SCOTUS Reports

Tag: U.S. Tax Court

  • Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T.C. No. 11 (2020): Collection Due Process and Jurisdiction over Computational Adjustments

    Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T. C. No. 11 (U. S. Tax Court 2020)

    In Amanda Iris Gluck Irrevocable Trust v. Commissioner, the U. S. Tax Court clarified its jurisdiction in collection due process (CDP) cases involving computational adjustments under the Tax Equity and Fiscal Responsibility Act (TEFRA). The Court held that while it lacked jurisdiction over the 2012 tax year due to the absence of a collection action, it could review the Trust’s underlying tax liabilities for 2014 and 2015 in a CDP context, despite these liabilities stemming from computational adjustments. This ruling underscores the broader scope of judicial review in CDP proceedings compared to deficiency cases, offering taxpayers a chance to contest liabilities they could not previously challenge.

    Parties

    Amanda Iris Gluck Irrevocable Trust (Petitioner) v. Commissioner of Internal Revenue (Respondent). The Trust was the petitioner at the U. S. Tax Court level, challenging the Commissioner’s actions through a collection due process (CDP) hearing and subsequent judicial review.

    Facts

    The Amanda Iris Gluck Irrevocable Trust (the Trust) was a direct and indirect partner in partnerships subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). In 2012, one of these partnerships sold property and realized a large capital gain. The Trust allegedly failed to report its entire distributive share of this gain, prompting the IRS to make computational adjustments to the Trust’s 2012-2015 tax returns. These adjustments eliminated the Trust’s net operating loss (NOL) for 2012 and disallowed NOL carryforward deductions for 2013-2015, resulting in assessed tax liabilities for those years. The IRS issued a levy notice for the 2013-2015 tax years, which the Trust challenged through a CDP hearing and subsequent petition to the U. S. Tax Court.

    Procedural History

    The IRS made computational adjustments to the Trust’s 2012-2015 tax returns and assessed the resulting tax liabilities. The IRS then issued a levy notice for the 2013-2015 tax years, prompting the Trust to request a CDP hearing. The settlement officer (SO) sustained the levy notice, and the Trust timely petitioned the U. S. Tax Court for review. The Commissioner moved to dismiss the case as to the 2012 and 2013 tax years, arguing that the 2012 tax year was not subject to the levy notice and that the 2013 liability had been fully paid. The Commissioner also moved for summary judgment as to the 2014 and 2015 tax years.

    Issue(s)

    1. Whether the U. S. Tax Court has jurisdiction to review the Trust’s underlying tax liability for the 2012 tax year in this CDP proceeding?

    2. Whether the U. S. Tax Court has jurisdiction to review the Trust’s underlying tax liabilities for the 2013-2015 tax years in this CDP proceeding?

    3. Whether the Trust’s challenge to the collection action for the 2013 tax year is moot due to full payment of the liability?

    4. Whether the Trust is entitled to challenge its underlying tax liabilities for the 2014 and 2015 tax years in this CDP proceeding?

    Rule(s) of Law

    1. Under I. R. C. § 6330(d)(1), the U. S. Tax Court has jurisdiction to review a notice of determination issued following a CDP hearing if a timely petition is filed.

    2. I. R. C. § 6330(c)(2)(B) allows a taxpayer to challenge the existence or amount of an underlying tax liability in a CDP proceeding if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute such tax liability.

    3. I. R. C. § 6230(a)(1) generally prohibits the U. S. Tax Court from reviewing computational adjustments in deficiency proceedings, but this limitation does not apply in CDP cases.

    4. The U. S. Tax Court reviews the SO’s determination regarding underlying tax liabilities de novo and other aspects of the determination for abuse of discretion.

    Holding

    1. The U. S. Tax Court lacks jurisdiction over the Trust’s 2012 tax year because no collection action was taken for that year.

    2. The U. S. Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review the Trust’s underlying tax liabilities for the 2013-2015 tax years in this CDP proceeding.

    3. The Trust’s challenge to the collection action for the 2013 tax year is moot because the liability has been fully paid.

    4. The Trust is entitled to challenge its underlying tax liabilities for the 2014 and 2015 tax years because it did not have a prior opportunity to dispute these liabilities.

    Reasoning

    The U. S. Tax Court’s reasoning in this case focused on the scope of its jurisdiction in CDP proceedings and the distinction between deficiency and CDP cases regarding computational adjustments. The Court emphasized that while it generally lacks jurisdiction to review computational adjustments in deficiency proceedings under I. R. C. § 6230(a)(1), its jurisdiction in CDP cases is not similarly limited. The Court cited McNeill v. Commissioner, 148 T. C. 481 (2017), to support its authority to review underlying liabilities arising from computational adjustments in CDP proceedings.

    The Court also analyzed the Trust’s right to challenge its underlying liabilities under I. R. C. § 6330(c)(2)(B), which allows such challenges if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. The Court determined that the Trust did not have a prior opportunity to dispute its 2014 and 2015 liabilities in a prepayment posture, thus entitling it to raise these challenges in the CDP hearing.

    The Court rejected the Commissioner’s argument that the Trust was merely disputing its 2012 tax liability to create an overpayment for offsetting purposes. Instead, the Court found that the Trust was challenging the disallowance of NOL carryforward deductions for 2014 and 2015, which directly affected its underlying tax liabilities for those years. The Court noted that it could consider facts related to other tax years, such as the 2012 NOL, to determine the correct amount of deductions for the years in issue.

    The Court also addressed the standard of review in CDP cases, applying de novo review to the Trust’s underlying liability challenges and abuse of discretion review to other aspects of the SO’s determination. The Court found genuine disputes of material fact regarding the Trust’s entitlement to NOL carryforward deductions for 2014 and 2015, precluding summary judgment.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction as to the 2012 tax year and dismissed the 2013 tax year as moot. The Court denied the Commissioner’s motion for summary judgment as to the 2014 and 2015 tax years, finding genuine disputes of material fact regarding the Trust’s underlying tax liabilities for those years.

    Significance/Impact

    This case clarifies the U. S. Tax Court’s jurisdiction in CDP proceedings involving computational adjustments under TEFRA. It underscores the broader scope of judicial review available to taxpayers in CDP cases compared to deficiency proceedings, allowing them to challenge underlying tax liabilities that they could not previously dispute. The decision also highlights the importance of the CDP process as a mechanism for taxpayers to contest tax liabilities assessed through computational adjustments, particularly when they have not had a prior opportunity to challenge those liabilities. This ruling may impact how taxpayers and the IRS approach CDP hearings and the litigation of tax liabilities arising from partnership items.

  • Whirlpool Financial Corp. & Consolidated Subsidiaries v. Commissioner of Internal Revenue, 154 T.C. No. 9 (2020): Foreign Base Company Sales Income and the Branch Rule

    Whirlpool Financial Corp. & Consolidated Subsidiaries v. Commissioner of Internal Revenue, 154 T. C. No. 9 (2020)

    In a landmark decision, the U. S. Tax Court ruled that income from appliance sales by Whirlpool’s Luxembourg subsidiary constituted Foreign Base Company Sales Income (FBCSI) under the branch rule of I. R. C. § 954(d)(2). The ruling clarified the tax treatment of income from a branch treated as a subsidiary, preventing tax deferral through a corporate restructuring involving a Mexican manufacturing branch and a Luxembourg sales entity. This decision reinforces the IRS’s ability to address tax avoidance strategies involving foreign subsidiaries and branches.

    Parties

    Whirlpool Financial Corporation & Consolidated Subsidiaries (Petitioner) and Whirlpool International Holdings S. a. r. l. , f. k. a. Maytag Corporation & Consolidated Subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent).

    Facts

    During 2009, Whirlpool Financial Corporation, through its subsidiaries, engaged in the manufacture and distribution of household appliances. Whirlpool restructured its Mexican operations in 2007-2009, establishing Whirlpool Overseas Manufacturing, S. a. r. l. (WOM) and Whirlpool Luxembourg S. a. r. l. (Whirlpool Luxembourg) in Luxembourg, both controlled foreign corporations (CFCs). Whirlpool Luxembourg operated a branch in Mexico, which nominally manufactured appliances under a maquiladora structure. The Luxembourg entity sold these appliances to Whirlpool and its Mexican subsidiary, generating significant income. The IRS determined that this income constituted FBCSI under I. R. C. § 954(d), taxable to Whirlpool as subpart F income under I. R. C. § 951(a).

    Procedural History

    Whirlpool filed a motion for partial summary judgment in the U. S. Tax Court, arguing that the sales income was not FBCSI under I. R. C. § 954(d)(1) due to substantial transformation of products by its Mexican branch. The IRS opposed this motion, citing disputes over whether the Luxembourg CFC actually manufactured the products. Both parties filed cross-motions for partial summary judgment on whether the sales income constituted FBCSI under the branch rule of I. R. C. § 954(d)(2). The Tax Court granted the IRS’s cross-motion, holding that the sales income was FBCSI under the branch rule.

    Issue(s)

    Whether the income earned by Whirlpool Luxembourg from sales of appliances to Whirlpool and its Mexican subsidiary constituted Foreign Base Company Sales Income (FBCSI) under I. R. C. § 954(d)(2), the branch rule?

    Rule(s) of Law

    I. R. C. § 954(d)(2) provides that where a CFC carries on activities through a branch outside its country of incorporation, and the use of the branch has substantially the same effect as if the branch were a wholly owned subsidiary, the income attributable to the branch shall be treated as income derived by a wholly owned subsidiary of the CFC and constitutes FBCSI. The regulations under § 1. 954-3(b), Income Tax Regs. , detail the allocation of income and the comparison of tax rates to determine the application of the branch rule.

    Holding

    The Tax Court held that the income earned by Whirlpool Luxembourg from the sales of appliances to Whirlpool and its Mexican subsidiary was FBCSI under I. R. C. § 954(d)(2). The court found that the Mexican branch’s activities were treated as if conducted by a subsidiary, and the sales income was allocable to Whirlpool Luxembourg, meeting the statutory requirements for FBCSI.

    Reasoning

    The court’s reasoning was based on the application of the branch rule under I. R. C. § 954(d)(2). It found that Whirlpool Luxembourg conducted manufacturing activities through its Mexican branch, which was treated as a subsidiary for tax purposes. The court allocated all manufacturing income to the Mexican branch and all sales income to Whirlpool Luxembourg. The effective tax rate on the sales income was 0%, significantly lower than the hypothetical 28% rate that would apply if the income were treated as sourced in Mexico. This disparity satisfied the conditions for applying the branch rule, resulting in the sales income being classified as FBCSI. The court also rejected Whirlpool’s arguments regarding the validity of the regulations and the applicability of the same country exception, emphasizing that the restructuring was designed to avoid U. S. and foreign taxes, precisely the abuse targeted by Congress in enacting subpart F.

    Disposition

    The court denied Whirlpool’s motions for partial summary judgment and granted the IRS’s cross-motion regarding the FBCSI issue. The sales income was included in Whirlpool’s taxable income under subpart F.

    Significance/Impact

    This decision reinforces the IRS’s enforcement of subpart F rules, particularly the branch rule, to combat tax avoidance strategies involving the separation of sales and manufacturing income through foreign subsidiaries and branches. It clarifies the application of I. R. C. § 954(d)(2) and its regulations, ensuring that income cannot be artificially separated to achieve tax deferral. The ruling may influence future tax planning involving foreign operations and underscores the importance of the branch rule in preventing tax evasion through corporate restructuring.

  • Lewis v. Commissioner, 154 T.C. No. 8 (2020): Definition of Collected Proceeds and Application of Budget Sequestration in Whistleblower Awards

    Lewis v. Commissioner, 154 T. C. No. 8 (2020)

    In Lewis v. Commissioner, the U. S. Tax Court clarified the definition of “collected proceeds” for IRS whistleblower awards and upheld the application of budget sequestration to these awards. The court ruled that reported and paid tax does not count as collected proceeds, even if influenced by an ongoing audit, and that no future proceeds could be anticipated from an estate with no tax liability. Additionally, the court affirmed that whistleblower awards are subject to budget sequestration, rejecting claims that such reductions are inappropriate under the law.

    Parties

    Timothy J. Lewis, the petitioner, was represented by Shine Lin and Thomas C. Pliske. The respondent, the Commissioner of Internal Revenue, was represented by Joel D. McMahan and A. Gary Begun.

    Facts

    Timothy J. Lewis, a former financial manager of a closely held corporation, filed a whistleblower claim alleging tax underpayments by the corporation and its shareholders for the year 2010 and prior years. The allegations primarily concerned improper wage deductions for the shareholders’ sons and mischaracterized loans. Following Lewis’s submission, the IRS audited the corporation’s 2010 tax year and the shareholders’ 2010 and 2011 tax years, resulting in adjustments and the collection of additional taxes. The corporation changed its reporting for 2011, not deducting wages for one son, but no additional tax was collected from this change. The shareholders filed gift tax returns, using unified credits to offset gift taxes. Upon one shareholder’s death, his estate filed a return showing no tax liability. The IRS Whistleblower Office (WBO) determined Lewis’s award based on the collected proceeds from the audit, excluding the 2011 reported tax and the deceased’s unified credit, and applying budget sequestration to the award.

    Procedural History

    The WBO issued a preliminary award recommendation to Lewis, which he challenged. After revisions and further communications, the WBO issued a final decision letter, maintaining the award amount and applying sequestration. Lewis timely petitioned the U. S. Tax Court for review, contesting the exclusion of certain taxes from collected proceeds and the application of sequestration. The court reviewed the case under its jurisdiction to review mandatory whistleblower awards, as provided by I. R. C. sec. 7623(b)(4).

    Issue(s)

    Whether reported and paid tax from a year not originally audited but influenced by an ongoing audit constitutes “collected proceeds” under I. R. C. sec. 7623(c)?

    Whether the use of a unified credit by a deceased taxpayer, resulting in no estate tax liability, can be considered as potential future collected proceeds?

    Whether the WBO abused its discretion by applying budget sequestration to reduce the whistleblower award?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b), a whistleblower is entitled to a mandatory award of 15% to 30% of the collected proceeds from an IRS action based on the whistleblower’s information. I. R. C. sec. 7623(c) defines “proceeds” to include penalties, interest, additions to tax, and other proceeds from laws the IRS is authorized to enforce. The Bipartisan Budget Act of 2018 amended this definition to include criminal fines and civil forfeitures. The Budget Control Act of 2011, as amended, mandates sequestration of certain government payments, including direct spending, unless specifically exempted.

    Holding

    The Tax Court held that reported and paid tax, even if influenced by an ongoing audit, does not constitute “collected proceeds” under I. R. C. sec. 7623(c). The court further held that there are no potential future proceeds from a deceased taxpayer’s estate when the estate tax return shows no tax liability. Finally, the court held that the WBO did not abuse its discretion in applying budget sequestration to the whistleblower award, as such awards are direct spending subject to sequestration under the Budget Control Act of 2011.

    Reasoning

    The court reasoned that reported and paid tax from a year not originally audited but influenced by an ongoing audit does not constitute “collected proceeds” based on prior case law, specifically Whistleblower 16158-14W v. Commissioner. The court noted that while the corporation’s change in reporting for 2011 might have been influenced by the whistleblower’s information, such tax was not “collected” by the IRS and thus not included in the award calculation. Regarding the unified credit, the court found no possibility of future proceeds from the deceased’s estate, as the estate tax return showed no tax liability, and the trust documents and applicable law indicated no future tax would be due upon the termination of the life estate. On the sequestration issue, the court rejected the argument that whistleblower awards are exempt from sequestration, finding that such awards are direct spending under the Budget Control Act, and the WBO’s application of sequestration was not an abuse of discretion. The court’s analysis included statutory interpretation, consideration of prior case law, and the application of sequestration rules as mandated by Congress.

    Disposition

    The Tax Court affirmed the WBO’s determinations regarding the calculation of collected proceeds and the application of budget sequestration to the whistleblower award. The case was resolved without further proceedings, and an appropriate order and decision were to be entered.

    Significance/Impact

    The decision in Lewis v. Commissioner provides critical guidance on the definition of “collected proceeds” for whistleblower awards, clarifying that reported and paid tax does not qualify even if influenced by an ongoing audit. This ruling impacts how whistleblower claims are evaluated and awarded, potentially affecting the financial incentives for reporting tax violations. Additionally, the court’s affirmation of the application of budget sequestration to whistleblower awards reinforces the fiscal policy measures enacted by Congress, ensuring that such awards are subject to the same budgetary constraints as other forms of direct spending. This decision may influence future cases and legislative considerations regarding the funding and payment of whistleblower awards.

  • Lander v. Commissioner, 154 T.C. No. 7 (2020): Validity of Tax Assessments and Prior Opportunity to Dispute Underlying Tax Liability

    Lander v. Commissioner, 154 T. C. No. 7 (U. S. Tax Ct. 2020)

    In Lander v. Commissioner, the U. S. Tax Court ruled that Joseph and Kimberly Lander could not challenge their 2005 income tax liability in a collection due process proceeding because they had a prior opportunity to dispute it during an IRS audit reconsideration process. The court also affirmed the validity of the IRS’s tax assessments for 2005, despite the Landers not receiving the notice of deficiency, as it was mailed to their last known address. This decision underscores the importance of prior opportunities to challenge tax liabilities and the procedural aspects of tax assessments.

    Parties

    Joseph Thomas Lander and Kimberly W. Lander, Petitioners, v. Commissioner of Internal Revenue, Respondent.

    Facts

    Joseph and Kimberly Lander filed a delinquent joint Federal income tax return for the taxable year 2005 on April 2, 2009, and subsequently filed an amended return in September 2009. The IRS examined their return, proposing adjustments that included disallowing a deduction for a flowthrough loss from GenSpec, LLC, and adjusting income due to unreported capital gains from K3 Ventures, LLC. The IRS sent a notice of deficiency to the Landers’ last known address on November 16, 2011, which was not received by them. Following the notice, the IRS assessed the tax liability on July 2, 2012, and began collection activities. The Landers, who did not receive the notice of deficiency, sought an audit reconsideration, which led to a conference with the IRS Appeals Office. During this process, some of the tax liability was abated. Later, the IRS filed a Federal tax lien, prompting the Landers to request a collection due process hearing, where they attempted to challenge the underlying tax liability.

    Procedural History

    The IRS issued a notice of deficiency on November 16, 2011, which the Landers did not receive. The IRS assessed the tax liability on July 2, 2012, and sent a notice and demand for payment. The Landers requested an audit reconsideration, which led to a conference with the IRS Appeals Office, resulting in some abatement of the tax. On January 13, 2015, the IRS filed a Federal tax lien and notified the Landers of their right to a hearing under I. R. C. § 6320. The Landers timely requested a collection due process hearing, challenging the validity of the underlying tax liability. The Appeals Office sustained the lien filing, and the Landers petitioned the U. S. Tax Court for review. The court remanded the case to the Appeals Office for further review of the notice of deficiency issue, and upon reevaluation, the Appeals Office upheld the lien filing. The case returned to the Tax Court, which affirmed the validity of the assessments and ruled that the Landers had a prior opportunity to dispute the tax liability during the audit reconsideration process.

    Issue(s)

    Whether the assessments entered against the Landers for the taxable year 2005 are valid despite the Landers not receiving the notice of deficiency?

    Whether the Landers had a prior opportunity to dispute the underlying tax liability for 2005, thus precluding them from challenging it in the collection due process proceeding?

    Rule(s) of Law

    Under I. R. C. § 6212(a), the IRS is authorized to send a notice of deficiency to a taxpayer by certified or registered mail. Section 6212(b)(1) states that mailing to the taxpayer’s last known address is sufficient. Section 6330(c)(2)(B) allows a taxpayer to challenge the underlying tax liability in a collection due process hearing if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute such tax liability. Section 301. 6330-1(e)(3), Q&A-E2, Proced. & Admin. Regs. , clarifies that an opportunity to dispute includes a prior conference with the IRS Appeals Office.

    Holding

    The Tax Court held that the assessments against the Landers for the taxable year 2005 were valid because the notice of deficiency was mailed to their last known address, despite not being received. The court also held that the Landers had a prior opportunity to dispute their underlying tax liability during the audit reconsideration process, thus they could not challenge it in the collection due process proceeding.

    Reasoning

    The court reasoned that the IRS satisfied the mailing requirement under I. R. C. § 6212 by sending the notice of deficiency to the Landers’ last known address, as evidenced by Form 3877 and USPS records. The court noted that the validity of the notice of deficiency does not depend on its receipt by the taxpayer. Regarding the opportunity to dispute, the court relied on the regulation at § 301. 6330-1(e)(3), Q&A-E2, which states that a conference with the IRS Appeals Office constitutes an opportunity to dispute the tax liability. The court found that the Landers had such an opportunity during the audit reconsideration process, where they engaged with the Appeals Office and some of their tax liability was abated. The court rejected the Landers’ argument that they were not given a full and fair opportunity to dispute their liability, citing the extensive engagement with the Appeals Office and the detailed consideration of their arguments and evidence. The court also distinguished the case from Lewis v. Commissioner, where the tax was not subject to deficiency procedures, but applied the same reasoning regarding the prior opportunity to dispute.

    Disposition

    The Tax Court affirmed the validity of the assessments and ruled that the Landers could not challenge their underlying tax liability in the collection due process proceeding. The case was remanded to the Appeals Office to consider the Landers’ claim for spousal relief and their ability to pay the balance due.

    Significance/Impact

    The Lander decision reinforces the importance of the IRS’s mailing practices in validating tax assessments and the significance of prior opportunities to dispute tax liabilities in collection due process proceedings. It clarifies that a taxpayer’s failure to receive a notice of deficiency does not invalidate the assessment if it was mailed to the last known address. The case also underscores the role of the IRS Appeals Office in providing taxpayers with an opportunity to dispute their liabilities, which may preclude further challenges in collection proceedings. This ruling may influence how taxpayers approach audit reconsiderations and collection due process hearings, emphasizing the need to fully engage in any available administrative processes before seeking judicial review.

  • Conard v. Commissioner, 154 T.C. No. 6 (2020): Constitutionality of Age and Disability Classifications Under I.R.C. § 72(t)

    Conard v. Commissioner, 154 T. C. No. 6 (U. S. Tax Ct. 2020)

    In Conard v. Commissioner, the U. S. Tax Court upheld the constitutionality of I. R. C. § 72(t), which imposes a 10% additional tax on early distributions from qualified retirement plans, against an equal protection challenge. The court applied the rational basis test and found that the age and disability classifications in the statute were reasonably related to the legitimate governmental purpose of encouraging retirement savings. This ruling reinforces the government’s ability to regulate retirement funds to prevent their use for non-retirement purposes.

    Parties

    Sandra M. Conard, the petitioner, represented herself pro se. The respondent was the Commissioner of Internal Revenue, represented by Scott W. Forbord and Mark J. Miller.

    Facts

    In 2008, Sandra M. Conard, who was not yet 59-1/2 years old and not disabled, received distributions totaling $61,777 from a qualified retirement plan. She reported these distributions on her federal income tax return for that year but did not pay the additional 10% tax imposed by I. R. C. § 72(t)(1), claiming that it was arbitrary and capricious. Conard also sought a refund of similar taxes paid for the years 2005, 2006, and 2007. The Commissioner issued a statutory notice of deficiency for 2008, asserting a deficiency of $6,177 due to the additional tax under I. R. C. § 72(t)(1). Conard challenged this deficiency, arguing that the application of I. R. C. § 72(t)(1) violated the equal protection component of the Due Process Clause of the Fifth Amendment.

    Procedural History

    The Commissioner mailed Conard a statutory notice of deficiency for the 2008 tax year, asserting a deficiency of $6,177 attributable to the additional tax under I. R. C. § 72(t)(1). Conard timely filed a petition with the U. S. Tax Court seeking review of the deficiency. The case was submitted fully stipulated under Rule 122 of the Tax Court Rules of Practice and Procedure. The Commissioner conceded the accuracy-related penalty under I. R. C. § 6662.

    Issue(s)

    Whether the application of the additional tax under I. R. C. § 72(t)(1) to distributions received by a taxpayer who is under 59-1/2 years old, not disabled, and not eligible for any other exceptions under I. R. C. § 72(t)(2), violates the equal protection component of the Due Process Clause of the Fifth Amendment?

    Rule(s) of Law

    I. R. C. § 72(t)(1) imposes an additional 10% tax on the taxable portion of distributions from qualified retirement plans received before the age of 59-1/2, unless an exception under I. R. C. § 72(t)(2) applies. The court applies the rational basis test to equal protection challenges involving economic rights and classifications that do not involve a fundamental interest or suspect classification. Under this test, a statute is upheld if the classification is reasonably related to a legitimate governmental purpose.

    Holding

    The court held that I. R. C. § 72(t) is constitutional as applied to Conard. The age and disability classifications in the statute bear a reasonable relationship to the legitimate governmental purpose of encouraging taxpayers to save for retirement and preventing the diversion of retirement funds to non-retirement uses.

    Reasoning

    The court applied the rational basis test as the classification under I. R. C. § 72(t) did not involve a fundamental interest or suspect classification. It noted that age and disability are not suspect classifications and that economic rights are subject to a low level of judicial scrutiny. The court cited legislative history indicating that the statute aimed to prevent the diversion of retirement savings to non-retirement uses. The age and disability exceptions were designed to encourage saving for retirement and accommodate those unable to work due to disability. The court found these rationales sufficient to meet the rational basis test, rejecting Conard’s equal protection challenge.

    Disposition

    The court sustained the deficiency determined by the Commissioner and entered a decision for the respondent as to the deficiency and for the petitioner as to the accuracy-related penalty under I. R. C. § 6662(a).

    Significance/Impact

    This decision reinforces the constitutionality of I. R. C. § 72(t) and its role in encouraging retirement savings by imposing penalties on early withdrawals. It upholds the government’s ability to differentiate treatment based on age and disability in the context of retirement plans without violating equal protection principles. The ruling may influence future challenges to similar statutory classifications and underscores the broad latitude legislatures have in creating tax distinctions.

  • Do S. Wong v. Commissioner, T.C. Memo. 2020-32: Collection Due Process and Abuse of Discretion in Tax Law

    Do S. Wong v. Commissioner, T. C. Memo. 2020-32 (U. S. Tax Court 2020)

    In Do S. Wong v. Commissioner, the U. S. Tax Court upheld the IRS’s filing of a federal tax lien against Wong, affirming the agency’s collection action as not constituting an abuse of discretion. Wong, who failed to substantiate his 2013 tax deductions and did not respond to IRS requests for financial information during the collection due process (CDP) hearing, challenged the lien. The court’s decision emphasizes the IRS’s discretion in collection actions and the importance of taxpayer cooperation in CDP proceedings, impacting future tax collection cases.

    Parties

    Do S. Wong, the petitioner, represented himself pro se. The respondent was the Commissioner of Internal Revenue, represented by Halvor R. Melom.

    Facts

    Do S. Wong, a California resident, filed a timely federal income tax return for 2013, reporting a tax liability of $10,395. He claimed an overpayment, which he elected to apply to his 2014 tax liability. The IRS examined his 2013 return and disallowed several hundred thousand dollars in business expense deductions due to lack of substantiation. The IRS proposed a deficiency of $156,326 and an accuracy-related penalty of $31,265. Wong did not respond to the 30-day letter or the subsequent notice of deficiency sent on June 28, 2016. The IRS assessed the deficiency and penalty on February 13, 2017, after Wong failed to file a petition within the 90-day period. To collect the unpaid liability, the IRS filed a notice of federal tax lien (NFTL) on February 27, 2018, and sent Wong a notice of the lien filing and his right to a hearing.

    Wong requested a CDP hearing, asserting he did not owe any tax for 2013. The settlement officer (SO) scheduled a telephone hearing for June 13, 2018, and outlined the required documentation for considering collection alternatives, including a Form 433-A and copies of unfiled tax returns for 2014-2017. Wong did not attend the hearing, submit the required documents, or communicate with the SO until after missing the hearing, when he requested additional time to provide documentation for his 2013 expenses and to complete his 2014-2017 returns. The SO denied the extension, advised Wong to pursue audit reconsideration, and closed the case on July 31, 2018. The IRS issued a notice of determination sustaining the NFTL filing on August 2, 2018.

    Procedural History

    Wong timely filed a petition with the U. S. Tax Court challenging the IRS’s determination. The Commissioner moved for summary judgment twice, first on July 11, 2019, and again on October 18, 2019, after supplementing the record with evidence of supervisory approval for the accuracy-related penalty. Wong did not respond to either motion. The court initially denied the first motion without prejudice due to uncertainty about the penalty’s supervisory approval but granted the second motion, finding no genuine dispute as to any material fact and ruling as a matter of law that the IRS did not abuse its discretion in sustaining the NFTL filing.

    Issue(s)

    Whether the IRS abused its discretion in sustaining the filing of a notice of federal tax lien against Wong, given his failure to substantiate his 2013 tax deductions and to cooperate in the CDP hearing process?

    Rule(s) of Law

    In a CDP case, the Tax Court reviews the IRS’s determination for abuse of discretion if the taxpayer’s underlying liability is not at issue. Abuse of discretion occurs when a determination is arbitrary, capricious, or without sound basis in fact or law. The IRS must verify that the requirements of applicable law or administrative procedure have been met, consider any relevant issues raised by the taxpayer, and balance the need for efficient tax collection with the taxpayer’s concerns about the intrusiveness of the collection action.

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in sustaining the filing of the NFTL against Wong. The court found that the IRS properly verified compliance with legal and administrative requirements, considered Wong’s concerns, and appropriately balanced collection needs with the taxpayer’s interests.

    Reasoning

    The court reasoned that Wong’s underlying tax liability for 2013 was not at issue because he received a valid notice of deficiency and did not petition the Tax Court within the statutory period. Thus, the court reviewed the IRS’s determination for abuse of discretion. The court found that the SO verified that the notice of deficiency was sent to Wong’s last known address, the tax liability was properly assessed, and supervisory approval was secured for the accuracy-related penalty, as required by section 6751(b)(1). The court noted that the SO provided Wong with instructions on how to pursue audit reconsideration, a discretionary process outside the CDP framework. Wong’s failure to attend the scheduled hearing, submit required financial information, or seek audit reconsideration justified the SO’s decision not to grant further extensions. The court concluded that the IRS’s actions were not arbitrary, capricious, or without sound basis in fact or law, thus not constituting an abuse of discretion.

    Disposition

    The U. S. Tax Court granted summary judgment in favor of the Commissioner and sustained the IRS’s collection action by upholding the filing of the NFTL.

    Significance/Impact

    Do S. Wong v. Commissioner reinforces the discretion afforded to the IRS in collection actions and the importance of taxpayer cooperation in CDP proceedings. The decision highlights that taxpayers must substantiate their claims and comply with IRS requests for information to challenge collection actions effectively. It also clarifies the IRS’s authority to proceed with collection actions when taxpayers fail to engage in the CDP process, potentially affecting future cases where taxpayers seek to challenge collection actions without providing necessary documentation or pursuing alternative remedies such as audit reconsideration. The case underscores the procedural requirements and the limited scope of judicial review in CDP cases, emphasizing the need for taxpayers to address their underlying liabilities through appropriate channels before challenging collection actions.

  • Sun River Financial Trust v. Commissioner, T.C. Memo. 2020-30: Abuse of Discretion in Collection Due Process Hearings

    Sun River Financial Trust v. Commissioner, T. C. Memo. 2020-30 (U. S. Tax Court 2020)

    In a significant ruling on collection due process (CDP) hearings, the U. S. Tax Court upheld the IRS’s decision to proceed with a levy and filing of a federal tax lien against Sun River Financial Trust for unpaid frivolous return penalties under Section 6702. The court found no abuse of discretion by the IRS, emphasizing that the taxpayer’s challenge to the reliability of IRS computer systems was insufficient to contest the underlying liability or the collection actions. This decision underscores the importance of raising meaningful challenges during CDP hearings and the deference given to IRS determinations in such cases.

    Parties

    Sun River Financial Trust, with Jay A. Greek as Trustee, was the petitioner in this case. The respondent was the Commissioner of Internal Revenue. The case was heard in the U. S. Tax Court under docket number 20735-16L.

    Facts

    Sun River Financial Trust filed delinquent tax returns for the years 2010 and 2011, reporting taxable incomes of $42,371 and $53,888 respectively, and claiming full refunds despite tax withholdings. The returns included Forms 1099-A, 1099-B, and 1099-OID, which the IRS deemed frivolous. After notifying the Trust of the frivolous nature of its returns and offering a chance to amend, the IRS assessed $5,000 penalties under Section 6702 for each year. The Trust did not amend its returns and instead submitted correspondence arguing the unreliability of IRS computer systems, based on GAO reports, without contesting the penalties’ merits. The IRS proceeded with notices of intent to levy and file a federal tax lien, leading to a CDP hearing.

    Procedural History

    The IRS issued a Final Notice of Intent to Levy and a Notice of Federal Tax Lien Filing in 2016, to which the Trust responded with requests for CDP hearings. The Settlement Officer (SO) reviewed the case, confirmed the assessments, and upheld the collection actions after the Trust failed to present evidence connecting the GAO reports to the assessments. The Trust then sought review in the U. S. Tax Court, which denied a motion to dismiss and upheld the IRS’s decision, finding no abuse of discretion.

    Issue(s)

    Whether the IRS abused its discretion in sustaining the proposed levy and the filing of a federal tax lien against Sun River Financial Trust for the collection of Section 6702 penalties for the years 2010 and 2011.

    Rule(s) of Law

    Section 6330(c)(3) of the Internal Revenue Code requires the SO to consider whether applicable legal and administrative requirements have been met, issues raised by the taxpayer, and the balance between efficient tax collection and the taxpayer’s concerns about the intrusiveness of collection actions. The standard of review in CDP cases is for abuse of discretion, except when the underlying tax liability is properly contested, in which case the review is de novo.

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in sustaining the proposed levy and the filing of the federal tax lien against Sun River Financial Trust for the collection of Section 6702 penalties for 2010 and 2011.

    Reasoning

    The court’s reasoning focused on the adequacy of the Trust’s challenge during the CDP hearing. The Trust’s argument centered on the unreliability of IRS computer systems, based on GAO reports, but failed to connect these reports to the specific assessments of the Section 6702 penalties. The court noted that without a meaningful challenge to the penalties themselves, the Trust did not properly raise its underlying liability. Furthermore, the court found that the SO adhered to statutory and administrative guidelines, relying on TXMODA transcripts to verify the assessments, which is permissible absent evidence of irregularity in the assessment procedure. The court emphasized that the SO considered all required elements under Section 6330(c)(3), including the verification of legal and administrative compliance, the issues raised by the Trust, and the balance between collection efficiency and taxpayer concerns. The court concluded that the SO’s decision was reasoned and balanced, and thus not an abuse of discretion.

    Disposition

    The U. S. Tax Court sustained the IRS’s decision to proceed with the proposed levy and the filing of the federal tax lien against Sun River Financial Trust.

    Significance/Impact

    This case reinforces the importance of taxpayers raising substantive challenges to their underlying liabilities during CDP hearings. It clarifies that general allegations about the IRS’s systems, without specific connections to the assessments in question, are insufficient to contest liability. The decision also upholds the deference given to IRS determinations in CDP cases, emphasizing that the court will not substitute its judgment for that of the SO unless there is clear evidence of abuse of discretion. This ruling has practical implications for legal practice, particularly in advising clients on how to effectively challenge IRS collection actions and the necessity of providing concrete evidence and arguments during CDP hearings.

  • Pulcine v. Commissioner, T.C. Memo. 2020-29: Whistleblower Award Requirements under Section 7623

    Pulcine v. Commissioner, T. C. Memo. 2020-29 (U. S. Tax Court 2020)

    In Pulcine v. Commissioner, the U. S. Tax Court upheld the IRS Whistleblower Office’s denial of a whistleblower award to Charles Stuart Pulcine. The court ruled that since no additional tax, penalties, interest, or other amounts were collected from the taxpayer based on Pulcine’s information, he was not entitled to an award under Section 7623(b). This decision underscores the necessity of collected proceeds for whistleblower awards and clarifies the court’s limited review scope over IRS tax liability determinations.

    Parties

    Charles Stuart Pulcine, the petitioner, filed a pro se whistleblower award claim against the Commissioner of Internal Revenue, the respondent, represented by Richard Hatfield.

    Facts

    Charles Stuart Pulcine submitted a Form 211 to the IRS Whistleblower Office on September 16, 2013, alleging that a corporate taxpayer had failed to file certain Forms 1120 and pay income tax. He claimed that $4 million in expenses should have been capitalized rather than deducted. The Whistleblower Office referred Pulcine’s claim to the IRS Large Business & International (LB&I) Division, which conducted an examination. Meanwhile, the taxpayer filed delinquent returns and made payments. The LB&I team found that the expenses in question were properly deducted, and no audit adjustments were warranted, except for a $9,966 refund issued after an amended return. The Whistleblower Office subsequently denied Pulcine’s claim for an award, stating that his information did not result in any additional tax, penalties, interest, or amounts.

    Procedural History

    Pulcine timely filed a petition with the U. S. Tax Court after receiving the final determination letter from the Whistleblower Office. Both parties filed motions for summary judgment. The court reviewed the motions under the standard of no genuine dispute as to any material fact and entitlement to judgment as a matter of law, as outlined in Rule 121(b) of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether the IRS abused its discretion in denying Charles Stuart Pulcine a whistleblower award under Section 7623(b) when no additional tax, penalties, interest, or other amounts were collected based on his information.

    Rule(s) of Law

    Under Section 7623(a), the Secretary has discretion to pay an award for detecting underpayments of tax or violations of internal revenue laws. Section 7623(b) mandates an award if the Secretary proceeds with an administrative or judicial action based on the whistleblower’s information and collects proceeds. The award ranges from 15% to 30% of collected proceeds. The court reviews the Secretary’s determination under an abuse-of-discretion standard, as established in Kasper v. Commissioner, 150 T. C. 8 (2018).

    Holding

    The U. S. Tax Court held that the IRS did not abuse its discretion in denying Charles Stuart Pulcine a whistleblower award under Section 7623(b) because no additional tax, penalties, interest, or other amounts were collected based on his information.

    Reasoning

    The court reasoned that for a whistleblower to qualify for an award under Section 7623(b), the IRS must proceed with an action based on the whistleblower’s information and collect proceeds from that action. In this case, the IRS examined the specific expenses Pulcine identified and determined they were properly substantiated and deducted, resulting in no additional tax liability. The court emphasized that it lacked jurisdiction to review the IRS’s determinations of tax liability or to direct the IRS to proceed with further actions, as established in Cohen v. Commissioner, 139 T. C. 299 (2012) and Cooper v. Commissioner, 136 T. C. 597 (2011). The court found no abuse of discretion by the IRS, as the decision to deny the award was based on a sound factual and legal basis.

    Disposition

    The court granted the Commissioner’s motion for summary judgment and denied Pulcine’s motion for summary judgment.

    Significance/Impact

    Pulcine v. Commissioner reinforces the requirement that collected proceeds are necessary for a whistleblower to receive an award under Section 7623(b). It also clarifies the limited scope of judicial review over IRS determinations regarding tax liability and the discretion afforded to the IRS in handling whistleblower claims. This decision may affect future whistleblower claims by emphasizing the importance of tangible results from the information provided.

  • Alvin E. Keels, Sr. v. Commissioner of Internal Revenue, T.C. Memo. 2020-25: Substantiation of Deductions and Tax Treatment of Deferred Compensation

    Alvin E. Keels, Sr. v. Commissioner of Internal Revenue, T. C. Memo. 2020-25 (U. S. Tax Court, 2020)

    In a ruling by the U. S. Tax Court, Alvin E. Keels, Sr. faced a mixed outcome regarding his tax deductions and income reporting for 2012-2014. The court upheld the IRS’s disallowance of most of Keels’ claimed deductions due to insufficient substantiation, except for specific contract labor expenses. Additionally, Keels was not taxed on deferred compensation from State Farm, as the IRS failed to prove these amounts were taxable under Section 409A. The court also confirmed Keels’ liability for late filing penalties and accuracy-related penalties for substantial understatements of income tax.

    Parties

    Alvin E. Keels, Sr. , the Petitioner, represented himself (pro se). The Respondent was the Commissioner of Internal Revenue, represented by Timothy B. Heavner and Robert J. Braxton.

    Facts

    Alvin E. Keels, Sr. , an independent State Farm agent since 1985, filed tax returns for the years 2012, 2013, and 2014. Keels reported various business expenses on his Schedule C and claimed deductions for these expenses. He also participated in State Farm’s nonqualified deferred compensation program, which included termination and extended termination payments. In 2014, Keels used a PayPal account for the Jazz Legacy Foundation (JLF), a non-profit he was involved with, to receive payments for ticket sales to a fundraiser. The IRS issued a notice of deficiency, disallowing most of Keels’ claimed deductions and asserting that certain amounts were taxable income, including the yearend balances of his deferred compensation account and payments received via PayPal.

    Procedural History

    The IRS issued a notice of deficiency to Keels for the tax years 2012, 2013, and 2014, determining deficiencies in income tax and asserting additions to tax and penalties. Keels filed a petition with the U. S. Tax Court contesting the IRS’s determinations. The court held a trial, after which it issued its opinion. The IRS conceded some deductions but maintained its position on others, including the tax treatment of Keels’ deferred compensation under Section 409A, which was raised for the first time in its posttrial brief. The court applied the de novo standard of review for factual findings and legal conclusions.

    Issue(s)

    Whether Keels substantiated his claimed deductions beyond those conceded by the IRS?

    Whether the yearend values of Keels’ termination and extended termination payments from State Farm’s deferred compensation program were taxable income for the years at issue?

    Whether Keels had $167,223 of income from PayPal, Inc. , for 2014?

    Whether Keels is liable for additions to tax for failure to timely file under Section 6651(a)(1) and accuracy-related penalties under Section 6662(a) for the years at issue?

    Rule(s) of Law

    Section 6001 of the Internal Revenue Code requires taxpayers to maintain records sufficient to establish the amount of any deduction claimed. The burden of proof generally rests with the taxpayer to substantiate deductions (Rule 142(a), Tax Court Rules of Practice and Procedure). Section 409A addresses the tax treatment of nonqualified deferred compensation plans, requiring specific conditions to be met to avoid immediate taxation. Section 6651(a)(1) imposes an addition to tax for failure to timely file a return unless the taxpayer shows reasonable cause. Section 6662(a) and (b)(2) impose an accuracy-related penalty for substantial understatements of income tax, with an exception if the taxpayer acted with reasonable cause and in good faith.

    Holding

    The court held that Keels substantiated specific contract labor deductions but failed to substantiate most other claimed deductions. The yearend values of Keels’ termination and extended termination payments were not taxable income for the years at issue, as the IRS did not meet its burden of proof under Section 409A. The $167,223 received via PayPal in 2014 was not income to Keels, as it belonged to JLF. Keels was liable for additions to tax under Section 6651(a)(1) for late filing and accuracy-related penalties under Section 6662(a) for substantial understatements of income tax.

    Reasoning

    The court found that Keels did not meet his burden of proof to substantiate most of his claimed deductions, as he failed to provide receipts, invoices, or other documentation showing the purpose of his expenses. His testimony was deemed insufficiently credible. Regarding the deferred compensation, the IRS bore the burden of proof due to its late assertion of Section 409A as a basis for taxation. The IRS failed to provide evidence that the State Farm plan did not meet Section 409A requirements or that there was no substantial risk of forfeiture. The PayPal receipts were not taxable to Keels, as they were for JLF’s activities. The court upheld the penalties for late filing and substantial understatements, finding no reasonable cause shown by Keels.

    Disposition

    The court’s decision was to be entered under Rule 155, reflecting the upheld deficiencies, the disallowed deductions, the nontaxability of the deferred compensation, the non-inclusion of PayPal receipts as income, and the imposition of penalties for late filing and substantial understatements.

    Significance/Impact

    This case underscores the importance of maintaining thorough records to substantiate tax deductions, as the court strictly applied substantiation requirements. It also highlights the procedural importance of timely raising legal theories in tax litigation, as the IRS’s late assertion of Section 409A led to the court’s finding that it bore the burden of proof, which it failed to meet. The decision reaffirms the application of penalties for late filing and substantial understatements, emphasizing the need for taxpayers to demonstrate reasonable cause to avoid such penalties.

  • Oakhill Woods, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2020-24: Charitable Contribution Deduction Substantiation Requirements

    Oakhill Woods, LLC v. Commissioner of Internal Revenue, T. C. Memo. 2020-24 (U. S. Tax Court, 2020)

    In Oakhill Woods, LLC v. Commissioner, the U. S. Tax Court ruled that a taxpayer must strictly comply with IRS regulations when claiming a charitable contribution deduction, specifically requiring the disclosure of the cost or adjusted basis of donated property on Form 8283. The court rejected the taxpayer’s argument of substantial compliance and upheld the validity of the regulation, emphasizing the importance of this information in identifying potential overvaluations. This decision underscores the need for precise adherence to substantiation rules to prevent abuse of charitable deductions.

    Parties

    Oakhill Woods, LLC (Oakhill), the petitioner, and Effingham Managers, LLC, as the Tax Matters Partner (TMP), filed the case against the Commissioner of Internal Revenue, the respondent.

    Facts

    Oakhill, a Georgia limited liability company operating as a partnership for federal income tax purposes, claimed a charitable contribution deduction for a donation of a conservation easement to the Georgia Land Trust (GLT) in 2010. The easement covered 379 acres of a 388-acre tract that Oakhill had received from HRH Investments, LLC (HRH), a related party, in December 2009. HRH had purchased the tract in August 2007 for $1,008,736. Oakhill’s appraisal valued the easement at $7,949,000, reflecting a significant increase in value during a period of economic downturn. Oakhill did not report the cost or adjusted basis of the donated property on Form 8283, instead attaching a letter stating that basis information was unnecessary for the deduction calculation.

    Procedural History

    The IRS selected Oakhill’s 2010 tax return for examination and subsequently issued a summary report in December 2014, proposing to disallow the deduction due to the omission of cost or adjusted basis information on Form 8283. Oakhill’s CPA provided this information to the IRS three years after the return was filed. The IRS then issued a notice of final partnership administrative adjustment (FPAA) in September 2017, disallowing the deduction and asserting penalties. Oakhill petitioned the U. S. Tax Court for readjustment of the partnership items in December 2017. The Commissioner filed a motion for partial summary judgment in May 2018, and Oakhill filed a cross-motion for partial summary judgment in December 2018, challenging the validity of the regulation requiring disclosure of cost or adjusted basis.

    Issue(s)

    Whether Oakhill complied with the substantiation requirements of section 1. 170A-13(c), Income Tax Regs. , by including the cost or adjusted basis of the donated property on Form 8283?

    Whether the regulation requiring disclosure of cost or adjusted basis on Form 8283 is valid?

    Rule(s) of Law

    Section 170(f)(11)(C) of the Internal Revenue Code requires taxpayers claiming a charitable contribution deduction for property valued over $5,000 to obtain a qualified appraisal and attach to the return an appraisal summary with information as prescribed by the Secretary. The Secretary has prescribed Form 8283 as the appraisal summary, which must include the cost or adjusted basis of the donated property. See sec. 1. 170A-13(c)(4)(ii)(E), Income Tax Regs.

    Holding

    The Tax Court held that Oakhill did not comply with the substantiation requirements because it failed to include the cost or adjusted basis of the donated property on Form 8283. The court also upheld the validity of the regulation requiring such disclosure.

    Reasoning

    The court reasoned that Oakhill’s omission of cost basis information on Form 8283 constituted a failure to strictly comply with the regulation. The court rejected Oakhill’s argument of substantial compliance, noting that the regulation’s requirement to disclose cost basis is essential for the IRS to identify potential overvaluations, as intended by Congress when enacting DEFRA. The court found that the significant disparity between Oakhill’s claimed value for the easement and the cost basis of the land, had it been disclosed, would have alerted the IRS to a potential overvaluation. The court also dismissed Oakhill’s argument that it had cured the omission by providing the information during the audit, stating that such information must be provided at the time of filing to serve its intended purpose.

    Regarding the validity of the regulation, the court applied the Chevron two-step test. It found that Congress had not directly spoken to the precise issue of where on the return the cost basis information must be disclosed, thus leaving discretion to the Secretary. The court concluded that the regulation was a permissible construction of the statute, as it reasonably required the inclusion of cost basis information in the appraisal summary to facilitate the IRS’s review process.

    The court also considered Oakhill’s reasonable cause defense but found that genuine disputes of material fact existed as to whether Oakhill had relied on competent and independent advice when deciding not to disclose the cost basis.

    Disposition

    The Tax Court granted in part the Commissioner’s motion for partial summary judgment, denying Oakhill’s deduction for failure to comply with the substantiation requirements. The court denied Oakhill’s cross-motion for partial summary judgment, upholding the validity of the regulation.

    Significance/Impact

    This case reinforces the strict compliance standard for charitable contribution deductions, particularly the requirement to disclose the cost or adjusted basis of donated property. It underscores the importance of this information in combating inflated valuations and tax shelter abuse. The decision also affirms the broad discretion granted to the Secretary in prescribing substantiation requirements, which may impact how taxpayers and practitioners approach the preparation of charitable contribution deductions. The case highlights the challenges taxpayers may face in establishing a reasonable cause defense when relying on advice from potentially conflicted parties.