tax valuation, the U. S. Tax Court upheld Pierson M. Grieve’s valuations of noncontrolling interests in two family investment LLCs, Rabbit 1, LLC and Angus MacDonald, LLC. The court rejected the IRS’s higher valuations, which relied on a speculative purchase of controlling interests. This decision reinforces the use of traditional valuation methods for noncontrolling interests, emphasizing the importance of excluding speculative future events in determining fair market value.

    Parties

    Pierson M. Grieve, the Petitioner, filed a petition against the Commissioner of Internal Revenue, the Respondent, in the United States Tax Court. Throughout the litigation, Grieve was represented by William D. Thomson and James G. Bullard, while the Commissioner was represented by Randall L. Eager, Jr. , and Christina L. Cook.

    Facts

    Pierson M. Grieve transferred noncontrolling interests in two family investment entities to trusts as part of his estate planning. Rabbit 1, LLC (Rabbit) was formed in July 2013 and held Ecolab stock and cash. Angus MacDonald, LLC (Angus) was formed in August 2012 and held a diversified portfolio of investments including cash, limited partnership interests, venture capital funds, and promissory notes. Grieve transferred a 99. 8% nonvoting interest in Rabbit to a Grantor Retained Annuity Trust (GRAT) on October 9, 2013, and a similar interest in Angus to an Irrevocable Trust on November 1, 2013. Both entities were managed by Pierson M. Grieve Management Corp. (PMG), controlled by Grieve’s daughter, Margaret Grieve.

    Procedural History

    The Commissioner issued a notice of deficiency on January 29, 2018, asserting that Grieve had undervalued the gifts, resulting in a deficiency in his 2013 federal gift tax and an accuracy-related penalty. Grieve timely filed a petition in the United States Tax Court contesting the deficiency. The court considered the case, including expert testimony from both parties, and ruled on the fair market values of the transferred interests.

    Issue(s)

    Whether the fair market value of the 99. 8% nonvoting interests in Rabbit 1, LLC and Angus MacDonald, LLC, transferred by Pierson M. Grieve to the GRAT and Irrevocable Trust, respectively, should be determined by traditional valuation methods or by considering the speculative purchase of the controlling 0. 2% interests?

    Rule(s) of Law

    The fair market value of property for gift tax purposes is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. (See United States v. Cartwright, 411 U. S. 546, 551 (1973); sec. 25. 2512-1, Gift Tax Regs. ) Elements affecting value that depend on speculative future events should be excluded from consideration. (See Olson v. United States, 292 U. S. 246, 257 (1934). )

    Holding

    The Tax Court held that the fair market values of the 99. 8% nonvoting interests in Rabbit and Angus should be determined using traditional valuation methods, rejecting the IRS’s approach which considered the speculative purchase of the 0. 2% controlling interests. The court adopted the valuations and discounts provided in the Value Consulting Group (VCG) reports, which Grieve had relied upon in his gift tax return.

    Reasoning

    The court reasoned that the IRS’s expert, Mr. Mitchell, based his valuations on the hypothetical purchase of the 0. 2% controlling interests, which was deemed speculative and contrary to established valuation principles. The court emphasized that future events, while possible, must be reasonably probable to be considered in valuation, and the IRS provided no empirical data or legal precedent to support Mitchell’s methodology. Conversely, Grieve’s expert, Mr. Frazier, utilized traditional asset-based valuation methods, which were consistent with prior court decisions and did not rely on speculative future events. The court found the lack of control and marketability discounts used by VCG to be within acceptable ranges based on prior cases, and thus adopted these valuations.

    Disposition

    The Tax Court rejected the IRS’s proposed adjustments to the fair market values of the transferred interests and upheld Grieve’s valuations as reported in his gift tax return. The decision was entered under Rule 155, allowing for further proceedings to determine the exact tax liability based on the court’s valuation findings.

    Significance/Impact

    This decision reaffirms the importance of traditional valuation methods in determining the fair market value of noncontrolling interests for gift tax purposes. It underscores the principle that speculative future events should not be considered in valuation unless they are reasonably probable. The ruling may impact future valuation disputes by emphasizing the need for empirical support and adherence to established valuation principles. Additionally, it highlights the challenges the IRS faces in contesting taxpayer valuations without concrete evidence supporting alternative valuation methodologies.

  • Le v. Commissioner, T.C. Memo. 2020-27: Fraud and Unreported Income in Tax Law

    Le v. Commissioner, T. C. Memo. 2020-27 (United States Tax Court, 2020)

    In Le v. Commissioner, the U. S. Tax Court upheld fraud penalties against Dung T. Le for tax evasion spanning 2004 to 2006, stemming from his deliberate underreporting of income from nail salons and structuring of bank deposits. The court’s decision underscores the severity of civil fraud penalties and the significance of accurate income reporting, setting a precedent for handling similar cases of tax evasion.

    Parties

    Dung T. Le and Nghia T. Tran (Petitioners) v. Commissioner of Internal Revenue (Respondent). Le was the primary defendant in a related criminal proceeding for tax evasion for 2006, to which he pleaded guilty. The case then proceeded to the Tax Court for civil tax determinations and penalties.

    Facts

    Dung T. Le and Nghia T. Tran owned and operated two nail salons in Lincoln, Nebraska: CA Nails and Cali Nails. During the tax years 2004, 2005, and 2006, Le diverted substantial amounts of business income by depositing customer checks into his personal savings account and making structured cash deposits to avoid currency transaction reporting requirements. Le was indicted and pleaded guilty to tax evasion for 2006 under 26 U. S. C. § 7201, resulting in criminal restitution. The IRS later assessed deficiencies for all three years and imposed fraud penalties on Le and accuracy-related penalties on both Le and Tran.

    Procedural History

    Le was criminally convicted for tax evasion in 2006 and agreed to a plea deal, resulting in dismissed charges for 2004 and 2005. The IRS issued a notice of deficiency for the tax years 2004 through 2006, assessing additional taxes and fraud penalties against Le, and accuracy-related penalties against both petitioners. The case was appealed to the U. S. Tax Court, where the standard of review was de novo for factual findings and abuse of discretion for penalty imposition.

    Issue(s)

    1. Whether the doctrine of collateral estoppel bars the Commissioner from relitigating petitioners’ tax liability for 2006?

    2. Whether petitioners failed to report gross receipts from their nail salon businesses for 2004, 2005, and 2006?

    3. Whether petitioners are entitled to Schedule C deductions for 2004, 2005, and 2006, in excess of the amounts the Commissioner allowed?

    4. Whether petitioners received additional State tax refunds in 2004 and 2006 which they failed to report?

    5. Whether Le is liable for civil fraud penalties under 26 U. S. C. § 6663 for each year in issue, or alternatively, accuracy-related penalties under 26 U. S. C. § 6662(a)?

    6. Whether Tran is liable for accuracy-related penalties under 26 U. S. C. § 6662(a)?

    Rule(s) of Law

    The court applied principles of tax law related to gross income reporting under 26 U. S. C. § 61(a), business expense deductions under 26 U. S. C. § 162(a), and civil fraud penalties under 26 U. S. C. § 6663. The court also considered the doctrine of collateral estoppel and the IRS’s use of the bank deposits method to reconstruct income.

    Holding

    The court held that: (1) collateral estoppel did not bar relitigation of Le’s 2006 tax liability as the criminal restitution amount was not essential to the judgment; (2) petitioners failed to report gross receipts from their nail salons in the amounts of $45,567. 92, $33,200. 89, and $84,475. 01 for 2004, 2005, and 2006, respectively; (3) petitioners were not entitled to additional Schedule C deductions beyond those allowed by the Commissioner; (4) petitioners failed to report additional State tax refunds for 2004 and 2006; (5) Le was liable for civil fraud penalties for all three years under 26 U. S. C. § 6663; and (6) Tran was not liable for accuracy-related penalties under 26 U. S. C. § 6662(a) due to the fraud penalties imposed on Le.

    Reasoning

    The court reasoned that Le’s actions constituted an intentional scheme to evade taxes, evidenced by his consistent underreporting of income, inadequate record-keeping, implausible explanations, concealment of income, non-cooperation with the IRS, involvement in illegal activities (culminating in a guilty plea), and extensive cash dealings. The court rejected the application of collateral estoppel, noting that the criminal restitution amount was not essential to the judgment of conviction. The court found that the IRS’s use of the bank deposits method was a valid approach to reconstruct income, and Le’s failure to substantiate his claims of non-taxable income from gifts or loans was dispositive. The court also addressed the issue of unreported State tax refunds, deeming them conceded by petitioners. The imposition of fraud penalties on Le was based on clear and convincing evidence of his fraudulent intent, while Tran was spared accuracy-related penalties due to the non-stackability of penalties under 26 U. S. C. § 6662(b).

    Disposition

    The court affirmed the deficiencies in income tax and the imposition of fraud penalties against Le for 2004, 2005, and 2006, and accuracy-related penalties for unreported State tax refunds for 2004 and 2006. The court declined to impose accuracy-related penalties on Tran.

    Significance/Impact

    Le v. Commissioner reinforces the IRS’s authority to assess civil tax liabilities and penalties independent of criminal proceedings and restitution orders. It highlights the importance of accurate income reporting and the severe consequences of fraud, including substantial penalties. The case also underscores the IRS’s ability to use indirect methods like the bank deposits method to reconstruct income when taxpayers fail to maintain adequate records. The decision serves as a cautionary tale for taxpayers about the risks of engaging in tax evasion and the potential for significant civil penalties in addition to criminal consequences.

  • Rock Bordelon and Torie Bordelon v. Commissioner of Internal Revenue, T.C. Memo. 2020-26: Personal Guarantees and At-Risk Rules in Tax Deduction Cases

    Rock Bordelon and Torie Bordelon v. Commissioner of Internal Revenue, T. C. Memo. 2020-26 (United States Tax Court, 2020)

    In a significant tax ruling, the U. S. Tax Court held that personal guarantees can establish sufficient at-risk amounts to allow deductions for losses from business activities. The decision affirmed that Rock Bordelon’s guarantees for loans to his business entities, Many LLC and Kilgore LLC, made him personally liable, thus enabling him to claim over $1. 5 million in previously disallowed losses. This ruling clarifies the application of the at-risk rules under I. R. C. § 465 and the impact of personal guarantees on a taxpayer’s basis in partnerships under I. R. C. § 704(d), offering guidance for taxpayers and tax professionals on the deductibility of business losses.

    Parties

    Rock Bordelon and Torie Bordelon, as petitioners, against the Commissioner of Internal Revenue, as respondent. The Bordelons were the taxpayers seeking redetermination of tax deficiencies determined by the Commissioner.

    Facts

    Rock Bordelon was engaged in the healthcare business, owning Allegiance Health Management, Inc. (AHM), a medical services company, and Allegiance Hospital of Many, LLC (Many LLC), which he formed to purchase and own a hospital in Louisiana. In 2008, Many LLC and AHM borrowed a $9. 9 million loan (Many Loan) from Union Bank, secured by the hospital and its equipment, with Bordelon executing a personal guarantee as required by the USDA. Many LLC was treated as a disregarded entity for federal tax purposes, with its income and expenses reported on Bordelon’s Schedule C. Bordelon also owned a 90% interest in Allegiance Specialty Hospital of Kilgore, LLC (Kilgore LLC), a partnership, which borrowed $550,000 in 2011 (Kilgore Loan) from Home Federal Bank, with Bordelon as the sole guarantor. The IRS challenged Bordelon’s claimed loss deductions for 2008 related to Many LLC and Kilgore LLC, asserting he was not at risk under I. R. C. § 465 and lacked sufficient basis in Kilgore LLC under I. R. C. § 704(d).

    Procedural History

    The IRS issued notices of deficiency for the tax years 2008-2011, disallowing loss deductions related to Many LLC and Kilgore LLC on the grounds that Bordelon was not at risk under I. R. C. § 465 and lacked sufficient basis in Kilgore LLC under I. R. C. § 704(d). The Bordelons timely filed petitions with the U. S. Tax Court seeking redetermination of the deficiencies. The Commissioner raised the at-risk issue regarding the Kilgore Loan at trial. The court held that Bordelon’s personal guarantees established sufficient amounts at risk and increased his basis in Kilgore LLC, allowing him to deduct the previously disallowed losses.

    Issue(s)

    Whether Rock Bordelon’s personal guarantees for the Many Loan and the Kilgore Loan established sufficient amounts at risk under I. R. C. § 465 and increased his basis in Kilgore LLC under I. R. C. § 704(d) to allow him to deduct the losses related to Many LLC for 2008 and Kilgore LLC for 2011?

    Rule(s) of Law

    Under I. R. C. § 465, a taxpayer’s loss deductions are limited to the amount for which the taxpayer is considered “at risk,” which includes amounts borrowed with respect to the activity, to the extent the taxpayer is personally liable for repayment or has pledged non-activity property as security. I. R. C. § 465(b)(2)(A), (B). A taxpayer is not considered at risk for amounts protected against loss through nonrecourse financing or guarantees. I. R. C. § 465(b)(4). Under I. R. C. § 704(d), a partner’s loss deduction is limited to his adjusted basis in the partnership, which is increased by the partner’s share of partnership liabilities to the extent the partner bears the economic risk of loss for the liability. 26 C. F. R. § 1. 752-1(a)(1), Income Tax Regs.

    Holding

    The Tax Court held that Bordelon’s personal guarantee of the Many Loan established sufficient amounts at risk under I. R. C. § 465, entitling him to deduct the losses related to Many LLC for 2008. Furthermore, Bordelon’s personal guarantee of the Kilgore Loan increased his basis in Kilgore LLC under I. R. C. § 704(d) and established amounts at risk under I. R. C. § 465, entitling him to deduct for 2011 his share of suspended losses disallowed for 2008.

    Reasoning

    The court applied the “worst-case scenario” analysis to determine whether Bordelon was personally liable for the Many Loan and the Kilgore Loan under I. R. C. § 465(b)(2)(A). The court found that Bordelon was the “obligor of last resort” for both loans, as he had no right to meaningful reimbursement from the primary obligors (Many LLC and AHM for the Many Loan, and Kilgore LLC for the Kilgore Loan) in the event of default. The court also considered the “realistic possibility” of economic loss under I. R. C. § 465(b)(4) and found that Bordelon was not protected against loss, as there were no other guarantors or recourse obligations for the loans. For the Kilgore Loan, the court applied the “constructive liquidation” test under 26 C. F. R. § 1. 752-2(b), Income Tax Regs. , and found that Bordelon’s guarantee made the loan recourse to him, increasing his basis in Kilgore LLC under I. R. C. § 704(d). The court’s reasoning relied on prior case law, including Brand v. Commissioner, 81 T. C. 821 (1983), Abramson v. Commissioner, 86 T. C. 360 (1986), and Melvin v. Commissioner, 88 T. C. 63 (1987), which established the principles for determining personal liability and protection against loss under the at-risk rules.

    Disposition

    The Tax Court ruled in favor of the Bordelons, allowing them to deduct the disallowed 2008 Many LLC loss deductions and the 2011 Kilgore LLC loss deductions. Decisions were to be entered under Rule 155.

    Significance/Impact

    This decision clarifies the application of the at-risk rules under I. R. C. § 465 and the impact of personal guarantees on a taxpayer’s basis in partnerships under I. R. C. § 704(d). It provides guidance for taxpayers and tax professionals on the deductibility of business losses, particularly in cases involving personal guarantees of business loans. The ruling emphasizes the importance of the “worst-case scenario” and “realistic possibility of economic loss” analyses in determining whether a taxpayer is at risk for borrowed amounts. The decision also highlights the significance of the “constructive liquidation” test in determining whether a partnership liability is recourse to a partner, affecting the partner’s basis in the partnership. This case may influence future tax planning and litigation involving personal guarantees and the at-risk rules.

  • Alvin E. Keels, Sr. v. Commissioner of Internal Revenue, T.C. Memo. 2020-25: Substantiation of Deductions and Tax Treatment of Deferred Compensation

    Alvin E. Keels, Sr. v. Commissioner of Internal Revenue, T. C. Memo. 2020-25 (U. S. Tax Court, 2020)

    In a ruling by the U. S. Tax Court, Alvin E. Keels, Sr. faced a mixed outcome regarding his tax deductions and income reporting for 2012-2014. The court upheld the IRS’s disallowance of most of Keels’ claimed deductions due to insufficient substantiation, except for specific contract labor expenses. Additionally, Keels was not taxed on deferred compensation from State Farm, as the IRS failed to prove these amounts were taxable under Section 409A. The court also confirmed Keels’ liability for late filing penalties and accuracy-related penalties for substantial understatements of income tax.

    Parties

    Alvin E. Keels, Sr. , the Petitioner, represented himself (pro se). The Respondent was the Commissioner of Internal Revenue, represented by Timothy B. Heavner and Robert J. Braxton.

    Facts

    Alvin E. Keels, Sr. , an independent State Farm agent since 1985, filed tax returns for the years 2012, 2013, and 2014. Keels reported various business expenses on his Schedule C and claimed deductions for these expenses. He also participated in State Farm’s nonqualified deferred compensation program, which included termination and extended termination payments. In 2014, Keels used a PayPal account for the Jazz Legacy Foundation (JLF), a non-profit he was involved with, to receive payments for ticket sales to a fundraiser. The IRS issued a notice of deficiency, disallowing most of Keels’ claimed deductions and asserting that certain amounts were taxable income, including the yearend balances of his deferred compensation account and payments received via PayPal.

    Procedural History

    The IRS issued a notice of deficiency to Keels for the tax years 2012, 2013, and 2014, determining deficiencies in income tax and asserting additions to tax and penalties. Keels filed a petition with the U. S. Tax Court contesting the IRS’s determinations. The court held a trial, after which it issued its opinion. The IRS conceded some deductions but maintained its position on others, including the tax treatment of Keels’ deferred compensation under Section 409A, which was raised for the first time in its posttrial brief. The court applied the de novo standard of review for factual findings and legal conclusions.

    Issue(s)

    Whether Keels substantiated his claimed deductions beyond those conceded by the IRS?

    Whether the yearend values of Keels’ termination and extended termination payments from State Farm’s deferred compensation program were taxable income for the years at issue?

    Whether Keels had $167,223 of income from PayPal, Inc. , for 2014?

    Whether Keels is liable for additions to tax for failure to timely file under Section 6651(a)(1) and accuracy-related penalties under Section 6662(a) for the years at issue?

    Rule(s) of Law

    Section 6001 of the Internal Revenue Code requires taxpayers to maintain records sufficient to establish the amount of any deduction claimed. The burden of proof generally rests with the taxpayer to substantiate deductions (Rule 142(a), Tax Court Rules of Practice and Procedure). Section 409A addresses the tax treatment of nonqualified deferred compensation plans, requiring specific conditions to be met to avoid immediate taxation. Section 6651(a)(1) imposes an addition to tax for failure to timely file a return unless the taxpayer shows reasonable cause. Section 6662(a) and (b)(2) impose an accuracy-related penalty for substantial understatements of income tax, with an exception if the taxpayer acted with reasonable cause and in good faith.

    Holding

    The court held that Keels substantiated specific contract labor deductions but failed to substantiate most other claimed deductions. The yearend values of Keels’ termination and extended termination payments were not taxable income for the years at issue, as the IRS did not meet its burden of proof under Section 409A. The $167,223 received via PayPal in 2014 was not income to Keels, as it belonged to JLF. Keels was liable for additions to tax under Section 6651(a)(1) for late filing and accuracy-related penalties under Section 6662(a) for substantial understatements of income tax.

    Reasoning

    The court found that Keels did not meet his burden of proof to substantiate most of his claimed deductions, as he failed to provide receipts, invoices, or other documentation showing the purpose of his expenses. His testimony was deemed insufficiently credible. Regarding the deferred compensation, the IRS bore the burden of proof due to its late assertion of Section 409A as a basis for taxation. The IRS failed to provide evidence that the State Farm plan did not meet Section 409A requirements or that there was no substantial risk of forfeiture. The PayPal receipts were not taxable to Keels, as they were for JLF’s activities. The court upheld the penalties for late filing and substantial understatements, finding no reasonable cause shown by Keels.

    Disposition

    The court’s decision was to be entered under Rule 155, reflecting the upheld deficiencies, the disallowed deductions, the nontaxability of the deferred compensation, the non-inclusion of PayPal receipts as income, and the imposition of penalties for late filing and substantial understatements.

    Significance/Impact

    This case underscores the importance of maintaining thorough records to substantiate tax deductions, as the court strictly applied substantiation requirements. It also highlights the procedural importance of timely raising legal theories in tax litigation, as the IRS’s late assertion of Section 409A led to the court’s finding that it bore the burden of proof, which it failed to meet. The decision reaffirms the application of penalties for late filing and substantial understatements, emphasizing the need for taxpayers to demonstrate reasonable cause to avoid such penalties.

  • Oakhill Woods, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2020-24: Charitable Contribution Deduction Substantiation Requirements

    Oakhill Woods, LLC v. Commissioner of Internal Revenue, T. C. Memo. 2020-24 (U. S. Tax Court, 2020)

    In Oakhill Woods, LLC v. Commissioner, the U. S. Tax Court ruled that a taxpayer must strictly comply with IRS regulations when claiming a charitable contribution deduction, specifically requiring the disclosure of the cost or adjusted basis of donated property on Form 8283. The court rejected the taxpayer’s argument of substantial compliance and upheld the validity of the regulation, emphasizing the importance of this information in identifying potential overvaluations. This decision underscores the need for precise adherence to substantiation rules to prevent abuse of charitable deductions.

    Parties

    Oakhill Woods, LLC (Oakhill), the petitioner, and Effingham Managers, LLC, as the Tax Matters Partner (TMP), filed the case against the Commissioner of Internal Revenue, the respondent.

    Facts

    Oakhill, a Georgia limited liability company operating as a partnership for federal income tax purposes, claimed a charitable contribution deduction for a donation of a conservation easement to the Georgia Land Trust (GLT) in 2010. The easement covered 379 acres of a 388-acre tract that Oakhill had received from HRH Investments, LLC (HRH), a related party, in December 2009. HRH had purchased the tract in August 2007 for $1,008,736. Oakhill’s appraisal valued the easement at $7,949,000, reflecting a significant increase in value during a period of economic downturn. Oakhill did not report the cost or adjusted basis of the donated property on Form 8283, instead attaching a letter stating that basis information was unnecessary for the deduction calculation.

    Procedural History

    The IRS selected Oakhill’s 2010 tax return for examination and subsequently issued a summary report in December 2014, proposing to disallow the deduction due to the omission of cost or adjusted basis information on Form 8283. Oakhill’s CPA provided this information to the IRS three years after the return was filed. The IRS then issued a notice of final partnership administrative adjustment (FPAA) in September 2017, disallowing the deduction and asserting penalties. Oakhill petitioned the U. S. Tax Court for readjustment of the partnership items in December 2017. The Commissioner filed a motion for partial summary judgment in May 2018, and Oakhill filed a cross-motion for partial summary judgment in December 2018, challenging the validity of the regulation requiring disclosure of cost or adjusted basis.

    Issue(s)

    Whether Oakhill complied with the substantiation requirements of section 1. 170A-13(c), Income Tax Regs. , by including the cost or adjusted basis of the donated property on Form 8283?

    Whether the regulation requiring disclosure of cost or adjusted basis on Form 8283 is valid?

    Rule(s) of Law

    Section 170(f)(11)(C) of the Internal Revenue Code requires taxpayers claiming a charitable contribution deduction for property valued over $5,000 to obtain a qualified appraisal and attach to the return an appraisal summary with information as prescribed by the Secretary. The Secretary has prescribed Form 8283 as the appraisal summary, which must include the cost or adjusted basis of the donated property. See sec. 1. 170A-13(c)(4)(ii)(E), Income Tax Regs.

    Holding

    The Tax Court held that Oakhill did not comply with the substantiation requirements because it failed to include the cost or adjusted basis of the donated property on Form 8283. The court also upheld the validity of the regulation requiring such disclosure.

    Reasoning

    The court reasoned that Oakhill’s omission of cost basis information on Form 8283 constituted a failure to strictly comply with the regulation. The court rejected Oakhill’s argument of substantial compliance, noting that the regulation’s requirement to disclose cost basis is essential for the IRS to identify potential overvaluations, as intended by Congress when enacting DEFRA. The court found that the significant disparity between Oakhill’s claimed value for the easement and the cost basis of the land, had it been disclosed, would have alerted the IRS to a potential overvaluation. The court also dismissed Oakhill’s argument that it had cured the omission by providing the information during the audit, stating that such information must be provided at the time of filing to serve its intended purpose.

    Regarding the validity of the regulation, the court applied the Chevron two-step test. It found that Congress had not directly spoken to the precise issue of where on the return the cost basis information must be disclosed, thus leaving discretion to the Secretary. The court concluded that the regulation was a permissible construction of the statute, as it reasonably required the inclusion of cost basis information in the appraisal summary to facilitate the IRS’s review process.

    The court also considered Oakhill’s reasonable cause defense but found that genuine disputes of material fact existed as to whether Oakhill had relied on competent and independent advice when deciding not to disclose the cost basis.

    Disposition

    The Tax Court granted in part the Commissioner’s motion for partial summary judgment, denying Oakhill’s deduction for failure to comply with the substantiation requirements. The court denied Oakhill’s cross-motion for partial summary judgment, upholding the validity of the regulation.

    Significance/Impact

    This case reinforces the strict compliance standard for charitable contribution deductions, particularly the requirement to disclose the cost or adjusted basis of donated property. It underscores the importance of this information in combating inflated valuations and tax shelter abuse. The decision also affirms the broad discretion granted to the Secretary in prescribing substantiation requirements, which may impact how taxpayers and practitioners approach the preparation of charitable contribution deductions. The case highlights the challenges taxpayers may face in establishing a reasonable cause defense when relying on advice from potentially conflicted parties.

  • Richard Essner v. Commissioner of Internal Revenue, T.C. Memo. 2020-23: Taxation of Inherited IRA Distributions and Section 7605(b) Examination Limits

    Richard Essner v. Commissioner of Internal Revenue, T. C. Memo. 2020-23 (U. S. Tax Court 2020)

    In Richard Essner v. Commissioner, the U. S. Tax Court upheld the IRS’s determination of tax deficiencies and penalties against Essner, a California cancer surgeon, for failing to report income from inherited IRA distributions in 2014 and 2015. The court rejected Essner’s claim that the IRS conducted an unnecessary second examination of his 2014 tax year, clarifying the scope of section 7605(b). This ruling underscores the necessity for taxpayers to accurately report inherited IRA distributions as income and the limited protections against IRS examinations under section 7605(b).

    Parties

    Richard Essner, the petitioner, represented himself pro se. The respondent, the Commissioner of Internal Revenue, was represented by Mark A. Nelson and Sarah A. Herson. The cases were consolidated under docket numbers 7013-17 and 1099-18 for trial and opinion.

    Facts

    Richard Essner, a cancer surgeon residing in California, inherited an IRA from his late mother, who had inherited it from his father. Essner received distributions from the IRA of $360,800 in 2014 and $148,084 in 2015. He researched the tax implications of these distributions on the IRS website and concluded they were not taxable. Essner engaged a return preparer for his 2014 and 2015 returns but did not inform the preparer of the IRA distributions. Consequently, Essner did not report these distributions as income on his tax returns. The IRS, having received Forms 1099-R reporting the distributions, initiated two separate processes to address the discrepancies: the Automated Underreporting (AUR) program and an individual examination by Tax Compliance Officer Hareshkumar Joshi.

    Procedural History

    The IRS’s AUR program identified a discrepancy in Essner’s 2014 return and issued a notice of deficiency on January 3, 2017, for $117,265, which Essner contested by filing a timely petition with the U. S. Tax Court under docket No. 7013-17. Concurrently, Officer Joshi examined Essner’s 2014 and 2015 returns, focusing on other issues but not the IRA distributions. On October 23, 2017, the IRS issued another notice of deficiency for Essner’s 2015 tax year, determining a deficiency of $101,750 and an accuracy-related penalty under section 6662(a) of $20,350, which Essner also contested under docket No. 1099-18. The Tax Court consolidated the cases for trial and opinion.

    Issue(s)

    Whether Essner failed to report distributions from an inherited IRA as income for 2014 and 2015?

    Whether the IRS subjected Essner to a duplicative inspection of his books and records relating to his 2014 tax year in violation of section 7605(b)?

    Whether Essner is liable for the accuracy-related penalty under section 6662(a) for tax year 2015?

    Rule(s) of Law

    Section 61(a) of the Internal Revenue Code defines gross income as “all income from whatever source derived”, including income from pensions under section 61(a)(11). Section 7605(b) limits the IRS to one inspection of a taxpayer’s books of account per taxable year, unless the taxpayer requests otherwise or the Secretary notifies the taxpayer in writing of the need for an additional inspection. Section 6662(a) authorizes the imposition of a 20% accuracy-related penalty for substantial understatements of income tax, which can be excused if the taxpayer shows reasonable cause and good faith.

    Holding

    The Tax Court held that Essner failed to report the IRA distributions as income for 2014 and 2015, sustaining the IRS’s deficiency determinations. The court also held that the IRS did not violate section 7605(b) by conducting a second examination of Essner’s 2014 tax year, as the AUR program’s actions did not constitute an examination of Essner’s books and records. Finally, the court held Essner liable for the accuracy-related penalty for tax year 2015, finding that he did not act with reasonable cause and good faith.

    Reasoning

    The court reasoned that Essner’s failure to report the IRA distributions as income was not supported by any evidence that a portion of the distributions represented a non-taxable return of his late father’s original investment. Essner’s inability to substantiate his claim due to lack of records from financial institutions did not relieve him of his burden of proof. Regarding section 7605(b), the court narrowly interpreted the statute, concluding that the AUR program’s review of third-party information and Essner’s filed tax returns did not constitute an examination of his books and records. Therefore, no second examination occurred, and the IRS’s actions were not unnecessary. For the accuracy-related penalty, the court found that Essner’s failure to consult his return preparer about the IRA distributions, despite his professional background and the size of the distributions, demonstrated a lack of reasonable cause and good faith.

    Disposition

    The Tax Court entered decisions sustaining the IRS’s determinations of tax deficiencies for 2014 and 2015 and the accuracy-related penalty for 2015.

    Significance/Impact

    This case reaffirms the IRS’s authority to require taxpayers to report inherited IRA distributions as income and clarifies the limited scope of section 7605(b) in protecting taxpayers from multiple examinations. It also highlights the importance of taxpayers seeking professional advice to ensure accurate tax reporting, particularly in complex situations involving inherited assets. The decision may influence future cases involving similar issues of tax reporting and IRS examination practices, emphasizing the need for clear communication and coordination within the IRS to avoid confusing taxpayers.

  • Railroad Holdings, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2020-22: Conservation Easement Deductions and the Perpetuity Requirement

    Railroad Holdings, LLC v. Commissioner of Internal Revenue, T. C. Memo. 2020-22 (U. S. Tax Court, 2020)

    The U. S. Tax Court ruled that Railroad Holdings, LLC could not claim a $16 million charitable contribution deduction for a conservation easement because the deed failed to ensure the conservation purpose was protected in perpetuity. The court found the deed’s extinguishment provision, which guaranteed a fixed dollar amount rather than a proportional share of any future proceeds, did not comply with IRS regulations requiring perpetual protection of the conservation purpose. This decision underscores the strict requirements for claiming conservation easement deductions and highlights the need for precise drafting of easement deeds to meet legal standards.

    Parties

    Railroad Holdings, LLC, as the petitioner, and the Commissioner of Internal Revenue, as the respondent, were the primary parties in this case. Railroad Land Manager, LLC served as the tax matters partner for Railroad Holdings, LLC throughout the proceedings.

    Facts

    In 2012, Railroad Holdings, LLC executed a conservation easement deed in favor of the Southeast Regional Land Conservancy, Inc. (SERLC), a charitable organization, for a 452-acre property in South Carolina. The deed included an extinguishment provision stating that, in the event of judicial extinguishment and subsequent sale of the property, SERLC would be entitled to a portion of the proceeds at least equal to the fair market value of the conservation easement at the time of the deed’s execution, rather than a proportionate share of the proceeds from the sale. Railroad Holdings claimed a $16 million charitable contribution deduction for this easement on its 2012 tax return. The IRS disallowed the deduction, asserting that the conservation purpose was not protected in perpetuity as required by I. R. C. sec. 170(h)(5)(A).

    Procedural History

    The IRS issued a notice of final partnership administrative adjustment (FPAA) on March 15, 2016, disallowing Railroad Holdings’ claimed deduction. Railroad Holdings timely filed a petition in the U. S. Tax Court on May 17, 2016. The Commissioner moved for partial summary judgment, arguing that the conservation easement did not meet the perpetuity requirement of I. R. C. sec. 170(h)(5)(A). The court granted the Commissioner’s motion, finding that the deed’s extinguishment provision failed to comply with the applicable regulations.

    Issue(s)

    Whether the conservation easement deed executed by Railroad Holdings, LLC, with an extinguishment provision guaranteeing a fixed dollar amount to SERLC, satisfied the requirement under I. R. C. sec. 170(h)(5)(A) that the conservation purpose be protected in perpetuity?

    Rule(s) of Law

    I. R. C. sec. 170(h)(5)(A) requires that a contribution be treated as exclusively for conservation purposes only if the conservation purpose is protected in perpetuity. 26 C. F. R. sec. 1. 170A-14(g)(6)(ii) stipulates that, in the event of an easement’s extinguishment, the donee organization must be entitled to a portion of the proceeds at least equal to the proportionate value of the perpetual conservation restriction at the time of the gift.

    Holding

    The U. S. Tax Court held that Railroad Holdings, LLC was not entitled to the charitable contribution deduction because the conservation easement deed’s extinguishment provision did not protect the conservation purpose in perpetuity, as required by I. R. C. sec. 170(h)(5)(A).

    Reasoning

    The court’s reasoning focused on the interpretation of the deed’s extinguishment provision and its compliance with the perpetuity requirement under I. R. C. sec. 170(h)(5)(A). The court noted that the deed provided SERLC with a fixed dollar amount rather than a proportionate share of any future sale proceeds, which did not meet the regulatory requirement set forth in 26 C. F. R. sec. 1. 170A-14(g)(6)(ii). The court emphasized that the donee’s entitlement to a proportionate share of extinguishment proceeds must be absolute and not subject to diminution over time due to property appreciation. The court rejected Railroad Holdings’ arguments regarding the use of the phrase “at least” in the deed, the intent of SERLC as expressed in a declaration, and the deed’s construction of terms provision, finding none sufficient to overcome the clear deficiency in the deed’s allocation formula. The court’s decision reinforced the strict interpretation of the perpetuity requirement and the necessity for precise drafting to ensure compliance with tax regulations.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for partial summary judgment, denying Railroad Holdings, LLC the claimed charitable contribution deduction.

    Significance/Impact

    This case is significant for its clarification of the perpetuity requirement under I. R. C. sec. 170(h)(5)(A) and its implications for conservation easement deductions. It underscores the importance of drafting easement deeds to comply strictly with IRS regulations, particularly regarding the allocation of proceeds in the event of extinguishment. The decision may impact future conservation easement transactions by prompting donors and donees to review and revise their deeds to ensure compliance with the perpetuity requirement. Additionally, this case may influence how courts and the IRS interpret similar provisions in other conservation easement deeds, potentially affecting the deductibility of such contributions.

  • Carter v. Commissioner, T.C. Memo. 2020-21; Evans v. Commissioner, T.C. Memo. 2020-21: Conservation Easement Deductions and Supervisory Approval of Penalties

    Nathaniel A. Carter and Stella C. Carter v. Commissioner of Internal Revenue, T. C. Memo. 2020-21; Ralph G. Evans v. Commissioner of Internal Revenue, T. C. Memo. 2020-21 (U. S. Tax Court 2020)

    In a significant ruling, the U. S. Tax Court disallowed charitable contribution deductions for conservation easements where the donors retained development rights in unspecified building areas. The court held that such rights violate the requirement for perpetual use restrictions on real property. Additionally, the court ruled that the IRS failed to timely secure supervisory approval for proposed gross valuation misstatement penalties, thus invalidating them. This decision impacts how conservation easements are structured and how penalties are assessed by the IRS.

    Parties

    Nathaniel A. Carter and Stella C. Carter (Petitioners) and Ralph G. Evans (Petitioner) v. Commissioner of Internal Revenue (Respondent). The cases were consolidated at the trial, briefing, and opinion stages.

    Facts

    In 2005, Dover Hall Plantation, LLC (DHP), owned by Nathaniel Carter, purchased a 5,245-acre tract of land in Glynn County, Georgia. In 2009, Ralph Evans purchased a 50% interest in DHP. In 2011, DHP conveyed a conservation easement to the North American Land Trust (NALT) over 500 acres of the property. The easement generally prohibited construction or occupancy of dwellings but allowed DHP to build single-family dwellings in up to 11 two-acre “building areas,” the locations of which were to be determined subject to NALT’s approval. DHP claimed a charitable contribution deduction for the easement on its 2011 tax return, and the Carters and Evans claimed deductions on their individual returns based on their shares of the partnership’s deduction. The IRS disallowed these deductions and proposed gross valuation misstatement penalties.

    Procedural History

    The IRS issued notices of deficiency to the Carters and Evans on August 18, 2015, disallowing the charitable contribution deductions and determining gross valuation misstatement penalties. The cases were consolidated for trial, briefing, and opinion. The Tax Court reviewed the case de novo, applying the preponderance of the evidence standard.

    Issue(s)

    Whether the conservation easement granted by DHP to NALT qualifies as a “qualified real property interest” under I. R. C. sec. 170(h)(2)(C), thus entitling petitioners to charitable contribution deductions? Whether the IRS timely secured written supervisory approval for the initial determination of the gross valuation misstatement penalties as required by I. R. C. sec. 6751(b)(1)?

    Rule(s) of Law

    I. R. C. sec. 170(h)(2)(C) defines a “qualified real property interest” as including “a restriction (granted in perpetuity) on the use which may be made of real property. ” I. R. C. sec. 170(h)(5)(A) requires that the conservation purpose be protected in perpetuity. I. R. C. sec. 6751(b)(1) mandates that no penalty under the Internal Revenue Code shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination.

    Holding

    The Tax Court held that the conservation easement did not meet the perpetual restriction requirement of I. R. C. sec. 170(h)(2)(C) because the retained development rights in the unspecified building areas allowed uses antithetical to the easement’s conservation purposes. Consequently, petitioners were not entitled to charitable contribution deductions. The court further held that the IRS’s supervisory approval of the gross valuation misstatement penalties was untimely under I. R. C. sec. 6751(b)(1), as it was granted after the initial determination of the penalties had been communicated to petitioners, thus invalidating the penalties.

    Reasoning

    The court followed its precedent in Pine Mountain Pres. , LLLP v. Commissioner, 151 T. C. 247 (2018), which established that retained development rights in unspecified areas violate the perpetual restriction requirement of I. R. C. sec. 170(h)(2)(C). The court reasoned that the building areas allowed for residential development, which is antithetical to the conservation purposes of preserving open space and natural habitats. The court distinguished this case from Belk v. Commissioner, 140 T. C. 1 (2013), where the easement allowed for substitution of property, noting that the issue here was the lack of a defined parcel subject to perpetual use restrictions. Regarding the penalties, the court applied its interpretation of I. R. C. sec. 6751(b)(1) from Clay v. Commissioner, 152 T. C. 223 (2019), requiring supervisory approval before the first communication of the penalty determination. The court found that the IRS’s communication to petitioners via Letters 5153 and accompanying RARs constituted the initial determination of the penalties, and the subsequent supervisory approval was untimely.

    Disposition

    The Tax Court disallowed the charitable contribution deductions claimed by petitioners and invalidated the gross valuation misstatement penalties proposed by the IRS.

    Significance/Impact

    This decision reinforces the strict requirements for conservation easements to qualify for charitable contribution deductions, particularly the need for perpetual use restrictions on a defined parcel of property. It also underscores the importance of timely supervisory approval for penalties under I. R. C. sec. 6751(b)(1), impacting IRS procedures for assessing penalties. The ruling may influence how conservation easements are drafted and how the IRS handles penalty assessments in future cases.