SCOTUS Reports

Tag: Jacobson v. Commissioner

  • Jacobson v. Commissioner, 148 T.C. 4 (2017): Voluntary Dismissal in Whistleblower Award Cases

    Jacobson v. Commissioner, 148 T. C. 4 (2017)

    In Jacobson v. Commissioner, the U. S. Tax Court allowed Elizabeth M. Jacobson to voluntarily dismiss her petition for review of the IRS’s denial of her whistleblower award claim. The court applied principles from Wagner v. Commissioner, finding no prejudice to the IRS from the dismissal. This ruling underscores the court’s discretion to grant voluntary dismissals in whistleblower cases, ensuring that the IRS’s original decision to deny the award remains binding on the petitioner.

    Parties

    Elizabeth M. Jacobson was the petitioner at the trial level in the United States Tax Court. The respondent was the Commissioner of Internal Revenue.

    Facts

    Elizabeth M. Jacobson, a Maryland resident, filed a Form 211 with the IRS Whistleblower Office in October 2011, seeking a whistleblower award. On May 11, 2015, the IRS issued a preliminary decision denying her claim, to which Jacobson responded with comments on July 10, 2015. Following review of her comments, the IRS issued a final determination on July 17, 2015, denying her claim on the grounds that no action was taken based on the information provided by Jacobson. Subsequently, on August 17, 2015, Jacobson filed a timely petition for review under I. R. C. sec. 7623(b)(4). On November 18, 2016, she moved to withdraw her petition, which the court treated as a motion for voluntary dismissal.

    Procedural History

    Jacobson filed her petition for review in the United States Tax Court on August 17, 2015, following the IRS’s final determination on July 17, 2015. On November 18, 2016, she filed a motion to withdraw her petition, which was treated as a motion for voluntary dismissal. The Commissioner did not object to this motion. The court, applying the principles from Wagner v. Commissioner, 118 T. C. 330 (2002), and considering the lack of prejudice to the Commissioner, granted Jacobson’s motion for voluntary dismissal on February 8, 2017.

    Issue(s)

    Whether the United States Tax Court should grant the petitioner’s motion for voluntary dismissal of her whistleblower award case, where the respondent does not object and would suffer no prejudice from such dismissal.

    Rule(s) of Law

    The court applied the principle established in Wagner v. Commissioner, 118 T. C. 330 (2002), which allows for voluntary dismissal of cases where no prejudice to the respondent would result. Specifically, the court noted that under Fed. R. Civ. P. 41(a)(2), dismissal is permitted at the discretion of the court unless the defendant will suffer clear legal prejudice.

    Holding

    The United States Tax Court held that because the Commissioner would suffer no prejudice from the dismissal of Jacobson’s petition for review of her whistleblower award claim, the court would grant her motion for voluntary dismissal.

    Reasoning

    The court’s reasoning was grounded in the principle established in Wagner v. Commissioner, which allows for voluntary dismissal when no prejudice to the respondent would result. The court considered that the IRS would not face duplicative litigation, as the time for seeking judicial review of the IRS’s determination had expired. Additionally, the court noted that the IRS’s original determination to deny Jacobson’s claim would remain binding on her post-dismissal. The court also referenced Davidson v. Commissioner, 144 T. C. 273 (2015), which extended Wagner’s logic to other types of cases, reinforcing the court’s discretion in granting voluntary dismissals. The court weighed the equities and found no clear legal prejudice to the Commissioner, thus exercising its discretion to grant the dismissal.

    Disposition

    The United States Tax Court granted Jacobson’s motion for voluntary dismissal, and an appropriate order of dismissal was entered.

    Significance/Impact

    The Jacobson case reaffirms the United States Tax Court’s discretion to grant voluntary dismissals in whistleblower award cases, aligning with precedents set in Wagner and Davidson. This ruling clarifies that petitioners may withdraw their petitions without prejudice to the respondent, provided the respondent does not object and would suffer no legal prejudice. The decision has practical implications for legal practitioners and whistleblowers, as it underscores the importance of considering the timing and implications of filing petitions for review of IRS determinations. It also highlights the binding nature of the IRS’s original decision upon dismissal, ensuring that petitioners are aware of the consequences of withdrawing their claims.

  • Jacobson v. Commissioner, 915 F.2d 832 (2d Cir. 1990): Duration of Surety Bond Liability in Tax Appeals

    Jacobson v. Commissioner, 915 F. 2d 832 (2d Cir. 1990)

    A surety bond filed in a tax appeal remains in effect until the deficiency is finally determined, even if the case is remanded.

    Summary

    In Jacobson v. Commissioner, the Second Circuit reversed and remanded a Tax Court decision, prompting the taxpayers to seek the release of a surety bond filed during the appeal. The Tax Court denied this request, ruling that the bond must remain in effect until the deficiency is finally determined, as required by Section 7485 of the Internal Revenue Code. This case clarifies that a surety bond’s liability extends beyond the initial appeal period and continues until all proceedings related to the deficiency determination are concluded.

    Facts

    The Jacobsons appealed a Tax Court decision regarding their 1979 federal income tax liability. They filed a surety bond of $58,888 on April 28, 1989, as required by Section 7485 of the Internal Revenue Code to stay the collection of the tax deficiency during the appeal. The Second Circuit reversed and remanded the case for reconsideration. Following the remand, the Jacobsons moved for the release of the bond, arguing its purpose was fulfilled once the appeal was decided.

    Procedural History

    The Tax Court initially decided against the Jacobsons in T. C. Memo. 1988-341. They appealed to the Second Circuit, which reversed and remanded the case in Jacobson v. Commissioner, 915 F. 2d 832 (2d Cir. 1990). Upon remand, the Jacobsons filed a motion to release the surety bond, which the Tax Court denied.

    Issue(s)

    1. Whether the surety bond filed by the Jacobsons to stay the collection of a tax deficiency during their appeal can be released following the Second Circuit’s remand and before final determination of the deficiency.

    Holding

    1. No, because the bond must remain in effect until the deficiency is finally determined as per Section 7485 of the Internal Revenue Code.

    Court’s Reasoning

    The Tax Court emphasized that the bond’s purpose, as stated in Section 7485, is to secure payment of the deficiency as finally determined. The court rejected the Jacobsons’ argument that the bond’s purpose was fulfilled once the appeal was decided, noting that the statute and bond terms clearly state it remains effective until final determination. The court distinguished previous cases cited by the Jacobsons, pointing out that Estate of Kahn v. Commissioner discussed the general purpose of the bond, not its statutory condition, and Graefenhain v. Pabst Brewing Co. dealt with a supersedeas bond, not a statutory bond under Section 7485. The court also noted potential risks to the government’s ability to collect if the bond were released prematurely. The court found no legislative history indicating a different interpretation of Section 7485.

    Practical Implications

    This ruling impacts how attorneys handle tax appeals involving surety bonds. It clarifies that such bonds remain in effect until all proceedings related to the deficiency are concluded, not just until the initial appeal is decided. This means taxpayers and their counsel must be prepared to maintain the bond through potentially lengthy remand proceedings. The decision also reinforces the government’s position in tax litigation by ensuring continued security for potential deficiencies. Practitioners should advise clients accordingly and consider the bond’s implications for their financial planning and litigation strategy. Subsequent cases, such as Huntsberry v. Commissioner, have followed this interpretation, emphasizing the importance of statutory language over general bond purpose statements.

  • Jacobson v. Commissioner, 96 T.C. 577 (1991): When a Partnership Transaction is Treated as a Partial Sale

    Jacobson v. Commissioner, 96 T. C. 577 (1991)

    A transaction structured as a contribution to a partnership followed by a distribution can be treated as a partial sale if it lacks a valid business purpose beyond tax avoidance.

    Summary

    JWC, fully owned by the Jacobsons and Larsons, transferred property to a new partnership with Metropolitan, receiving cash equal to 75% of the property’s value. The Tax Court ruled this transaction was, in substance, a sale of a 75% interest in the property to Metropolitan, rather than a contribution followed by a distribution. This decision was based on the absence of a valid business purpose for the transaction structure, which was designed to avoid tax on the sale. Consequently, investment tax credit recapture was triggered for the portion of the property deemed sold.

    Facts

    JWC, a partnership owned by the Jacobsons and Larsons, sought to sell McDonald properties for two years. They formed a new partnership with Metropolitan Life Insurance Co. , contributing the properties subject to mortgages and receiving cash equal to 75% of the property’s value, which was immediately distributed back to JWC. JWC reported this as a non-taxable contribution followed by a taxable distribution. The IRS argued it was a partial sale.

    Procedural History

    The IRS issued notices of deficiency to the Jacobsons and Larsons, treating the transaction as a partial sale. The taxpayers petitioned the U. S. Tax Court, which consolidated the cases. The court ruled in favor of the IRS, holding that the transaction was a partial sale.

    Issue(s)

    1. Whether the transfer of property to a partnership followed by a cash distribution should be treated as a contribution and distribution under IRC sections 721 and 731, or as a partial sale.
    2. Whether and to what extent the taxpayers must recapture investment tax credits on the transfer of section 38 property to the partnership under IRC section 47.

    Holding

    1. No, because the transaction lacked a valid business purpose beyond tax avoidance, it should be treated as a partial sale.
    2. Yes, because the portion of the property deemed sold triggers investment tax credit recapture under IRC section 47.

    Court’s Reasoning

    The court applied the substance over form doctrine, focusing on the economic reality of the transaction. It found no valid business purpose for structuring the transaction as a contribution and distribution rather than a sale. The court considered factors from Otey v. Commissioner, emphasizing the absence of a business purpose for the chosen form. The transaction’s structure was seen as an attempt to avoid taxes, with the cash distribution equal to 75% of the property’s value being disguised sale proceeds. The court also noted that the taxpayers were effectively relieved of 75% of the mortgage debt, further supporting the sale characterization. Regarding the investment tax credit, the court held that the portion of section 38 property deemed sold did not qualify for the “mere change in form” exception under IRC section 47, thus triggering recapture.

    Practical Implications

    This decision underscores the importance of having a valid business purpose when structuring transactions to avoid tax. Taxpayers must be cautious when using partnerships to defer gain recognition, as the IRS and courts will scrutinize such arrangements. The ruling impacts how similar transactions should be analyzed, requiring a focus on economic substance over form. It also affects legal practice by emphasizing the need for careful tax planning and documentation of business purposes. Businesses should be aware that structuring transactions to avoid taxes may lead to recharacterization as sales, with potential tax liabilities and recapture of investment tax credits. Subsequent cases have followed this precedent, reinforcing the need for genuine business reasons behind partnership transactions.

  • Jacobson v. Commissioner, 73 T.C. 610 (1979): Deductibility of Theft Losses and Timing of Joint Return Election

    Jacobson v. Commissioner, 73 T. C. 610 (1979)

    A taxpayer can claim a theft loss deduction if the loss can be attributed to theft rather than mere disappearance, and the election to file a joint return must be made before a notice of deficiency is mailed if the taxpayer subsequently files a petition with the Tax Court.

    Summary

    Charlotte Jacobson sought to deduct a theft loss for personal property taken from her home in 1974 and also attempted to file a joint return with her estranged husband after receiving a deficiency notice. The Tax Court allowed the theft loss deduction, finding that the loss was due to theft rather than mere disappearance. However, the court denied the joint return election because Jacobson failed to prove the amended return was mailed before the deficiency notice was issued, as required by I. R. C. sec. 6013(b)(2)(C).

    Facts

    Charlotte Jacobson left her marital home in Gakona, Alaska, in November 1973 due to marital issues and moved to Seattle. She left her possessions in the home. In June 1974, she returned to Alaska and worked in Paxson, continuing to leave her possessions in Gakona. In September 1974, her estranged husband Charles instructed his girlfriend to clean the house and dispose of Jacobson’s belongings, which were removed without Jacobson’s knowledge or permission. Jacobson discovered the loss of her possessions, including antiques and personal items valued at $4,000, and sought a theft loss deduction on her 1974 separate tax return. After receiving a deficiency notice on February 11, 1977, Jacobson and Charles attempted to file an amended joint return for 1974, which was received by the IRS on February 16, 1977.

    Procedural History

    Jacobson filed a separate return for 1974 and received a deficiency notice on February 11, 1977. She and her husband then attempted to file an amended joint return, which was received by the IRS on February 16, 1977. Jacobson petitioned the Tax Court to contest the deficiency and sought to deduct the theft loss and file a joint return.

    Issue(s)

    1. Whether Jacobson is entitled to deduct $4,000 as a theft loss for 1974.
    2. Whether Jacobson and her husband may file an amended joint return for 1974 after a deficiency notice has been mailed to Jacobson and she has filed a petition with the Tax Court.

    Holding

    1. Yes, because Jacobson established that her property was stolen in 1974, and her basis in the lost items was at least $4,000, entitling her to a theft loss deduction.
    2. No, because Jacobson failed to prove that the amended joint return was mailed on or before February 11, 1977, the date the deficiency notice was mailed, as required by I. R. C. sec. 6013(b)(2)(C).

    Court’s Reasoning

    The court applied I. R. C. sec. 165(c)(3), which allows a deduction for losses arising from theft, and found that Jacobson’s testimony and the evidence supported a theft rather than a mere disappearance of her property. The court noted that Jacobson did not need to prove who the thief was, only that the loss was due to theft. For the joint return issue, the court interpreted I. R. C. sec. 6013(b)(2)(C) strictly, stating that a joint return cannot be elected after a deficiency notice has been mailed if the taxpayer files a petition with the Tax Court. The court rejected Jacobson’s attempt to apply I. R. C. sec. 7502, the timely mailing rule, because she failed to provide sufficient evidence that the amended return was mailed before the deficiency notice. The court emphasized the statutory requirement to take the law as written and the potential procedural complications of allowing such a change after a deficiency notice.

    Practical Implications

    This case clarifies that taxpayers must substantiate theft to claim a loss deduction and cannot rely solely on the mysterious disappearance of property. It also underscores the strict timing requirements for electing to file a joint return after a deficiency notice has been issued. Practitioners should advise clients to carefully document thefts and ensure timely filing of amended returns to avoid similar issues. The decision impacts how taxpayers and their advisors approach theft loss deductions and joint return elections, emphasizing the importance of timely and well-documented actions. Subsequent cases have cited Jacobson for its interpretation of the timely mailing rule and the requirements for substantiating theft losses.

  • Jacobson v. Commissioner, 28 T.C. 1171 (1957): Collapsible Corporations and Tax Treatment of Stock Sales

    Jacobson v. Commissioner, 28 T.C. 1171 (1957)

    A corporation formed to construct property with the intent to sell the stock before realizing substantial income from the constructed property can be classified as a “collapsible corporation,” and the resulting gain from the stock sale will be taxed as ordinary income rather than capital gains.

    Summary

    The case concerns the tax treatment of gains realized from the sale of stock in Hudson Towers, Inc., a corporation formed to build apartment buildings. The IRS determined that the corporation was a “collapsible corporation” under Section 117(m) of the 1939 Internal Revenue Code. This meant the shareholders’ gains from selling their stock should be taxed as ordinary income, not capital gains. The court agreed, finding that the shareholders had the required “view” of selling their stock before the corporation realized substantial income from the project. The court also addressed a dispute over whether the 10% stock ownership limitation in Section 117(m)(3)(A) applied to Rose M. Jacobson. The court held that this limitation did not apply to her, as she owned more than 10% of the stock when her husband’s stock was attributed to her.

    Facts

    Morris Winograd purchased land with the intent to build apartment buildings. He, along with Joseph Facher, Morris Kanengiser, Lewis S. Jacobson, and William Schmitz, formed Hudson Towers, Inc. The corporation was created on April 29, 1949. Hudson Towers, Inc. then entered into agreements to construct five apartment buildings. The construction was completed by June 16, 1950. After construction was finished, an alleged crack appeared in one of the buildings. The shareholders decided to sell their stock in Hudson Towers, Inc. on November 14, 1950, with the sale consummated on February 28, 1951. The shareholders reported their gains as long-term capital gains. The Commissioner of Internal Revenue determined that the gains should be reported as ordinary income.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ income tax, asserting that the gains from the sale of stock in Hudson Towers, Inc., should have been taxed as ordinary income instead of capital gains, due to the collapsible corporation rules. The petitioners challenged this determination in the Tax Court.

    Issue(s)

    1. Whether Hudson Towers, Inc., was a “collapsible corporation” under section 117(m) of the Internal Revenue Code of 1939, so that the gain realized by the petitioners upon the sale of stock was ordinary income rather than capital gains.

    2. If Hudson Towers, Inc. was a collapsible corporation, whether the 10 percent stock ownership limitation of section 117(m)(3)(A) applied to petitioner Rose M. Jacobson.

    Holding

    1. Yes, because the court found that the corporation was formed with the “view” to sell the stock before the corporation realized substantial income.

    2. No, because the limitation did not apply, and the court found Rose Jacobson’s ownership exceeded the 10% threshold.

    Court’s Reasoning

    The court applied Section 117(m) of the Internal Revenue Code of 1939, which deals with collapsible corporations. The court stated that a corporation will be considered collapsible when it is formed for construction, and the construction is followed by a shareholder’s sale of stock before the corporation realizes a substantial portion of the income from the construction, resulting in a gain for the shareholder. The court found that the petitioners had the “view” of selling their stock before the corporation earned substantial income, and the timing of the sale was a key factor. The court dismissed the petitioners’ claims that an unforeseen crack in one of the buildings motivated the sale. The court found the testimony to be unconvincing because it did not hold any independent verification and contradicted the prior statements made by the petitioners. The court found that the taxpayers intended to profit from the stock sale. Regarding the ownership limitation, the court determined that since Lewis Jacobson owned more than 10% of the company’s stock via attribution, and Rose Jacobson owned 7% directly, the 10% ownership limitation did not apply to Rose, since her husband’s shares are attributable to her.

    Practical Implications

    This case highlights the importance of the “view” requirement in determining if a corporation is collapsible. Tax practitioners must carefully consider the intent of the shareholders at the time of the corporation’s formation and throughout its existence. A change of plans after construction does not automatically shield a corporation from collapsible status if the original intent was to sell the stock. This case emphasizes that the IRS and the courts will look closely at the timing of stock sales relative to the corporation’s income and the shareholders’ motivations. It is important to document reasons for stock sales and any potential changes in intent. The case also underscores the importance of how stock ownership is attributed for purposes of the tax code. The case serves as a reminder of the complexity of tax law and the need for thorough analysis of the facts and applicable regulations.

  • Jacobson v. Commissioner, 32 T.C. 893 (1959): Defining ‘Collapsible Corporation’ and the Requisite ‘View’ for Tax Purposes

    32 T.C. 893 (1959)

    A corporation is deemed ‘collapsible’ if formed or availed of with a ‘view’ to sell or exchange stock before the corporation realizes substantial income from constructed property, and this ‘view’ need not be the primary motive from inception but can arise during construction, unless solely attributable to unforeseeable post-construction events.

    Summary

    Petitioners, shareholders of Hudson Towers, Inc., a corporation formed to construct apartment buildings, sold their stock shortly after construction completion, reporting capital gains. The Commissioner determined the corporation was ‘collapsible’ under Section 117(m) of the 1939 I.R.C., thus gains should be ordinary income. The Tax Court upheld the Commissioner, finding the sale was not solely due to a post-construction crack as claimed by petitioners, but rather the ‘view’ to sell existed during or before construction. The court emphasized that the ‘view’ to collapse need not be the primary initial motive and can arise during the project’s lifecycle. The court also held that Rose M. Jacobson met the stock ownership threshold for collapsible corporation rules.

    Facts

    Five individuals formed Hudson Towers, Inc. to construct apartment buildings, financing the project with loans and a mortgage insured by the Federal Housing Administration (FHA). Construction was completed by June 16, 1950, and apartments were rented out. In September or October 1950, a crack was noticed in one building. Shareholders, claiming fear of structural issues due to the crack, decided to sell their stock in Hudson Towers, Inc. They sold the stock in February 1951 and reported long-term capital gains. Hudson Towers, Inc. paid no dividends and reported net losses for 1949 and 1950.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ income tax for 1951, arguing the gain from the stock sale was ordinary income because Hudson Towers, Inc. was a collapsible corporation. The petitioners contested this determination in the Tax Court.

    Issue(s)

    1. Whether Hudson Towers, Inc. was a ‘collapsible corporation’ within the meaning of Section 117(m) of the Internal Revenue Code of 1939, such that the gain from the sale of stock should be treated as ordinary income.
    2. If Hudson Towers, Inc. was a collapsible corporation, whether the 10% stock ownership limitation of Section 117(m)(3)(A) applied to petitioner Rose M. Jacobson.

    Holding

    1. Yes, Hudson Towers, Inc. was a collapsible corporation because the petitioners failed to prove that the ‘view’ to sell the stock arose solely due to post-construction circumstances.
    2. No, the 10% stock ownership limitation did not apply to Rose M. Jacobson because shares owned by her husband’s partners were attributable to her, exceeding the 10% threshold.

    Court’s Reasoning

    The court found the Commissioner’s determination presumptively correct, placing the burden on petitioners to prove error. The court stated, “Ordinarily a corporation will be considered collapsible when its activity is principally construction and the construction is followed by the shareholders’ sale of their stock before the corporation realizes a substantial part of the income to be derived from the construction and the shareholders realize gain attributable to the constructed property.” The petitioners argued their ‘view’ to sell arose *after* construction due to the crack, making the collapsible corporation rules inapplicable under Treasury Regulations. However, the court deemed the petitioners’ testimony about the crack as the sole motive for sale “unconvincing and we can give it no weight.” The court highlighted inconsistencies and improbabilities in their narrative, noting the shareholders’ failure to seek expert advice on the crack and the timing of the sale shortly after completion and before substantial income realization. The court inferred that “at least some of the shareholders anticipated right along the possibility of making a profit from the sale of their stock before the corporation had realized any substantial net income.” Regarding Rose Jacobson, the court interpreted Section 117(m)(3)(A)(ii) to mean that constructive ownership through her husband’s partnership, combined with her direct ownership, surpassed the 10% threshold, thus the limitation did not apply to her. The court explicitly rejected the argument that Section 117(m) could not convert capital gain into ordinary income, stating the statute’s plain language mandates such treatment for collapsible corporations.

    Practical Implications

    Jacobson v. Commissioner is significant for clarifying the ‘view’ requirement in the collapsible corporation doctrine under the 1939 I.R.C. It demonstrates that the ‘view’ to sell stock and recognize gain before substantial corporate income realization need not be the primary or initial purpose when forming a corporation. The case emphasizes that the ‘view’ can arise during the construction phase itself. Taxpayers cannot easily avoid collapsible corporation treatment by claiming a post-construction event triggered the sale unless such event is demonstrably unforeseeable and the sole cause. This case underscores the importance of contemporaneous documentation and objective evidence to support claims of post-construction motivations for stock sales. It highlights the IRS’s scrutiny of stock sales following construction projects and the courts’ willingness to look beyond taxpayer’s self-serving testimony to determine the existence of a ‘view’ to collapse. For legal professionals, Jacobson serves as a reminder of the broad scope of the collapsible corporation rules and the challenges in proving the absence of a proscribed ‘view’ during the relevant period.