SCOTUS Reports

Tag: Reasonable Cause Defense

  • McGuire v. Comm’r, 149 T.C. No. 9 (2017): Advance Premium Tax Credits and Taxpayer Obligations under the Affordable Care Act

    McGuire v. Commissioner of Internal Revenue, 149 T. C. No. 9 (2017)

    In McGuire v. Comm’r, the U. S. Tax Court ruled that excess advance premium tax credits received under the Affordable Care Act (ACA) must be repaid as an increase in tax, despite the taxpayers’ lack of awareness due to administrative errors. The McGuires, who were overpaid credits because of unprocessed income changes, were not liable for penalties due to their reasonable reliance on the health exchange and their tax preparer, highlighting the complexities and potential pitfalls of ACA implementation.

    Parties

    Steven A. McGuire and Robin L. McGuire, Petitioners, v. Commissioner of Internal Revenue, Respondent. The McGuires were the taxpayers and petitioners at the trial level before the United States Tax Court.

    Facts

    In 2014, Steven and Robin McGuire applied for and received advance premium tax credits under the Affordable Care Act through Covered California, a health insurance exchange. Initially, their eligibility was determined based on Steven’s income of approximately $800 per week. However, Robin began working in late 2013, increasing their household income above 400% of the federal poverty line, which disqualified them from receiving the credit. Despite notifying Covered California of the income change, the McGuires’ eligibility was not re-evaluated, and they continued to receive the credits, totaling $7,092 for the year. The McGuires did not receive Form 1095-A, which is necessary to reconcile the credits received with the credits to which they were entitled. They also did not report the excess credits as an increase in tax on their federal income tax return for 2014.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to the McGuires on August 8, 2016, disallowing the $7,092 in advance premium tax credits and determining an accuracy-related penalty. The McGuires, residing in California, petitioned the United States Tax Court for a redetermination of the deficiency. The Tax Court reviewed the case de novo, focusing on the statutory requirements under the Internal Revenue Code and the McGuires’ liability for the tax and penalty.

    Issue(s)

    Whether excess advance premium tax credits received under the Affordable Care Act must be repaid as an increase in tax, even if the taxpayers did not receive Form 1095-A and were unaware of the excess credits due to administrative errors by the health insurance exchange?

    Whether the McGuires are liable for an accuracy-related penalty under section 6662(a) for the understatement of their tax liability resulting from the unreported excess advance premium tax credits?

    Rule(s) of Law

    Under section 36B(f)(2) of the Internal Revenue Code, if the amount of the advance premium tax credit exceeds the amount to which the taxpayer is entitled, the excess must be repaid as an increase in tax. There is no limit to the amount of the tax increase for taxpayers with income above 400% of the federal poverty line.

    Section 6662(a) imposes an accuracy-related penalty for any portion of an underpayment of tax required to be shown on a return, which is attributable to negligence or a substantial understatement of income tax. However, section 6664(c)(1) provides a defense to this penalty if the taxpayer can show that the underpayment was due to reasonable cause and the taxpayer acted in good faith.

    Holding

    The Tax Court held that the McGuires were liable for the $7,092 deficiency resulting from the excess advance premium tax credits they received, as mandated by section 36B(f)(2) of the Internal Revenue Code. However, the court also held that the McGuires were not liable for the accuracy-related penalty under section 6662(a) due to their reasonable cause and good faith in relying on Covered California and their tax preparer.

    Reasoning

    The court reasoned that it lacked the equitable power to override the clear statutory language of section 36B(f)(2), which treats excess advance premium tax credits as an increase in tax. The McGuires’ failure to report the excess credits was not excused by their lack of knowledge, as the statute imposes a clear obligation on taxpayers to reconcile the credits received with those to which they are entitled.

    Regarding the penalty, the court found that the Commissioner failed to meet the burden of production for the negligence penalty under section 6662(a). For the substantial understatement penalty, the court acknowledged that the McGuires’ understatement exceeded the threshold but determined that they had reasonable cause and acted in good faith. The McGuires’ nonreceipt of Form 1095-A, coupled with their reliance on Covered California to properly adjust their eligibility and on their tax preparer, contributed to their reasonable cause defense. The court cited cases such as Frias v. Commissioner and Rinehart v. Commissioner, where nonreceipt of information returns and reliance on third parties contributed to reasonable cause and good faith defenses.

    Disposition

    The Tax Court entered a decision for the respondent (Commissioner) as to the tax deficiency of $7,092 and for the petitioners (McGuires) as to the accuracy-related penalty.

    Significance/Impact

    McGuire v. Comm’r underscores the strict liability imposed on taxpayers for repaying excess advance premium tax credits under the ACA, regardless of administrative errors or lack of notification. The decision highlights the importance of taxpayers’ proactive engagement with health exchanges and the necessity of receiving and acting on Form 1095-A. The case also emphasizes the potential for reasonable cause and good faith defenses to penalties when taxpayers rely on third parties and do not receive required information returns. This ruling may influence future cases involving ACA tax credits and underscores the need for clear communication and efficient administration by health exchanges to prevent similar issues.

  • 106 Ltd. v. Commissioner of Internal Revenue, 136 T.C. 67 (2011): Partnership-Level Penalties and Reasonable Cause Defense in Tax Law

    106 Ltd. v. Commissioner of Internal Revenue, 136 T. C. 67 (2011)

    In 106 Ltd. v. Commissioner, the U. S. Tax Court ruled that it had jurisdiction over a partnership-level penalty dispute related to a Son-of-BOSS tax shelter transaction. The court held that the partnership could assert a reasonable cause and good faith defense at the partnership level, but found that the partnership could not rely on advice from promoters involved in structuring the transaction. This decision underscores the limits of relying on professional advice to avoid penalties in tax shelter cases and clarifies the Tax Court’s jurisdiction over partnership-level penalties.

    Parties

    106 Ltd. was the petitioner in this case, with David Palmlund serving as the tax matters partner. The respondent was the Commissioner of Internal Revenue. The case was heard in the United States Tax Court.

    Facts

    David Palmlund, the tax matters partner for 106 Ltd. , engaged in a Son-of-BOSS transaction in 2001, which generated over $1 million in artificial losses claimed on the partners’ tax returns. The transaction involved the formation of several entities, including 32 LLC, 7612 LLC, and 106 Ltd. , and the purchase and subsequent distribution of foreign currency options and Canadian dollars. Palmlund relied on the advice of Joe Garza, his attorney, and the accounting firm Turner & Stone. The IRS issued a Final Partnership Administrative Adjustment (FPAA) that adjusted various partnership items to zero and asserted a gross-valuation misstatement penalty under section 6662(h) of the Internal Revenue Code. Palmlund conceded the tax due but contested the penalty, arguing that he relied in good faith on professional advice.

    Procedural History

    The IRS issued an FPAA to 106 Ltd. , which adjusted various partnership items and asserted penalties. Palmlund, as the tax matters partner, timely petitioned the U. S. Tax Court. The court granted partial summary judgment to the Commissioner on two issues: (1) that the 2001 asset distribution from 106 Ltd. was nonliquidating, and (2) that there was a gross-valuation misstatement in excess of 400% on the partnership return. The remaining issue was whether the partnership had a reasonable cause and good faith defense to the penalty.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction over the gross-valuation misstatement penalty in this partnership-level proceeding?

    Whether a partnership can assert a reasonable cause and good faith defense in a partnership-level proceeding?

    Whether the partnership can reasonably rely in good faith on the tax advice given by a promoter?

    Rule(s) of Law

    The Tax Court has jurisdiction over penalties in partnership-level proceedings if the penalty relates to an adjustment to a partnership item that can be assessed without a partner-level affected items proceeding. See Petaluma FX Partners v. Commissioner, 135 T. C. 29 (2010). A partnership can assert its own reasonable cause and good faith defense in a partnership-level proceeding. See American Boat Co. LLC v. United States, 583 F. 3d 471 (7th Cir. 2009). A taxpayer cannot reasonably rely in good faith on the advice of a promoter, defined as an adviser who participates in structuring the transaction or has an interest in, or profits from, the transaction. See Tigers Eye Trading, LLC v. Commissioner, T. C. Memo 2009-121.

    Holding

    The U. S. Tax Court held that it had jurisdiction over the gross-valuation misstatement penalty in this partnership-level proceeding because the penalty related to an adjustment to the partnership’s inside basis, a partnership item. The court also held that the partnership could assert a reasonable cause and good faith defense at the partnership level but found that the partnership could not reasonably rely in good faith on the advice of Joe Garza and Turner & Stone, who were deemed promoters of the transaction.

    Reasoning

    The court’s reasoning focused on three main points. First, it distinguished the case from Petaluma FX Partners, which held that the Tax Court lacked jurisdiction over penalties related to adjustments to a partner’s outside basis. Here, the penalty related to the partnership’s inside basis, which is a partnership item under the regulations, and thus within the court’s jurisdiction. Second, the court followed the Seventh Circuit’s decision in American Boat Co. in holding that a partnership can assert a reasonable cause and good faith defense in a partnership-level proceeding, rejecting the contrary view in Clearmeadow Investments, LLC v. United States. Finally, the court found that Palmlund could not rely on the advice of Garza and Turner & Stone because they were promoters of the transaction. The court adopted the definition of promoter from Tigers Eye Trading and found that both advisers participated in structuring the transaction and profited from its implementation. Additionally, the court noted Palmlund’s business sophistication and the inaccuracies in Garza’s opinion letter as further evidence of a lack of good faith reliance.

    Disposition

    The court entered its decision for the respondent, upholding the gross-valuation misstatement penalty against 106 Ltd.

    Significance/Impact

    This case is significant for clarifying the Tax Court’s jurisdiction over penalties in partnership-level proceedings and affirming that partnerships can assert a reasonable cause and good faith defense at that level. It also underscores the importance of the nature of the professional advice received, particularly from advisers who are promoters of the transaction in question. The decision impacts the ability of taxpayers to rely on professional advice to avoid penalties in tax shelter cases and highlights the need for independent, non-conflicted advice to establish a reasonable cause defense. The case has been cited in subsequent decisions addressing similar issues in the context of partnership-level proceedings and the application of penalties.