SCOTUS Reports

Tag: 2024

  • Students and Academics for Free Expression, Speech, and Political Action in Campus Education, Inc. v. Commissioner of Internal Revenue, 163 T.C. No. 9 (2024): Voluntary Dismissal in Declaratory Judgment Cases

    Students and Academics for Free Expression, Speech, and Political Action in Campus Education, Inc. v. Commissioner of Internal Revenue, 163 T. C. No. 9 (U. S. Tax Ct. 2024)

    The U. S. Tax Court granted a joint motion to dismiss a declaratory judgment case without prejudice, affirming its discretion to allow voluntary dismissal in cases filed under I. R. C. § 7428. The case involved SAFE SPACE’s incomplete application for tax-exempt status, highlighting the court’s ability to manage its docket and the importance of administrative record development in tax exemption disputes.

    Parties

    Students and Academics for Free Expression, Speech, and Political Action in Campus Education, Inc. (SAFE SPACE), as Petitioner, and the Commissioner of Internal Revenue, as Respondent, at the trial and appellate levels before the United States Tax Court.

    Facts

    SAFE SPACE, a corporation based in Metairie, Louisiana, submitted Form 1023 to the IRS on June 13, 2023, seeking recognition of exemption under I. R. C. § 501(c)(3). After more than 270 days without action from the IRS, SAFE SPACE filed a Petition on March 18, 2024, under I. R. C. § 7428, seeking a declaratory judgment on its initial qualification as a tax-exempt organization. The application was later identified as incomplete by the IRS. On May 3, 2024, both parties filed a Joint Motion to Dismiss the case without prejudice, with the intent for SAFE SPACE to perfect its application and create a full administrative record for future IRS review.

    Procedural History

    SAFE SPACE filed a Petition under I. R. C. § 7428 with the U. S. Tax Court on March 18, 2024, after the IRS failed to act on its Form 1023 application within 270 days. On May 3, 2024, the parties filed a Joint Motion to Dismiss the case without prejudice, which was considered by the court under its discretion to manage declaratory judgment cases.

    Issue(s)

    Whether the U. S. Tax Court has discretion to grant a motion for voluntary dismissal in a case filed pursuant to I. R. C. § 7428?

    Rule(s) of Law

    The U. S. Tax Court has discretion to grant motions for voluntary dismissal in declaratory judgment cases under I. R. C. § 7428, as guided by Federal Rules of Civil Procedure (FRCP) Rule 41(a)(2), which allows a court to dismiss a case by order at the plaintiff’s request on terms the court considers proper. The court may consider factors such as prejudice to the opposing party and whether the statutory period for filing a petition has expired.

    Holding

    The U. S. Tax Court has discretion to grant a motion for voluntary dismissal in a case filed pursuant to I. R. C. § 7428. The court will dismiss this case without prejudice.

    Reasoning

    The court’s reasoning was grounded in its authority to manage its docket and the applicability of FRCP Rule 41(a)(2) to declaratory judgment cases. The court distinguished between deficiency cases under I. R. C. § 6213, where voluntary dismissal is generally not allowed due to I. R. C. § 7459(d), and declaratory judgment cases like this one, where such dismissals are permissible. The court considered the absence of a limited statutory period for filing a petition under I. R. C. § 7428(a)(2), the lack of prejudice to the Commissioner as evidenced by the joint motion, and the potential benefits of further administrative record development before the IRS. The court’s discretion was exercised in favor of dismissal without prejudice, allowing SAFE SPACE the opportunity to perfect its application and create a more complete record for future IRS determination and potential judicial review.

    Disposition

    The U. S. Tax Court granted the Joint Motion to Dismiss the case without prejudice.

    Significance/Impact

    This case reinforces the U. S. Tax Court’s discretion to manage its docket in declaratory judgment cases, particularly those involving incomplete applications for tax-exempt status. It underscores the importance of a complete administrative record in tax exemption disputes and highlights the court’s flexibility in allowing parties to perfect their applications before seeking judicial review. The decision may encourage organizations to ensure their applications are complete before resorting to court action, potentially reducing litigation and promoting more efficient administrative processes.

  • Mukhi v. Commissioner, 163 T.C. No. 8 (2024): Assessment Authority of IRS for I.R.C. § 6038(b)(1) Penalties

    Mukhi v. Commissioner, 163 T. C. No. 8 (U. S. Tax Court 2024)

    In Mukhi v. Commissioner, the U. S. Tax Court ruled that the IRS lacks statutory authority to assess penalties under I. R. C. § 6038(b)(1) for failure to file Forms 5471. The court reaffirmed its stance despite a contrary decision by the D. C. Circuit in Farhy v. Commissioner, emphasizing the unambiguous text of the statute. This ruling prevents the IRS from collecting these penalties via liens or levies, significantly impacting how the IRS can enforce information reporting requirements related to foreign corporations.

    Parties

    Raju J. Mukhi, Petitioner, was represented by Sanford J. Boxerman and Michelle F. Schwerin. The Commissioner of Internal Revenue, Respondent, was represented by Randall L. Eager, Alicia H. Eyler, and William Benjamin McClendon.

    Facts

    Between November 2001 and September 2005, Raju J. Mukhi created three foreign entities, including Sukhmani Partners II Ltd. , a foreign corporation for U. S. tax purposes. Mukhi failed to timely file Forms 5471, Information Return of U. S. Persons With Respect To Certain Foreign Corporations, from tax year 2002 through 2013 to disclose his ownership interest in this foreign corporation. After Mukhi pleaded guilty to criminal tax violations for subscribing to false U. S. individual income tax returns and willful failure to file reports of foreign bank and financial accounts, the IRS began an examination for Mukhi’s liability for civil tax penalties. During the examination, Mukhi filed under protest Forms 5471. At the conclusion of the examination, the IRS assessed $120,000 in penalties under I. R. C. § 6038(b)(1) for failure to timely file Form 5471 for tax years 2002 through 2013. The IRS issued notices proposing a levy and filed a lien notice to collect the unpaid penalties, prompting Mukhi to request a collection due process hearing under I. R. C. §§ 6320 and 6330. After the hearing, the IRS issued a notice of determination sustaining the collection actions. Mukhi filed a petition with the U. S. Tax Court challenging the IRS’s authority to assess these penalties.

    Procedural History

    The U. S. Tax Court initially granted summary judgment in Mukhi’s favor in Mukhi v. Commissioner, No. 4329-22L, 162 T. C. (Apr. 8, 2024), relying on its prior decision in Farhy v. Commissioner, 160 T. C. 399 (2023), which held that the IRS lacked authority to assess I. R. C. § 6038(b)(1) penalties. Subsequently, the U. S. Court of Appeals for the D. C. Circuit reversed the Tax Court’s decision in Farhy, determining that the I. R. C. § 6038(b)(1) penalty is assessable. Farhy v. Commissioner, 100 F. 4th 223 (D. C. Cir. 2024). The IRS filed a motion for reconsideration of the Tax Court’s holding regarding the I. R. C. § 6038(b)(1) penalties in Mukhi’s case. The Tax Court granted the motion for reconsideration but reaffirmed its original holding that the IRS lacks statutory authority to assess the I. R. C. § 6038(b)(1) penalty.

    Issue(s)

    Whether the IRS has statutory authority to assess penalties under I. R. C. § 6038(b)(1) for failure to file Forms 5471?

    Rule(s) of Law

    The IRS’s authority to assess certain liabilities is derived from I. R. C. § 6201(a), which authorizes and requires the IRS to assess “all taxes (including interest, additional amounts, additions to the tax, and assessable penalties)” imposed by the Code. I. R. C. § 6038(b)(1) imposes a penalty of $10,000 for each tax year for which a U. S. person does not file the required information return. The plain meaning of assessable penalties, as used in I. R. C. § 6201(a), is a necessarily more limited definition than all penalties because it imposes an additional condition. In the absence of a specified mode of recovery, the default rule of 28 U. S. C. § 2461(a) applies, which provides that a civil penalty prescribed for the violation of an Act of Congress without specifying the mode of recovery may be recovered in a civil action.

    Holding

    The U. S. Tax Court held that the IRS lacks statutory authority to assess the penalty under I. R. C. § 6038(b)(1) for failure to file Forms 5471. Consequently, the IRS may not proceed with the collection of these penalties from Mukhi via the lien or the proposed levy.

    Reasoning

    The Tax Court’s reasoning was grounded in the unambiguous text of the statute. The court rejected the IRS’s argument that I. R. C. § 6201(a) authorizes the assessment of all exactions found in the Code, emphasizing that the term “assessable penalties” in the statute denotes a more limited scope of assessment authority. The court highlighted the absence of text in I. R. C. § 6038(b)(1) that expressly authorizes the IRS to assess the penalty or sets forth the procedure for collection. The court compared the text of I. R. C. § 6038(b)(1) to other civil penalty statutes, which clearly indicate that the IRS may assess the penalties. The court also addressed the D. C. Circuit’s reversal in Farhy, noting that the Eighth Circuit, where an appeal would presumptively lie, has not yet issued a precedential opinion on the assessability of the I. R. C. § 6038(b)(1) penalty. The court rejected policy arguments advanced by the IRS and the D. C. Circuit, including the administrative burden of collecting the penalty through a civil action and the potential deterrent effect of the penalty. The court concluded that the IRS’s authority to assess must be clearly granted by Congress, and the text of I. R. C. § 6038(b)(1) does not provide such authority.

    Disposition

    The U. S. Tax Court reaffirmed its prior holding that the IRS may not proceed with the collection of the I. R. C. § 6038(b)(1) penalties from Mukhi via the proposed collection actions.

    Significance/Impact

    Mukhi v. Commissioner has significant implications for the enforcement of information reporting requirements related to foreign corporations. The decision clarifies that the IRS must pursue civil actions in district courts to collect penalties under I. R. C. § 6038(b)(1), rather than relying on administrative assessment and collection methods. This ruling may impact the IRS’s ability to efficiently enforce compliance with these reporting obligations, as it requires a more resource-intensive process for penalty collection. The decision also underscores the importance of clear statutory language in defining the IRS’s authority, potentially influencing future interpretations of similar penalty provisions in the Internal Revenue Code. The Tax Court’s adherence to its precedent, despite the D. C. Circuit’s contrary decision, highlights the court’s commitment to its role in providing uniformity in tax law and its willingness to maintain its interpretation until a higher court decides otherwise.

  • Jenner v. Commissioner, 163 T.C. No. 7 (2024): FBAR Penalties and Collection Due Process Rights

    Jenner v. Commissioner, 163 T. C. No. 7 (U. S. Tax Court 2024)

    In Jenner v. Commissioner, the U. S. Tax Court ruled that Foreign Bank Account Reporting (FBAR) penalties are not taxes and thus not subject to the collection due process (CDP) hearing requirements of I. R. C. §§ 6320 and 6330. The court dismissed the case for lack of jurisdiction, clarifying that the IRS was not obligated to provide a CDP hearing for FBAR penalties, which are governed by Title 31, not Title 26 of the U. S. Code.

    Parties

    Stephen C. Jenner and Judy A. Jenner, petitioners, v. Commissioner of Internal Revenue, respondent.

    Facts

    Stephen C. Jenner and Judy A. Jenner were assessed FBAR penalties under 31 U. S. C. § 5321 for failing to file foreign bank account reports for the years 2005 through 2009. The Department of the Treasury’s Bureau of the Fiscal Service (BFS) informed the Jenners that funds would be withheld from their monthly Social Security benefits under the Treasury Offset Program (TOP) to satisfy their debts. The Jenners requested collection due process (CDP) hearings, but the IRS denied these requests, asserting that FBAR penalties are not taxes and thus not subject to I. R. C. § 6330 requirements. The Jenners subsequently filed a petition with the U. S. Tax Court, alleging they were deprived of their CDP rights.

    Procedural History

    The Jenners filed their petition with the U. S. Tax Court on June 5, 2023, while residing in Florida. The Commissioner moved to dismiss the case for lack of jurisdiction on July 19, 2023, arguing that the collection of FBAR penalties is not subject to the notice and other requirements of I. R. C. § 6330. The Tax Court, in its opinion dated October 22, 2024, granted the Commissioner’s motion and dismissed the case for lack of jurisdiction.

    Issue(s)

    Whether Foreign Bank Account Reporting (FBAR) penalties are subject to the requirements of I. R. C. §§ 6320 and 6330, which mandate collection due process (CDP) hearings for unpaid taxes?

    Rule(s) of Law

    The Internal Revenue Code, specifically I. R. C. §§ 6320 and 6330, mandates collection due process (CDP) hearings for unpaid taxes. FBAR penalties are authorized and imposed by Title 31 of the U. S. Code, specifically 31 U. S. C. § 5321, and are not considered taxes under the Internal Revenue Code. The U. S. Tax Court has jurisdiction over cases involving unpaid taxes as per I. R. C. § 7442.

    Holding

    FBAR penalties are not taxes imposed by the Internal Revenue Code and thus are not subject to the requirements of I. R. C. §§ 6320 and 6330. The U. S. Tax Court lacks jurisdiction over the Jenners’ petition because FBAR penalties do not fall within the court’s jurisdiction.

    Reasoning

    The court’s reasoning was based on the statutory distinction between Title 26 (Internal Revenue Code) and Title 31 (Money and Finance) of the U. S. Code. FBAR penalties, governed by Title 31, are considered nontax debts to the United States, and their collection is subject to different procedures than those for taxes under Title 26. The court emphasized that the CDP procedures under I. R. C. §§ 6320 and 6330 apply only to unpaid taxes, as evidenced by the language in these sections that consistently refers to “tax. ” The court cited previous decisions, such as Goza v. Commissioner and Williams v. Commissioner, to support its conclusion that FBAR penalties are not subject to the deficiency procedures or CDP requirements. The court also noted that the collection mechanism for FBAR penalties is a civil action, not a lien or levy, further distinguishing them from taxes. The court rejected the Jenners’ arguments that the administrative offsets on their Social Security benefits constituted levies by the Secretary that entitled them to a CDP hearing, stating that such offsets are governed by Title 31, not Title 26.

    Disposition

    The U. S. Tax Court dismissed the case for lack of jurisdiction.

    Significance/Impact

    Jenner v. Commissioner clarifies that FBAR penalties are not subject to the collection due process (CDP) requirements of I. R. C. §§ 6320 and 6330. This decision reinforces the distinction between Title 26 and Title 31 penalties, impacting how taxpayers and the IRS handle FBAR penalty assessments and collections. The ruling may influence future litigation regarding the applicability of tax court jurisdiction to penalties imposed under other titles of the U. S. Code. Practitioners must advise clients that FBAR penalties are not subject to the same procedural protections as tax liabilities, potentially affecting strategies for challenging such penalties.

  • Carter v. Commissioner, 163 T.C. No. 6 (2024): Automatic Stay and Whistleblower Awards in Bankruptcy

    Carter v. Commissioner, 163 T. C. No. 6 (2024)

    In Carter v. Commissioner, the U. S. Tax Court ruled that a taxpayer’s bankruptcy filing does not automatically stay a whistleblower award case. The decision clarifies that only cases directly concerning the debtor’s tax liability are subject to an automatic stay under 11 U. S. C. § 362(a)(8). This ruling distinguishes between the debtor’s tax liability and unrelated whistleblower claims, impacting how such cases proceed in bankruptcy.

    Parties

    John F. Carter, Petitioner, filed a whistleblower award claim against the Commissioner of Internal Revenue, Respondent, in the United States Tax Court. Carter later filed for bankruptcy, becoming a debtor in that proceeding, while the Commissioner remained the respondent in the Tax Court case.

    Facts

    John F. Carter engaged in a transaction with a target taxpayer in 2012. In May 2015, Carter filed a whistleblower claim asserting that the target incorrectly reported the transaction. The IRS Whistleblower Office (WBO) referred the claim to an IRS operating division for examination. On January 24, 2022, the WBO issued a Final Determination denying Carter a whistleblower award, stating that the information provided did not result in the collection of any proceeds or an assessment related to the issues raised. Subsequently, on May 23, 2023, Carter filed for bankruptcy, and the IRS filed a proof of claim for Carter’s unpaid tax for pre-Petition years.

    Procedural History

    Carter filed a Petition in the U. S. Tax Court to review the WBO’s denial of his whistleblower award claim. After filing the Petition, Carter filed for bankruptcy on May 23, 2023. The IRS filed a proof of claim in Carter’s bankruptcy case for unpaid tax for pre-Petition years. On August 12, 2024, Carter filed a Notice of Proceeding in Bankruptcy with the Tax Court. The Court ordered the parties to address whether the automatic stay under 11 U. S. C. § 362(a)(8) applied to the whistleblower case. The parties filed a joint status report, with Carter asserting that the automatic stay applied, while the Commissioner disagreed.

    Issue(s)

    Whether a taxpayer’s bankruptcy filing automatically stays a whistleblower award case filed by the taxpayer pursuant to 11 U. S. C. § 362(a)(8)?

    Rule(s) of Law

    Bankruptcy Code section 362(a)(8) provides an automatic stay of Tax Court proceedings “concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief. ” The Tax Court has jurisdiction to determine whether a case is automatically stayed under this section. Prior Tax Court decisions have interpreted the automatic stay to apply only if the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy.

    Holding

    The U. S. Tax Court held that a taxpayer’s bankruptcy filing does not automatically stay a whistleblower award case under 11 U. S. C. § 362(a)(8). The Court determined that a whistleblower case does not concern the debtor’s tax liability, even if the claim involves the same transaction and facts as the debtor’s tax liability.

    Reasoning

    The Tax Court’s reasoning focused on the scope of its jurisdiction in whistleblower cases, which is limited to reviewing the IRS’s award determinations for abuse of discretion under I. R. C. § 7623(b). The Court emphasized that its review does not involve factual findings about the target taxpayer or the proper tax treatment of the transaction in question, and thus, cannot affect the debtor’s pre-Petition tax liability. The Court also considered Carter’s argument regarding potential setoff of the whistleblower award against his tax liability, concluding that the automatic stay against creditor setoff rights under 11 U. S. C. § 362(a)(7) is separate and does not necessitate a stay of the whistleblower case itself. The Court’s interpretation of the amended version of 11 U. S. C. § 362(a)(8) remained consistent with prior case law, focusing on the tax liability of the debtor as the criterion for applying the automatic stay. The Court also noted that the IRS must seek relief from stay in the bankruptcy court before exercising any right to set off a whistleblower award against the debtor’s unpaid tax liability.

    Disposition

    The U. S. Tax Court issued an order denying the automatic stay of the whistleblower award case, allowing the case to proceed despite Carter’s bankruptcy filing.

    Significance/Impact

    Carter v. Commissioner clarifies the application of the automatic stay under 11 U. S. C. § 362(a)(8) in the context of whistleblower award cases. The decision establishes that such cases do not concern the debtor’s tax liability and thus are not subject to an automatic stay triggered by a bankruptcy filing. This ruling has practical implications for whistleblowers who file for bankruptcy, as it allows their award claims to proceed independently of their bankruptcy proceedings. The decision also reinforces the limited jurisdiction of the Tax Court in whistleblower cases, focusing solely on the IRS’s award determinations and not on the underlying tax liability of the target taxpayer. Future courts may reference this case when addressing the interplay between bankruptcy and whistleblower award claims.

  • McDougall v. Commissioner, 163 T.C. No. 5 (2024): Gift Tax Implications of QTIP Trust Commutation

    McDougall v. Commissioner, 163 T. C. No. 5 (2024)

    In McDougall v. Commissioner, the U. S. Tax Court ruled that the commutation of a QTIP trust did not result in a taxable gift by the surviving spouse but did result in taxable gifts by the remainder beneficiaries. The court held that the surviving spouse, Bruce McDougall, did not make a taxable gift under I. R. C. § 2519 because he made no gratuitous transfer. However, his children, Linda and Peter, made taxable gifts under I. R. C. § 2511 by relinquishing their remainder interests without receiving consideration. This decision clarifies the application of the QTIP fiction and the tax consequences of trust commutations.

    Parties

    Petitioners: Bruce E. McDougall (Donor), Linda M. Lewis (Donor), Peter F. McDougall (Donor). Respondent: Commissioner of Internal Revenue. Bruce, Linda, and Peter were the petitioners in the consolidated cases, Docket Nos. 2458-22, 2459-22, and 2460-22, respectively.

    Facts

    Upon the death of Clotilde McDougall in 2011, her estate passed to a residuary trust (Residuary Trust) under her will. Her husband, Bruce McDougall, had an income interest in the trust, while their children, Linda and Peter, held remainder interests. Bruce elected to treat the Residuary Trust property as qualified terminable interest property (QTIP) under I. R. C. § 2056(b)(7). In 2016, Bruce, Linda, and Peter agreed to commute the Residuary Trust, distributing all assets to Bruce. Subsequently, Bruce sold some of these assets to trusts established for Linda and Peter in exchange for promissory notes. The parties filed gift tax returns for 2016, reporting the transactions as offsetting reciprocal gifts with no tax liability. The Commissioner issued Notices of Deficiency, asserting that the commutation resulted in gifts from Bruce to Linda and Peter under I. R. C. § 2519, and from Linda and Peter to Bruce under I. R. C. § 2511.

    Procedural History

    The petitioners timely filed Petitions for redetermination of the deficiencies. Bruce, Linda, and Peter moved for summary judgment, arguing no taxable gifts occurred. The Commissioner filed a Motion for Partial Summary Judgment, seeking rulings that the commutation resulted in a disposition of Bruce’s qualifying income interest under I. R. C. § 2519, gifts from Linda and Peter to Bruce under I. R. C. § 2511, and that these were not offsetting reciprocal gifts. The Tax Court granted in part and denied in part both motions, applying the principles established in Estate of Anenberg v. Commissioner.

    Issue(s)

    1. Whether the commutation of the Residuary Trust resulted in a taxable gift by Bruce McDougall under I. R. C. § 2519? 2. Whether the commutation of the Residuary Trust resulted in taxable gifts by Linda and Peter McDougall under I. R. C. § 2511?

    Rule(s) of Law

    I. R. C. § 2519(a) provides that any disposition of a qualifying income interest for life in QTIP shall be treated as a transfer of all interests in such property other than the qualifying income interest. I. R. C. § 2511 imposes a tax on the transfer of property by gift. I. R. C. § 2501(a)(1) specifies that the gift tax applies to transfers of property by gift during a calendar year. Treasury Regulation § 25. 2511-2(a) clarifies that the gift tax is a primary and personal liability of the donor, measured by the value of the property passing from the donor.

    Holding

    The Tax Court held that Bruce McDougall did not make a taxable gift under I. R. C. § 2519 because he made no gratuitous transfer, as required by I. R. C. § 2501. However, the court held that Linda and Peter McDougall made taxable gifts under I. R. C. § 2511 by relinquishing their remainder interests in the Residuary Trust without receiving consideration.

    Reasoning

    The court reasoned that Bruce’s deemed transfer under I. R. C. § 2519 was not a taxable gift because he received full ownership of the Residuary Trust assets, which negated any gratuitous transfer. The court applied the principles from Estate of Anenberg, emphasizing that a transfer alone does not create gift tax liability; a gratuitous transfer is required. The court rejected the Commissioner’s arguments that the commutation and subsequent sale of assets triggered gift tax liability for Bruce, finding no gratuitous transfer occurred. Regarding Linda and Peter, the court found they made gratuitous transfers by relinquishing valuable remainder interests without receiving anything in return. The court dismissed the argument that the QTIP fiction should apply to Linda and Peter, noting that the QTIP regime focuses on the surviving spouse’s transfer tax liability and does not negate the children’s real interests. The court also rejected the argument of offsetting reciprocal gifts, clarifying that Bruce’s deemed transfer under I. R. C. § 2519 did not provide consideration to Linda and Peter. The court further noted that the economic positions of the parties were altered by the commutation, reinforcing the conclusion that Linda and Peter made taxable gifts.

    Disposition

    The Tax Court granted in part and denied in part both the petitioners’ Motion for Summary Judgment and the Commissioner’s Motion for Partial Summary Judgment. The court concluded that Bruce did not make any taxable gifts, while Linda and Peter did make taxable gifts to Bruce.

    Significance/Impact

    This case clarifies the application of the QTIP fiction under I. R. C. § 2519 and the tax consequences of trust commutations. It distinguishes between the surviving spouse’s deemed transfer and the remainder beneficiaries’ actual transfers, emphasizing that the QTIP fiction does not extend to negate the tax liability of other beneficiaries. The decision reinforces the principle that a gratuitous transfer is required for gift tax liability and provides guidance on the tax treatment of trust commutations and subsequent asset distributions. Subsequent courts may rely on this case when addressing similar issues involving QTIP trusts and gift tax implications.

  • Varian Medical Systems, Inc. v. Commissioner, 163 T.C. No. 4 (2024): Interaction of Section 245A and Section 78 Dividends Under the Tax Cuts and Jobs Act

    Varian Medical Systems, Inc. v. Commissioner, 163 T. C. No. 4 (2024)

    The U. S. Tax Court ruled that Varian Medical Systems, Inc. could deduct dividends deemed received under IRC Section 78 during a gap period created by the Tax Cuts and Jobs Act (TCJA), where Section 245A was effective but amendments to Section 78 were not. This decision highlights the significance of statutory text and effective dates in tax law, allowing certain fiscal year taxpayers to claim deductions that would otherwise be disallowed.

    Parties

    Varian Medical Systems, Inc. and its subsidiaries, as the Petitioner, brought this action against the Commissioner of Internal Revenue, as the Respondent, before the United States Tax Court.

    Facts

    Varian Medical Systems, Inc. , a U. S. corporation, operates through subsidiaries in various countries, including controlled foreign corporations (CFCs) with fiscal years not aligned with the calendar year. For the fiscal year ending September 28, 2018, Varian filed a consolidated federal income tax return, electing to claim foreign tax credits under IRC Section 960. Varian included a section 78 dividend of approximately $159 million in its taxable income and claimed a deduction of approximately $60 million under Section 245A for this deemed dividend. The Commissioner issued a Notice of Deficiency disallowing the Section 245A deduction and increasing the section 78 dividend by $1. 9 million. Varian petitioned the Tax Court for a redetermination, seeking to claim additional Section 245A deductions related to its lower-tier CFCs.

    Procedural History

    Varian filed a Motion for Partial Summary Judgment seeking a determination that it was entitled to a deduction under Section 245A for its section 78 dividend for the 2018 tax year. The Commissioner filed a Cross-Motion for Partial Summary Judgment, arguing the opposite. After briefing and a hearing, the Tax Court issued its opinion, granting Varian’s motion in part and the Commissioner’s motion in part.

    Issue(s)

    Whether Varian Medical Systems, Inc. is entitled to a deduction under IRC Section 245A for dividends deemed received under IRC Section 78 for its 2018 tax year, given the effective date mismatch between Section 245A and the amendments to Section 78 under the Tax Cuts and Jobs Act?

    Rule(s) of Law

    IRC Section 245A, enacted by the TCJA, allows a domestic corporation a deduction for the foreign-source portion of dividends received from specified 10-percent owned foreign corporations. IRC Section 78, as it existed before the TCJA amendments, provides that certain amounts deemed paid by a domestic corporation under Section 960 shall be treated as dividends received for purposes of the Code, excluding Section 245. The TCJA amended Section 78 to exclude Section 245A dividends, but this amendment had a different effective date from Section 245A.

    Holding

    The Tax Court held that Varian is entitled to a deduction under Section 245A for amounts properly treated as dividends under Section 78 for its 2018 tax year. The Court further held that Treasury Regulation § 1. 78-1 does not alter this conclusion and that IRC Section 245A(d)(1) disallows foreign tax credits to the extent they are attributable to amounts treated as dividends under Section 78 and deducted under Section 245A.

    Reasoning

    The Court’s reasoning focused on the plain text of the relevant statutory provisions. Section 245A allows a deduction for any dividend received from a specified 10-percent owned foreign corporation, and Section 78 treats certain amounts as dividends received for all purposes of the Code except Section 245. The effective date mismatch between Section 245A and the amendments to Section 78 created a window during which Section 245A was in effect but the amendments to Section 78 were not, allowing fiscal year taxpayers like Varian to claim the deduction. The Court rejected the Commissioner’s arguments that Section 78 dividends were not qualifying dividends under Section 245A, emphasizing that the statutory text did not require an actual distribution. The Court also found that Treasury Regulation § 1. 78-1 could not override the clear statutory text, and that Section 245A(d)(1) properly limited Varian’s foreign tax credits.

    Disposition

    The Tax Court granted Varian’s Motion for Partial Summary Judgment to the extent it sought a deduction under Section 245A for its section 78 dividend and denied the Commissioner’s Motion to the extent it sought the opposite conclusion. The Court granted the Commissioner’s Motion so far as it sought to limit Varian’s foreign tax credits under Section 245A(d)(1).

    Significance/Impact

    This case clarifies the interaction between Section 245A and Section 78 dividends during the gap period created by the TCJA’s effective date provisions. It underscores the importance of adhering to statutory text and effective dates in tax law, potentially affecting other taxpayers with fiscal years who might benefit from similar deductions. The decision also highlights the limits of agency regulations in altering clear statutory provisions and the application of Section 245A(d)(1) in limiting foreign tax credits related to Section 78 dividends.

  • J.E. Ryckman v. Commissioner, 163 T.C. No. 3 (2024): Jurisdiction and Procedural Rights under Tax Treaties

    J. E. Ryckman v. Commissioner, 163 T. C. No. 3 (United States Tax Court 2024)

    In a case of first impression, the U. S. Tax Court ruled it lacks jurisdiction to review the IRS’s denial of a Collection Due Process (CDP) hearing for a taxpayer’s Canadian tax liability under the Canada-U. S. Income Tax Treaty. The court interpreted the Treaty to require the U. S. to treat Canadian claims as U. S. claims with exhausted rights, thus precluding additional U. S. procedural protections. This decision highlights the interplay between treaties and domestic law, affirming that later-enacted statutes do not conflict with treaty obligations if properly harmonized.

    Parties

    J. E. Ryckman, the petitioner, sought to challenge the IRS’s denial of her request for a Collection Due Process (CDP) hearing. The Commissioner of Internal Revenue, the respondent, moved to dismiss her petition for lack of jurisdiction. Throughout the proceedings, Ms. Ryckman was represented by David R. Jojola, Derek W. Kaczmarek, Nicholas Michaud, and Paul J. Vaporean, while the Commissioner was represented by Ping Chang and Derek S. Pratt.

    Facts

    Ms. Ryckman, a resident of Arizona, owed approximately $200,000 in Canadian taxes for the tax years 1993 and 1994. In 2017, the Canada Revenue Agency (CRA) sent a mutual collection assistance request (MCAR) to the IRS under the Canada-U. S. Income Tax Treaty. The MCAR stated that Ms. Ryckman’s tax liabilities were “finally determined” under Canadian law, meaning all administrative and judicial rights to restrain collection had lapsed or been exhausted. The U. S. Competent Authority granted the MCAR, and the IRS subsequently filed a notice of federal tax lien (NFTL) against Ms. Ryckman. Despite being informed that she had no right to a CDP hearing, Ms. Ryckman requested one, which the IRS denied. She then petitioned the Tax Court for review of the denial.

    Procedural History

    The IRS filed a notice of federal tax lien (NFTL) against Ms. Ryckman on December 7, 2020, and notified her on January 25, 2021, that she was not entitled to a CDP hearing. Ms. Ryckman requested a CDP hearing on February 4, 2021, which the IRS denied on February 8, 2021. Ms. Ryckman filed her petition with the Tax Court on February 18, 2021, challenging the IRS’s denial. The Commissioner moved to dismiss the petition for lack of jurisdiction, arguing that the Tax Court did not have authority to review the denial of a CDP hearing related to a Canadian tax liability under the Treaty.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review the IRS’s denial of a Collection Due Process (CDP) hearing request regarding the collection of Canadian taxes pursuant to a mutual collection assistance request (MCAR) under the Canada-U. S. Income Tax Treaty?

    Rule(s) of Law

    The Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review a determination only if the IRS was subject to obligations imposed by I. R. C. § 6320 or § 6330 in making that determination. Under the Canada-U. S. Income Tax Treaty, Article XXVI A(2) defines a revenue claim as “finally determined” when all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted. Article XXVI A(3) requires the requested State to collect the accepted revenue claim “as though such revenue claim were the requested State’s own revenue claim finally determined in accordance with the laws applicable to the collection of the requested State’s own taxes. ” Article XXVI A(5) states that nothing in the article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State’s finally determined revenue claim by the requested State.

    Holding

    The Tax Court held that it lacked jurisdiction under I. R. C. § 6330(d)(1) to review the IRS’s denial of Ms. Ryckman’s request for a CDP hearing because the IRS was not subject to any obligations imposed by I. R. C. § 6320 or § 6330 with respect to her hearing request. The Court interpreted the Canada-U. S. Income Tax Treaty to require the U. S. to treat Ms. Ryckman’s Canadian tax liability as a U. S. tax assessment for which all rights to restrain collection, including CDP rights, had lapsed or been exhausted.

    Reasoning

    The Court’s reasoning was based on a detailed analysis of the Treaty provisions and their interaction with the CDP statutes. The Court noted that the Treaty’s requirement that a Canadian revenue claim be treated as “finally determined” under U. S. law meant that Ms. Ryckman had no additional rights to a CDP hearing in the U. S. The Court emphasized that the Treaty’s language precluded the creation of any new administrative or judicial rights in the U. S. for finally determined Canadian claims. The Court also considered the IRS’s post-ratification conduct, which initially suggested that CDP rights applied to treaty levies but later shifted to offering alternative administrative processes. The Court rejected the dissent’s argument that the Treaty should be read to allow for CDP rights, as this would create a conflict with the later-enacted CDP statutes, which the Court found could be harmonized with the Treaty’s provisions. The Court also addressed policy considerations, noting that allowing additional procedural rights in the U. S. would undermine the Treaty’s purpose of ensuring that collection assistance requests are made only after all remedies in the applicant State are exhausted.

    Disposition

    The Tax Court dismissed Ms. Ryckman’s petition for lack of jurisdiction, as the IRS’s denial of her CDP hearing request was not a determination subject to judicial review under I. R. C. § 6330(d)(1).

    Significance/Impact

    This case is significant for its interpretation of the interaction between tax treaties and domestic law, particularly in the context of procedural rights. It clarifies that the U. S. must treat Canadian revenue claims accepted under the Treaty as U. S. tax assessments with exhausted rights, thereby foreclosing additional U. S. procedural protections. This ruling may impact future cases involving tax treaties and collection assistance requests, emphasizing the importance of harmonizing treaty obligations with domestic statutes. It also underscores the limited jurisdiction of the Tax Court and the need for taxpayers to exhaust all remedies in the applicant State before seeking relief in the U. S. under a treaty.

  • LaRosa v. Commissioner, 163 T.C. No. 2 (2024): Scope of Equitable Relief under I.R.C. § 6015(f) for Erroneous Refunds

    LaRosa v. Commissioner, 163 T. C. No. 2 (United States Tax Court 2024)

    The U. S. Tax Court ruled that an erroneous refund consisting solely of interest does not qualify for innocent spouse relief under I. R. C. § 6015(f). The court clarified that such relief is available only for unpaid taxes or deficiencies, not for erroneous refunds of interest. This decision limits the scope of equitable relief available to spouses seeking to avoid joint and several tax liabilities stemming from erroneous refunds.

    Parties

    Catherine L. LaRosa, Petitioner, sought relief from joint and several tax liability against the Commissioner of Internal Revenue, Respondent, in the United States Tax Court, Docket No. 10164-20.

    Facts

    Catherine and Dominick LaRosa received an erroneous refund from the Commissioner consisting solely of statutory interest for tax years 1981 and 1982. The LaRosas had previously fully satisfied their tax liabilities for those years. After a successful erroneous refund suit by the Commissioner, Mrs. LaRosa sought innocent spouse relief under I. R. C. § 6015(f), claiming that holding her liable for the erroneous refund was inequitable. The Commissioner denied her request, asserting that an erroneous refund of interest does not qualify for relief under § 6015(f).

    Procedural History

    The Commissioner initiated an erroneous refund suit under I. R. C. § 7405 against the LaRosas, which was adjudicated in the U. S. District Court for the District of Maryland, resulting in a judgment against the LaRosas. Following this, Mrs. LaRosa filed a request for innocent spouse relief with the Commissioner, which was denied. She then filed a Petition in the U. S. Tax Court seeking review of the Commissioner’s determination. The Commissioner moved to dismiss for lack of jurisdiction, arguing that an erroneous refund of interest does not qualify for innocent spouse relief under § 6015(f). The Tax Court recharacterized the motion as one for summary judgment.

    Issue(s)

    Whether an erroneous refund consisting solely of interest constitutes an unpaid tax or deficiency eligible for innocent spouse relief under I. R. C. § 6015(f)?

    Rule(s) of Law

    I. R. C. § 6015(f) allows the Commissioner to grant equitable relief from joint and several tax liability if, considering all facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or deficiency. The statute specifies that relief under § 6015(f) is available only for unpaid taxes or deficiencies, not for erroneous refunds unrelated to a recalculation of tax liability.

    Holding

    The Tax Court held that an erroneous refund consisting solely of interest does not constitute an unpaid tax or deficiency and thus is not eligible for innocent spouse relief under I. R. C. § 6015(f).

    Reasoning

    The court distinguished between rebate and nonrebate refunds, noting that only rebate refunds, which involve a recalculation of tax liability, can revive a tax liability and be recoverable through deficiency procedures. The erroneous refund in question was a nonrebate refund because it was issued due to a perceived error in calculating interest, not because of a recalculation of the LaRosas’ tax liabilities. The court rejected Mrs. LaRosa’s argument that interest should be treated as tax for the purpose of determining a rebate under § 6211, pointing out that the relevant statutory provisions do not support such treatment. The court also noted that the Tax Court has jurisdiction over cases involving requests for equitable relief under § 6015(f), but this jurisdiction does not extend to granting relief for erroneous refunds of interest.

    Disposition

    The Tax Court granted summary judgment in favor of the Commissioner, finding that Mrs. LaRosa was not eligible for innocent spouse relief under I. R. C. § 6015(f).

    Significance/Impact

    This decision clarifies the scope of innocent spouse relief under I. R. C. § 6015(f), limiting its application to unpaid taxes or deficiencies and excluding erroneous refunds of interest. It underscores the distinction between rebate and nonrebate refunds and their implications for tax liability. The ruling may impact future cases where spouses seek to avoid joint and several liability stemming from erroneous refunds, emphasizing the importance of the nature of the refund in determining eligibility for relief.

  • Berman v. Commissioner, 163 T.C. No. 1 (2024): Interplay of Installment Method and Section 1042 Deferral in Tax Law

    Berman v. Commissioner, 163 T. C. No. 1 (U. S. Tax Court 2024)

    In Berman v. Commissioner, the U. S. Tax Court ruled that taxpayers who sold stock to an ESOP under an installment agreement and elected to defer gain under Section 1042 could still use the installment method under Section 453 to report gains. The court reconciled these provisions, allowing gain recognition to be deferred until payments were received, impacting how gains are reported and deferred in tax planning involving ESOPs and installment sales.

    Parties

    Edward L. Berman and Ellen L. Berman were petitioners in Docket No. 202-13, and Annie Berman was the petitioner in Docket No. 388-13. The respondent in both cases was the Commissioner of Internal Revenue.

    Facts

    In 2002, Edward and Annie Berman each sold shares of E. M. Lawrence, Ltd. to the E. M. Lawrence Employee Stock Ownership Plan (ESOP) for $4. 15 million, receiving promissory notes as payment. They reported making Section 1042 elections on their 2002 tax returns to defer recognition of the gains. In 2003, they purchased floating rate notes (FRNs) as qualified replacement property (QRP) within the replacement period but later engaged in Derivium 90% loan transactions, effectively selling the FRNs. The Commissioner issued notices of deficiency for 2003-2008, asserting that the entire deferred gain should be recognized in 2003 due to the sale of the QRP.

    Procedural History

    The Commissioner issued notices of deficiency to the Bermans for tax years 2003 through 2008, asserting unreported long-term capital gains due to the sale of QRP in 2003. The Bermans filed petitions with the U. S. Tax Court for redetermination. Cross-motions for partial summary judgment were filed, focusing on whether the Bermans could use the installment method under Section 453 to report the recapture of gains triggered by the disposition of their QRP in 2003.

    Issue(s)

    Whether taxpayers who elected to defer gain under Section 1042 for the sale of stock to an ESOP in an installment sale are precluded from using the installment method under Section 453 to report the recapture of those gains upon disposition of the qualified replacement property?

    Rule(s) of Law

    Section 453 of the Internal Revenue Code mandates that income from an installment sale be taken into account under the installment method unless the taxpayer elects otherwise. Section 1042 allows a taxpayer to defer recognition of gain on the sale of qualified securities to an ESOP if qualified replacement property is purchased within the replacement period. The court must reconcile these provisions, as Section 1042(e) states that gain shall be recognized upon disposition of QRP “notwithstanding any other provision of this title. “

    Holding

    The court held that the Bermans’ Section 1042 elections did not preclude them from using the installment method under Section 453 to report gains from the ESOP stock sales. The court determined that the gains “which would be recognized” under Section 1042(a) in the absence of the election were subject to the installment method, and thus, the timing and amount of gain recognition were to be determined under Section 453 when payments were received.

    Reasoning

    The court reconciled Sections 1042 and 453 by interpreting the phrase “which would be recognized” in Section 1042(a) to refer to the gain that would be recognized absent the Section 1042 election, which in an installment sale scenario would be governed by Section 453. The court noted that Congress was presumed to be aware of the operation of Section 453 when enacting Section 1042. The Bermans did not elect out of Section 453, and thus, the installment method applied to the timing of gain recognition. The court further held that the basis of the QRP should be adjusted under Section 1042(d) by the amount of gain deferred, and upon disposition of the QRP, the gain on the deemed sale was calculated accordingly. The court’s decision was based on statutory interpretation, the legislative history of Section 453, and the policy of allowing taxpayers to defer gain recognition until payments are received, consistent with the installment method.

    Disposition

    The court granted the Bermans’ motion for partial summary judgment and denied the Commissioner’s motion, ruling that the Bermans could report the recaptured gains under the installment method for the years in which they received payments.

    Significance/Impact

    The decision in Berman v. Commissioner clarifies the interplay between Sections 1042 and 453, providing guidance on how gains from installment sales to ESOPs can be deferred and reported. This ruling has significant implications for tax planning involving ESOPs, as it allows taxpayers to defer recognition of gains until payments are received under the installment method, even if they have made a Section 1042 election. The case underscores the importance of considering both statutory provisions in structuring such transactions and may influence future tax court decisions and IRS guidance on the application of these sections.

  • Belagio Fine Jewelry, Inc. v. Commissioner, 162 T.C. No. 11 (2024): Non-Jurisdictional Nature of Filing Deadlines in Tax Court

    Belagio Fine Jewelry, Inc. v. Commissioner, 162 T. C. No. 11 (U. S. Tax Court 2024)

    The U. S. Tax Court ruled that the 90-day filing deadline for petitions challenging employment tax determinations under I. R. C. § 7436 is not jurisdictional. Belagio Fine Jewelry, Inc. filed its petition one day late, prompting the Commissioner’s motion to dismiss for lack of jurisdiction. The court, applying the Supreme Court’s ‘clear statement’ rule, determined that the deadline is a non-jurisdictional claim-processing rule, potentially subject to equitable tolling. This decision clarifies the procedural nature of filing deadlines in tax disputes, affecting how such deadlines are treated in future cases.

    Parties

    Belagio Fine Jewelry, Inc. (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case originated in the U. S. Tax Court, docketed as No. 35762-21.

    Facts

    Belagio Fine Jewelry, Inc. , did not file quarterly employment tax returns for the years 2016 and 2017. Following an audit, the Commissioner issued a notice of employment tax determination on August 24, 2021, asserting that Belagio had an employee during the audit periods and assessing deficiencies in employment taxes, additions to tax, and penalties. The notice specified that the last day to file a petition with the Tax Court was November 22, 2021. Belagio mailed its petition via FedEx Express Saver on November 18, 2021, but it arrived at the court on November 23, 2021, one day after the deadline.

    Procedural History

    The Commissioner filed a motion to dismiss for lack of jurisdiction on March 2, 2022, arguing that the 90-day period to file a petition under I. R. C. § 7436 is jurisdictional. Belagio objected, asserting that the deadline is a nonjurisdictional claim-processing rule subject to equitable tolling. The Tax Court, in its opinion filed on June 25, 2024, denied the Commissioner’s motion, holding that the 90-day filing deadline is not jurisdictional.

    Issue(s)

    Whether the 90-day deadline under I. R. C. § 7436(b)(2) for filing a petition for redetermination of employment status is a jurisdictional requirement or a nonjurisdictional claim-processing rule?

    Rule(s) of Law

    The Supreme Court has established that a statutory deadline is jurisdictional only if Congress ‘clearly states’ that it is so. The analysis involves examining the statute’s text, context, and historical treatment. Jurisdictional requirements typically speak in terms of the court’s power to hear a case, whereas claim-processing rules direct parties to take certain procedural steps without affecting the court’s authority.

    Holding

    The Tax Court held that the 90-day deadline for filing a petition for redetermination of employment status under I. R. C. § 7436(b)(2) is not jurisdictional. The court reasoned that the text of the statute does not reference the court’s jurisdiction, and the context and historical treatment of the statute do not support a jurisdictional interpretation.

    Reasoning

    The court’s reasoning was structured around the Supreme Court’s ‘clear statement’ rule for determining whether a statutory deadline is jurisdictional. First, the court analyzed the text of I. R. C. § 7436(b)(2), noting that it does not use the term ‘jurisdiction’ and focuses on the consequences to the taxpayer rather than the court’s power. The court emphasized that the use of the word ‘initiated’ in the statute indicates the commencement of a proceeding rather than a limitation on the court’s authority.

    Second, the court examined the statutory context, highlighting the separation of the jurisdictional grant in § 7436(a) from the filing deadline in § 7436(b)(2). The court found no clear tie between the two provisions, further supporting a nonjurisdictional reading. Additionally, the court noted the limited applicability of the 90-day deadline, which only applies when the Commissioner sends a notice via certified or registered mail, suggesting it is unusual for a jurisdictional requirement to have such exceptions.

    Third, the court reviewed the historical treatment of the statute, finding no Supreme Court precedent directly addressing the jurisdictional nature of the 90-day deadline. The court also dismissed prior Tax Court and circuit court opinions as ‘drive-by jurisdictional rulings’ lacking in-depth analysis. The court concluded that the prior-construction canon did not apply, as the statute had not been amended since the relevant judicial interpretations.

    The court’s analysis led to the conclusion that the 90-day deadline is a nonjurisdictional claim-processing rule. The court reserved judgment on whether the deadline could be subject to equitable tolling, indicating that this issue would be addressed in a future appropriate motion.

    Disposition

    The Tax Court denied the Commissioner’s motion to dismiss for lack of jurisdiction, holding that the 90-day deadline for filing a petition under I. R. C. § 7436(b)(2) is not jurisdictional.

    Significance/Impact

    This decision clarifies the procedural nature of filing deadlines in tax disputes, particularly those involving employment tax determinations. By holding that the 90-day deadline under I. R. C. § 7436(b)(2) is not jurisdictional, the court has opened the possibility for equitable tolling in such cases, potentially affecting how taxpayers and the IRS approach similar disputes in the future. The ruling aligns with the Supreme Court’s recent emphasis on limiting the use of the term ‘jurisdictional’ to requirements that genuinely affect a court’s adjudicatory authority. This decision may influence the treatment of similar deadlines in other areas of tax law and could prompt further litigation on the applicability of equitable tolling to nonjurisdictional deadlines in the Tax Court.