SCOTUS Reports

Tag: U.S. Tax Court

  • CF Headquarters Corp. v. Commissioner, 164 T.C. No. 5 (2025): Taxability of Government Grants Under I.R.C. §§ 118, 102, and 139

    CF Headquarters Corp. v. Commissioner, 164 T. C. No. 5 (U. S. Tax Ct. 2025)

    CF Headquarters Corp. received a $3. 1 million grant from the Empire State Development Corp. post-9/11 for business recovery. The U. S. Tax Court ruled that these proceeds were taxable income, not excludable as capital contributions, gifts, or disaster relief under I. R. C. §§ 118, 102, and 139, but found the company not liable for an accuracy-related penalty due to substantial authority for its position.

    Parties

    CF Headquarters Corporation, a Delaware corporation wholly owned by Cantor Fitzgerald, L. P. , was the petitioner. The Commissioner of Internal Revenue was the respondent. The case was filed in the United States Tax Court with docket number 22321-12.

    Facts

    In the aftermath of the September 11, 2001, terrorist attacks, the State of New York established the World Trade Center Job Creation and Retention Program (JCRP) to aid affected businesses. CF Headquarters Corp. (petitioner), a holding company owned by Cantor Fitzgerald, L. P. , received a $3,107,500 grant in 2007 under the JCRP as reimbursement for rent expenses paid by its affiliates, Cantor Fitzgerald and Cantor Fitzgerald Securities. The grant was governed by an Amended and Restated Grant Disbursement Agreement (ARDA) which required the petitioner to maintain certain employment levels in New York City. The grant proceeds were lent to Cantor Fitzgerald in exchange for a 49-year promissory note. On its 2007 federal income tax return, the petitioner excluded the grant proceeds from gross income, which the Commissioner contested, asserting the proceeds should be included in gross income and that the petitioner was liable for an accuracy-related penalty under I. R. C. § 6662(a) and (b)(2).

    Procedural History

    The Commissioner issued a Notice of Deficiency determining a deficiency of $1,056,550 and an accuracy-related penalty of $211,310 for the tax year 2007. CF Headquarters Corp. timely filed a petition with the United States Tax Court to contest the deficiency and penalty. The case was reviewed by the full court, and the opinion was written by Chief Judge Kerrigan.

    Issue(s)

    Whether the $3,107,500 in grant proceeds received by the petitioner under the JCRP are excludable from gross income under I. R. C. § 118 as contributions to capital, I. R. C. § 102 as gifts, or I. R. C. § 139 as qualified disaster relief payments?

    Whether the petitioner is liable for the accuracy-related penalty under I. R. C. § 6662(a) and (b)(2) due to a substantial understatement of income tax?

    Rule(s) of Law

    I. R. C. § 61(a) defines gross income broadly to include all income from whatever source derived, unless excluded by law. I. R. C. § 118(a) excludes from gross income any contribution to the capital of a corporation by a nonshareholder, provided such contribution does not constitute payment for goods or services rendered. I. R. C. § 102(a) excludes from gross income the value of property acquired by gift. I. R. C. § 139(a) excludes from gross income any amount received by an individual as a qualified disaster relief payment. I. R. C. § 6662(a) and (b)(2) impose a 20% accuracy-related penalty for a substantial understatement of income tax, but this penalty does not apply if there is substantial authority for the taxpayer’s position.

    Holding

    The grant proceeds received by the petitioner are not excludable from gross income under I. R. C. § 118 as they were not intended to become part of the petitioner’s permanent working capital. The grant proceeds are also not excludable under I. R. C. § 102 as they were not given out of detached and disinterested generosity. Lastly, the proceeds are not excludable under I. R. C. § 139 as this section applies only to individuals and not corporations. The petitioner is not liable for the accuracy-related penalty under I. R. C. § 6662(a) and (b)(2) because there was substantial authority for its position.

    Reasoning

    The court reasoned that for a transfer to be excluded under I. R. C. § 118 as a contribution to capital, it must become part of the permanent working capital of the corporation. The grant proceeds in question were used to reimburse operating expenses (rent) and were not restricted to capital expenditures. The court cited United States v. Chicago, Burlington & Quincy Railroad Co. , 412 U. S. 401 (1973), which established that government payments intended for operational costs are not contributions to capital. The court also found that the grant was not a gift under I. R. C. § 102 because it was not motivated by detached and disinterested generosity but by an expectation of economic benefits to the state, as articulated in Commissioner v. Duberstein, 363 U. S. 278 (1960). The court rejected the application of I. R. C. § 139 as it applies only to individuals. Regarding the penalty, the court found substantial authority for the petitioner’s position in the statutory text of I. R. C. § 118 as it existed in 2007, and in Supreme Court cases such as Edwards v. Cuba Railroad Co. , 268 U. S. 628 (1925), Brown Shoe Co. v. Commissioner, 339 U. S. 583 (1950), and United States v. Chicago, Burlington & Quincy Railroad Co. , 412 U. S. 401 (1973), which supported the petitioner’s good faith argument that the grants were not taxable income.

    Disposition

    The court entered a decision for the respondent as to the deficiency and for the petitioner as to the accuracy-related penalty.

    Significance/Impact

    This case clarifies the tax treatment of government grants post-disaster under I. R. C. §§ 118, 102, and 139. It distinguishes between grants intended as contributions to capital versus those intended to reimburse operational costs, reinforcing the principle that the former may be excluded from income while the latter are taxable. The decision also highlights the importance of the transferor’s intent in determining whether a payment is a gift under I. R. C. § 102. The finding on the accuracy-related penalty underscores the necessity of substantial authority in tax positions, particularly in novel circumstances such as post-disaster economic recovery. Subsequent legislative changes to I. R. C. § 118 in 2017 further delineated the tax treatment of government grants, reflecting the evolving nature of tax law in response to judicial interpretations.

  • Eaton Corporation and Subsidiaries v. Commissioner of Internal Revenue, 164 T.C. No. 4 (2025): Application of Foreign Tax Credits Under Sections 902 and 960

    Eaton Corporation and Subsidiaries v. Commissioner of Internal Revenue, 164 T. C. No. 4 (U. S. Tax Ct. 2025)

    In a significant ruling on foreign tax credits, the U. S. Tax Court denied Eaton Corporation’s claim for deemed-paid foreign tax credits under sections 902 and 960 of the Internal Revenue Code. The decision hinges on the interposition of a domestic partnership between two tiers of foreign corporations, which the court found precludes Eaton from claiming credits for taxes paid by lower-tier corporations. This ruling underscores the strict interpretation of statutory provisions governing foreign tax credits and the consequences of corporate structuring on tax outcomes.

    Parties

    Eaton Corporation and Subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner is the domestic parent corporation of a multi-tier corporate structure, while Respondent is the federal official responsible for enforcing the Internal Revenue Code.

    Facts

    Eaton Corporation, a domestic corporation, was the ultimate parent of two tiers of controlled foreign corporations (CFCs) with a domestic partnership, Eaton Worldwide, LLC (EW LLC), interposed between the tiers. For tax years 2007 and 2008, EW LLC included in its gross income the subpart F income and amounts determined under section 956 from the lower tier CFCs. However, EW LLC made no distributions to its partners, the upper tier CFCs, during these years. Consequently, Eaton did not increase its gross income based on EW LLC’s inclusions under section 951. In a prior case, Eaton I, the court held that EW LLC’s inclusions under section 951 increased the earnings and profits (E&P) of its partners, all of which were CFCs.

    Procedural History

    The case was before the U. S. Tax Court on cross-motions for partial summary judgment filed by Eaton and the Commissioner. The court had previously addressed the impact of section 951 inclusions on the E&P of the upper tier CFCs in Eaton I. The current motions sought a ruling on Eaton’s entitlement to deemed-paid foreign tax credits under sections 902 and 960 for taxes paid by the lower tier CFCs.

    Issue(s)

    Whether Eaton Corporation is entitled to foreign tax credits under sections 902 and 960 for income taxes paid or accrued by the lower tier of foreign corporations owned by EW LLC, despite no distributions being made by EW LLC to its partners in 2007 and 2008?

    Rule(s) of Law

    Sections 902 and 960 of the Internal Revenue Code govern the availability of deemed-paid foreign tax credits. Section 902 allows a domestic corporation to claim a credit for foreign income taxes deemed paid on dividends received from a foreign corporation. Section 960 extends this rule to include section 951 inclusions as if they were dividends, provided the inclusions are in the gross income of a domestic corporation. The court must strictly construe these statutory provisions.

    Holding

    The U. S. Tax Court held that Eaton Corporation is not entitled to foreign tax credits under sections 902 and 960 for taxes paid by the lower tier of foreign corporations, as no dividends were received from these corporations and the section 951 inclusions were not included in the gross income of a domestic corporation.

    Reasoning

    The court’s reasoning focused on the plain text of sections 902 and 960. Section 902 requires the receipt of dividends to trigger the deemed-paid credit, which did not occur in this case. Section 960 allows for the treatment of section 951 inclusions as dividends for the purpose of section 902, but only if the inclusions are in the gross income of a domestic corporation. Here, the inclusions were in the gross income of EW LLC, a domestic partnership, not a domestic corporation. The court rejected Eaton’s argument that the upper tier CFCs should be treated as domestic corporations for the purpose of section 960, emphasizing that different statutory rules govern the calculation of gross income and E&P. The court also noted that Eaton’s corporate structuring choice, by interposing a partnership between the tiers of CFCs, led to this outcome, underscoring the principle that taxpayers must accept the tax consequences of their chosen structures.

    Disposition

    The court granted summary judgment in favor of the Commissioner, denying Eaton’s claim for deemed-paid foreign tax credits for the taxes paid by the lower tier CFCs.

    Significance/Impact

    This decision reaffirms the strict interpretation of the statutory provisions governing foreign tax credits and underscores the importance of corporate structuring in tax planning. It highlights that the interposition of a domestic partnership between tiers of foreign corporations can significantly impact the availability of foreign tax credits. The ruling may influence how multinational corporations structure their ownership of foreign subsidiaries to optimize their tax positions under the Internal Revenue Code.

  • Donlan v. Commissioner, 164 T.C. No. 3 (2025): Electronic Signatures and Jurisdiction in Tax Court

    Donlan v. Commissioner, 164 T. C. No. 3 (U. S. Tax Court 2025)

    In a significant ruling on electronic signatures, the U. S. Tax Court upheld its jurisdiction over a case filed using its online petition generator. The court ruled that a taxpayer’s name in the signature block of an electronically filed petition constitutes a valid signature, rejecting the Commissioner’s motion to dismiss for lack of jurisdiction. This decision clarifies the validity of electronic filings in tax disputes and supports pro se litigants’ access to the court.

    Parties

    Robert Donlan, Jr. and Kegan Donlan (Petitioners) v. Commissioner of Internal Revenue (Respondent).

    Facts

    On July 22, 2024, the Commissioner mailed a Notice of Deficiency to Robert and Kegan Donlan. The Donlans timely filed a Petition with the U. S. Tax Court on October 21, 2024, using the Court’s online petition generator. This generator produces a petition without handwritten signatures, instead displaying a block with the typewritten names and contact information of the petitioners. On December 3, 2024, the Commissioner filed an Answer and a Motion to Dismiss for Lack of Jurisdiction, asserting that the petition was not properly signed.

    Procedural History

    The Commissioner filed a Motion to Dismiss for Lack of Jurisdiction, arguing that the absence of handwritten signatures on the electronically filed petition deprived the Court of jurisdiction. The Donlans did not respond to the Motion. The standard of review for jurisdictional issues is de novo.

    Issue(s)

    Whether a petition filed electronically through the Tax Court’s online petition generator, which lacks a handwritten signature but includes the petitioners’ names in the signature block, is properly signed under Tax Court Rule 23(a)(3), thereby conferring jurisdiction to the Court.

    Rule(s) of Law

    Tax Court Rule 23(a)(3) states: “A person’s name on a signature block on a paper that the person authorized to be filed electronically, and that is so filed, constitutes the person’s signature. ” The Court’s electronic filing instructions further clarify that the combination of the DAWSON username and password serves as the signature of the individual filing the document.

    Holding

    The U. S. Tax Court held that a petition filed using the Court’s online petition generator, which includes the petitioners’ names in the signature block, is properly signed under Tax Court Rule 23(a)(3). Consequently, the Court has jurisdiction over the Donlans’ Petition.

    Reasoning

    The Court’s reasoning focused on interpreting Tax Court Rule 23(a)(3) and its electronic filing instructions. The Court emphasized that the rule explicitly deems a person’s name in the signature block of an electronically filed document as a valid signature if the person authorized the filing. The Court also considered the practical implications of electronic filings, noting that the majority of taxpayers represent themselves and that the online petition generator was designed to facilitate access to the Court. The Court rejected the Commissioner’s argument that handwritten signatures are required, pointing out that other courts and the IRS also accept electronic signatures. The Court’s analysis highlighted the policy of promoting access to justice through electronic means and clarified that the lack of a handwritten signature does not invalidate an electronically filed petition.

    Disposition

    The Court denied the Commissioner’s Motion to Dismiss for Lack of Jurisdiction, affirming its jurisdiction over the Donlans’ Petition.

    Significance/Impact

    This case significantly impacts the practice of tax law by affirming the validity of electronic signatures in Tax Court petitions. It clarifies that the Court’s online petition generator meets the signature requirement, thereby facilitating pro se litigation and promoting access to justice. The decision aligns with broader trends toward electronic filing and may influence other courts to adopt similar interpretations of electronic signatures. It also underscores the importance of clear court rules and instructions in guiding litigants through the electronic filing process.

  • Tooke v. Commissioner, 164 T.C. No. 2 (2025): Appointments Clause and Separation of Powers in Administrative Proceedings

    Tooke v. Commissioner, 164 T. C. No. 2 (2025)

    In Tooke v. Commissioner, the U. S. Tax Court upheld the constitutionality of the IRS Independent Office of Appeals, rejecting arguments that its officers’ appointments violated the Appointments Clause and that the Chief’s removal restrictions infringed on separation of powers. The court found that Appeals Officers and Team Managers are not “Officers of the United States,” and thus do not require formal appointment under the Constitution. This ruling clarifies the status of administrative adjudicators and supports the IRS’s current structure for handling collection due process hearings.

    Parties

    Charlton C. Tooke III (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case was filed in the U. S. Tax Court, Docket No. 398-21L.

    Facts

    Charlton C. Tooke III filed federal income tax returns for the years 2012 through 2017 but did not pay the assessed taxes. The IRS issued a Notice of Federal Tax Lien Filing and a Final Notice of Intent to Levy. Tooke requested a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals (Appeals). During the hearing, Tooke raised constitutional arguments concerning the separation of powers, specifically the Appointments Clause and removal power of Appeals Officers, Appeals Team Managers, and the Chief of Appeals. The Appeals Officer rejected these arguments, and the Appeals Team Manager issued a Notice of Determination sustaining the tax lien and proposed levy action. Tooke subsequently filed a petition in the U. S. Tax Court challenging the constitutionality of the Appeals process.

    Procedural History

    Tooke timely filed a petition in the U. S. Tax Court challenging the Notice of Determination issued by the IRS Independent Office of Appeals. He filed two motions: an Appointments Clause Motion asserting that the Appeals Officers, Appeals Team Managers, and the Chief of Appeals were unconstitutionally appointed, and a Separation of Powers Motion asserting that the Chief’s removal restrictions violated constitutional principles. The Tax Court considered these motions under the standard of review applicable to summary judgment.

    Issue(s)

    Whether Appeals Officers and Appeals Team Managers are “Officers of the United States” under the Appointments Clause, requiring formal appointment? Whether Tooke has standing to challenge the appointment and removal of the Chief of Appeals?

    Rule(s) of Law

    The Appointments Clause of the U. S. Constitution, Article II, Section 2, Clause 2, requires that all “Officers of the United States” be appointed by the President with the advice and consent of the Senate, or by Congress vesting the appointment of inferior officers in the President alone, the courts of law, or the heads of departments. “Officers of the United States” are those who hold a continuing position, exercise significant authority pursuant to the laws of the United States, and are established by law.

    Holding

    The U. S. Tax Court held that Appeals Officers and Appeals Team Managers are not “Officers of the United States” and thus do not need to be appointed under the mandates of the Appointments Clause. The court also held that Tooke lacked standing to challenge the appointment and removal of the Chief of Appeals.

    Reasoning

    The court reasoned that Appeals Officers and Appeals Team Managers do not wield significant authority as defined by Supreme Court precedents in cases like Buckley v. Valeo, Freytag v. Commissioner, and Lucia v. SEC. Appeals Officers lack the power to take testimony, issue subpoenas, or enforce compliance with discovery orders, powers that are characteristic of officers. Their decisions are subject to review by Appeals Team Managers and the Commissioner, further diminishing their authority. The court also found that the positions of Appeals Officers and Team Managers are not “established by Law” as required by the Appointments Clause, citing the diffuse statutory language in sections 6320 and 6330 of the Internal Revenue Code. Regarding standing, the court determined that Tooke’s injury was not traceable to the Chief of Appeals, who did not participate in Tooke’s CDP hearing, and thus Tooke lacked standing to challenge the Chief’s appointment and removal. The court rejected Tooke’s “root-to-branch” theory of causation, which argued that the Chief’s unconstitutional appointment tainted the entire Appeals process.

    Disposition

    The court denied Tooke’s Appointments Clause Motion as to the Chief of Appeals and his Separation of Powers Motion. The court also denied Tooke’s Appointments Clause Motion as to Appeals Officers and Appeals Team Managers, finding that they are not “Officers of the United States. “

    Significance/Impact

    The decision in Tooke v. Commissioner affirms the constitutionality of the IRS Independent Office of Appeals’ current structure and operations. It clarifies that Appeals Officers and Team Managers do not require formal appointment under the Appointments Clause, upholding the IRS’s authority to conduct CDP hearings without constitutional challenge. The ruling also sets a precedent for standing requirements in challenges to the appointment and removal of high-level administrative officials who do not directly participate in a taxpayer’s case. This case may influence future challenges to the constitutionality of administrative adjudicators and the separation of powers doctrine in tax administration.

  • Capitol Places II Owner, LLC v. Commissioner, 164 T.C. No. 1 (2025): Requirements for Charitable Contribution Deduction for Conservation Easements

    Capitol Places II Owner, LLC v. Commissioner, 164 T. C. No. 1 (U. S. Tax Ct. 2025)

    In a ruling impacting tax deductions for conservation easements, the U. S. Tax Court in Capitol Places II Owner, LLC v. Commissioner clarified the stringent requirements for a building to qualify as a ‘certified historic structure’ under I. R. C. § 170(h). The court denied a charitable contribution deduction exceeding $23 million for a facade easement, ruling that the building was neither listed in the National Register of Historic Places nor certified as historically significant to its district. This decision underscores the necessity for precise compliance with statutory definitions and certification processes in claiming such tax benefits.

    Parties

    Capitol Places II Owner, LLC (Petitioner), as the notice partner of Historic Preservation Fund 2014 LLC, challenged the Commissioner of Internal Revenue (Respondent) over a notice of final partnership administrative adjustment (FPAA) issued by the IRS disallowing a claimed charitable contribution deduction.

    Facts

    Capitol Places II Owner, LLC (CPII) donated a facade easement over the Manson Building in Columbia, South Carolina, to the Historic Columbia Foundation in December 2014. CPII claimed a charitable contribution deduction of $23,900,000 on its 2014 tax return, asserting that the building was a ‘certified historic structure’ under I. R. C. § 170(h)(4)(C). The Manson Building, designed by architect James Urquhart, was located in the Columbia Commercial Historic District, listed in the National Register in October 2014. However, it was not individually listed nor certified as historically significant to the district by the Secretary of the Interior.

    Procedural History

    The IRS examined CPII’s return and issued an FPAA disallowing the deduction. CPII filed a timely petition in the U. S. Tax Court, challenging the FPAA. The Commissioner moved for partial summary judgment, arguing that the easement did not qualify as a ‘qualified conservation contribution’ under I. R. C. § 170(h) because the building did not meet the statutory definition of a ‘certified historic structure. ‘

    Issue(s)

    Whether the Manson Building qualifies as a ‘certified historic structure’ under I. R. C. § 170(h)(4)(C) by being either listed in the National Register or certified by the Secretary of the Interior as historically significant to the Columbia Commercial Historic District?

    Rule(s) of Law

    Under I. R. C. § 170(h)(4)(C), a ‘certified historic structure’ includes: (i) any building, structure, or land area listed in the National Register, or (ii) any building located in a registered historic district and certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district. The statute requires a written application for certification of historic significance to the district, as outlined in 36 C. F. R. § 67. 4.

    Holding

    The U. S. Tax Court held that the Manson Building did not qualify as a ‘certified historic structure’ under I. R. C. § 170(h)(4)(C). It was neither individually listed in the National Register nor certified by the Secretary of the Interior as historically significant to the Columbia Commercial Historic District. Consequently, the easement donation did not meet the statutory requirements for a qualified conservation contribution, and the claimed charitable contribution deduction was disallowed.

    Reasoning

    The court’s reasoning focused on the precise interpretation of ‘listed in the National Register’ and the necessity of certification for buildings in registered historic districts. The court rejected CPII’s argument that the building was ‘listed’ merely by being within the district boundaries, emphasizing that the statute requires individual listing. The court also dismissed the claim that the building’s designation as a ‘contributing resource’ to the district constituted the required certification of historic significance, noting the absence of a formal certification application as required by 36 C. F. R. § 67. 4. The court applied principles of statutory interpretation, including the avoidance of rendering statutory provisions superfluous and the presumption of congressional awareness of existing regulatory frameworks. Additionally, the court considered the statutory scheme’s comprehensive nature and the specific requirements for ‘certified historic structures’ over more general provisions for ‘historically important land areas. ‘

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment, disallowing the charitable contribution deduction for the facade easement donation.

    Significance/Impact

    This decision reinforces the strict criteria for claiming charitable contribution deductions for conservation easements, particularly concerning historic structures. It underscores the importance of precise compliance with the statutory definitions and certification processes established by I. R. C. § 170(h) and related regulations. The ruling may influence future cases involving similar deductions, emphasizing that mere inclusion in a historic district does not suffice for tax benefits without specific certification. It also highlights the necessity of a clear and enforceable conservation purpose within the easement deed itself, impacting how such agreements are drafted and interpreted.

  • 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.

  • 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.