SCOTUS Reports

Tag: McNeill v. Commissioner

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

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

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

    Parties

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

    Facts

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

    Procedural History

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

    Issue(s)

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

    Rule(s) of Law

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

    Holding

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

    Reasoning

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

    Disposition

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

    Significance/Impact

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

  • McNeill v. Commissioner, 27 T.C. 899 (1957): Losses from Sales Between Related Taxpayers

    27 T.C. 899 (1957)

    The Internal Revenue Code disallows deductions for losses from sales or exchanges of property, directly or indirectly, between an individual and a corporation more than 50% of whose stock is owned by that individual, their family, or related entities.

    Summary

    In McNeill v. Commissioner, the U.S. Tax Court addressed two main issues: the deductibility of a loss from the sale of land to a corporation owned by the taxpayer and his family, and the classification of bad debts incurred by a practicing attorney. The court held that the land sale was disallowed under Section 24(b) of the 1939 Internal Revenue Code as an indirect sale between related taxpayers. The court reasoned that even though the sale was technically through the city of Altoona, McNeill’s intervention in the transfer to Royal Village Corporation, which he and his family controlled, triggered the prohibition. Additionally, the court determined that the bad debts were not proximately related to the attorney’s business and therefore were deductible only as nonbusiness bad debts subject to specific limitations.

    Facts

    Robert H. McNeill acquired land near Altoona, Pennsylvania, with the intention of developing and selling lots. Efforts to sell the land were unsuccessful. The county seized part of the property for unpaid taxes, later transferring it to the City of Altoona. McNeill’s right of redemption in the property expired. Through McNeill’s intervention, the City of Altoona sold the property to Royal Village Corporation, whose stock was primarily held by McNeill and his family. McNeill claimed an abandonment loss on his 1946 tax return. McNeill, also, made several loans and endorsements of notes which became worthless.

    Procedural History

    The Commissioner of Internal Revenue disallowed McNeill’s claimed deduction for the abandonment loss and reclassified his claimed business bad debts as non-business bad debts. McNeill petitioned the U.S. Tax Court challenging the Commissioner’s determinations. The Tax Court heard the case, making findings of fact and issuing an opinion disallowing the claimed loss and reclassifying the bad debts, resulting in a tax deficiency for McNeill.

    Issue(s)

    1. Whether McNeill’s loss from the sale of land to the Royal Village Corporation is deductible, considering the provisions of Section 24(b)(1)(B) of the Internal Revenue Code of 1939 regarding sales between related taxpayers.

    2. Whether bad debts incurred by McNeill are deductible as business bad debts, or are subject to the limitations of non-business bad debts under the Internal Revenue Code.

    Holding

    1. No, because the sale of the land to Royal Village Corporation was an indirect sale between related taxpayers, thus the loss was not deductible.

    2. No, because the bad debts were not proximately related to McNeill’s professional activities and were therefore subject to the limitations of non-business bad debts.

    Court’s Reasoning

    The court determined that McNeill’s loss from the sale of land to the Royal Village Corporation was not deductible. The court found that the transfer to the corporation, which was owned by McNeill and his family, constituted an indirect sale between related taxpayers, which is prohibited under Section 24(b)(1)(B) of the 1939 Internal Revenue Code. The court distinguished this case from McCarty v. Cripe, where a public auction was held, and there was no evidence of prearrangement. In McNeill’s case, McNeill’s intervention to have the land transferred directly to the Royal Village Corporation instead of taking title in his own name triggered the application of Section 24(b). The court also found that McNeill did not abandon the property, as he attempted to retain control over it. The court reasoned that the purpose of this section was to prevent taxpayers from creating tax losses through transactions within closely held groups where there might not be a genuine economic loss. The court stated: “We conclude that the purpose of Section 24 (b) was to put an end to the right of taxpayers to choose, by intra-family transfers and other designated devices, their own time for realizing tax losses on investments which, for most practical purposes, are continued uninterrupted.”

    Regarding the bad debts, the court determined that these debts were not proximately related to McNeill’s law practice. The court found that McNeill was not in the business of lending money and that these transactions were isolated in character. The court, therefore, agreed with the Commissioner that these debts were personal in nature and deductible as nonbusiness bad debts.

    Practical Implications

    This case highlights the importance of carefully structuring transactions between related parties to avoid the disallowance of losses. Attorneys and tax professionals must advise their clients on the tax implications of such transactions, specifically considering the ownership structure and the potential application of Section 24(b) of the Internal Revenue Code (and its current equivalent). It also shows that the IRS and the courts will scrutinize the business connection for bad debt deductions. The case reinforces the need for clear documentation and evidence that a loss is genuine and not a result of transactions designed to manipulate tax liabilities within a family or closely held group.