SCOTUS Reports

Tag: U.S. Tax Court

  • Richard Essner v. Commissioner of Internal Revenue, T.C. Memo. 2020-23: Taxation of Inherited IRA Distributions and Section 7605(b) Examination Limits

    Richard Essner v. Commissioner of Internal Revenue, T. C. Memo. 2020-23 (U. S. Tax Court 2020)

    In Richard Essner v. Commissioner, the U. S. Tax Court upheld the IRS’s determination of tax deficiencies and penalties against Essner, a California cancer surgeon, for failing to report income from inherited IRA distributions in 2014 and 2015. The court rejected Essner’s claim that the IRS conducted an unnecessary second examination of his 2014 tax year, clarifying the scope of section 7605(b). This ruling underscores the necessity for taxpayers to accurately report inherited IRA distributions as income and the limited protections against IRS examinations under section 7605(b).

    Parties

    Richard Essner, the petitioner, represented himself pro se. The respondent, the Commissioner of Internal Revenue, was represented by Mark A. Nelson and Sarah A. Herson. The cases were consolidated under docket numbers 7013-17 and 1099-18 for trial and opinion.

    Facts

    Richard Essner, a cancer surgeon residing in California, inherited an IRA from his late mother, who had inherited it from his father. Essner received distributions from the IRA of $360,800 in 2014 and $148,084 in 2015. He researched the tax implications of these distributions on the IRS website and concluded they were not taxable. Essner engaged a return preparer for his 2014 and 2015 returns but did not inform the preparer of the IRA distributions. Consequently, Essner did not report these distributions as income on his tax returns. The IRS, having received Forms 1099-R reporting the distributions, initiated two separate processes to address the discrepancies: the Automated Underreporting (AUR) program and an individual examination by Tax Compliance Officer Hareshkumar Joshi.

    Procedural History

    The IRS’s AUR program identified a discrepancy in Essner’s 2014 return and issued a notice of deficiency on January 3, 2017, for $117,265, which Essner contested by filing a timely petition with the U. S. Tax Court under docket No. 7013-17. Concurrently, Officer Joshi examined Essner’s 2014 and 2015 returns, focusing on other issues but not the IRA distributions. On October 23, 2017, the IRS issued another notice of deficiency for Essner’s 2015 tax year, determining a deficiency of $101,750 and an accuracy-related penalty under section 6662(a) of $20,350, which Essner also contested under docket No. 1099-18. The Tax Court consolidated the cases for trial and opinion.

    Issue(s)

    Whether Essner failed to report distributions from an inherited IRA as income for 2014 and 2015?

    Whether the IRS subjected Essner to a duplicative inspection of his books and records relating to his 2014 tax year in violation of section 7605(b)?

    Whether Essner is liable for the accuracy-related penalty under section 6662(a) for tax year 2015?

    Rule(s) of Law

    Section 61(a) of the Internal Revenue Code defines gross income as “all income from whatever source derived”, including income from pensions under section 61(a)(11). Section 7605(b) limits the IRS to one inspection of a taxpayer’s books of account per taxable year, unless the taxpayer requests otherwise or the Secretary notifies the taxpayer in writing of the need for an additional inspection. Section 6662(a) authorizes the imposition of a 20% accuracy-related penalty for substantial understatements of income tax, which can be excused if the taxpayer shows reasonable cause and good faith.

    Holding

    The Tax Court held that Essner failed to report the IRA distributions as income for 2014 and 2015, sustaining the IRS’s deficiency determinations. The court also held that the IRS did not violate section 7605(b) by conducting a second examination of Essner’s 2014 tax year, as the AUR program’s actions did not constitute an examination of Essner’s books and records. Finally, the court held Essner liable for the accuracy-related penalty for tax year 2015, finding that he did not act with reasonable cause and good faith.

    Reasoning

    The court reasoned that Essner’s failure to report the IRA distributions as income was not supported by any evidence that a portion of the distributions represented a non-taxable return of his late father’s original investment. Essner’s inability to substantiate his claim due to lack of records from financial institutions did not relieve him of his burden of proof. Regarding section 7605(b), the court narrowly interpreted the statute, concluding that the AUR program’s review of third-party information and Essner’s filed tax returns did not constitute an examination of his books and records. Therefore, no second examination occurred, and the IRS’s actions were not unnecessary. For the accuracy-related penalty, the court found that Essner’s failure to consult his return preparer about the IRA distributions, despite his professional background and the size of the distributions, demonstrated a lack of reasonable cause and good faith.

    Disposition

    The Tax Court entered decisions sustaining the IRS’s determinations of tax deficiencies for 2014 and 2015 and the accuracy-related penalty for 2015.

    Significance/Impact

    This case reaffirms the IRS’s authority to require taxpayers to report inherited IRA distributions as income and clarifies the limited scope of section 7605(b) in protecting taxpayers from multiple examinations. It also highlights the importance of taxpayers seeking professional advice to ensure accurate tax reporting, particularly in complex situations involving inherited assets. The decision may influence future cases involving similar issues of tax reporting and IRS examination practices, emphasizing the need for clear communication and coordination within the IRS to avoid confusing taxpayers.

  • Railroad Holdings, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2020-22: Conservation Easement Deductions and the Perpetuity Requirement

    Railroad Holdings, LLC v. Commissioner of Internal Revenue, T. C. Memo. 2020-22 (U. S. Tax Court, 2020)

    The U. S. Tax Court ruled that Railroad Holdings, LLC could not claim a $16 million charitable contribution deduction for a conservation easement because the deed failed to ensure the conservation purpose was protected in perpetuity. The court found the deed’s extinguishment provision, which guaranteed a fixed dollar amount rather than a proportional share of any future proceeds, did not comply with IRS regulations requiring perpetual protection of the conservation purpose. This decision underscores the strict requirements for claiming conservation easement deductions and highlights the need for precise drafting of easement deeds to meet legal standards.

    Parties

    Railroad Holdings, LLC, as the petitioner, and the Commissioner of Internal Revenue, as the respondent, were the primary parties in this case. Railroad Land Manager, LLC served as the tax matters partner for Railroad Holdings, LLC throughout the proceedings.

    Facts

    In 2012, Railroad Holdings, LLC executed a conservation easement deed in favor of the Southeast Regional Land Conservancy, Inc. (SERLC), a charitable organization, for a 452-acre property in South Carolina. The deed included an extinguishment provision stating that, in the event of judicial extinguishment and subsequent sale of the property, SERLC would be entitled to a portion of the proceeds at least equal to the fair market value of the conservation easement at the time of the deed’s execution, rather than a proportionate share of the proceeds from the sale. Railroad Holdings claimed a $16 million charitable contribution deduction for this easement on its 2012 tax return. The IRS disallowed the deduction, asserting that the conservation purpose was not protected in perpetuity as required by I. R. C. sec. 170(h)(5)(A).

    Procedural History

    The IRS issued a notice of final partnership administrative adjustment (FPAA) on March 15, 2016, disallowing Railroad Holdings’ claimed deduction. Railroad Holdings timely filed a petition in the U. S. Tax Court on May 17, 2016. The Commissioner moved for partial summary judgment, arguing that the conservation easement did not meet the perpetuity requirement of I. R. C. sec. 170(h)(5)(A). The court granted the Commissioner’s motion, finding that the deed’s extinguishment provision failed to comply with the applicable regulations.

    Issue(s)

    Whether the conservation easement deed executed by Railroad Holdings, LLC, with an extinguishment provision guaranteeing a fixed dollar amount to SERLC, satisfied the requirement under I. R. C. sec. 170(h)(5)(A) that the conservation purpose be protected in perpetuity?

    Rule(s) of Law

    I. R. C. sec. 170(h)(5)(A) requires that a contribution be treated as exclusively for conservation purposes only if the conservation purpose is protected in perpetuity. 26 C. F. R. sec. 1. 170A-14(g)(6)(ii) stipulates that, in the event of an easement’s extinguishment, the donee organization must be entitled to a portion of the proceeds at least equal to the proportionate value of the perpetual conservation restriction at the time of the gift.

    Holding

    The U. S. Tax Court held that Railroad Holdings, LLC was not entitled to the charitable contribution deduction because the conservation easement deed’s extinguishment provision did not protect the conservation purpose in perpetuity, as required by I. R. C. sec. 170(h)(5)(A).

    Reasoning

    The court’s reasoning focused on the interpretation of the deed’s extinguishment provision and its compliance with the perpetuity requirement under I. R. C. sec. 170(h)(5)(A). The court noted that the deed provided SERLC with a fixed dollar amount rather than a proportionate share of any future sale proceeds, which did not meet the regulatory requirement set forth in 26 C. F. R. sec. 1. 170A-14(g)(6)(ii). The court emphasized that the donee’s entitlement to a proportionate share of extinguishment proceeds must be absolute and not subject to diminution over time due to property appreciation. The court rejected Railroad Holdings’ arguments regarding the use of the phrase “at least” in the deed, the intent of SERLC as expressed in a declaration, and the deed’s construction of terms provision, finding none sufficient to overcome the clear deficiency in the deed’s allocation formula. The court’s decision reinforced the strict interpretation of the perpetuity requirement and the necessity for precise drafting to ensure compliance with tax regulations.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for partial summary judgment, denying Railroad Holdings, LLC the claimed charitable contribution deduction.

    Significance/Impact

    This case is significant for its clarification of the perpetuity requirement under I. R. C. sec. 170(h)(5)(A) and its implications for conservation easement deductions. It underscores the importance of drafting easement deeds to comply strictly with IRS regulations, particularly regarding the allocation of proceeds in the event of extinguishment. The decision may impact future conservation easement transactions by prompting donors and donees to review and revise their deeds to ensure compliance with the perpetuity requirement. Additionally, this case may influence how courts and the IRS interpret similar provisions in other conservation easement deeds, potentially affecting the deductibility of such contributions.

  • Carter v. Commissioner, T.C. Memo. 2020-21; Evans v. Commissioner, T.C. Memo. 2020-21: Conservation Easement Deductions and Supervisory Approval of Penalties

    Nathaniel A. Carter and Stella C. Carter v. Commissioner of Internal Revenue, T. C. Memo. 2020-21; Ralph G. Evans v. Commissioner of Internal Revenue, T. C. Memo. 2020-21 (U. S. Tax Court 2020)

    In a significant ruling, the U. S. Tax Court disallowed charitable contribution deductions for conservation easements where the donors retained development rights in unspecified building areas. The court held that such rights violate the requirement for perpetual use restrictions on real property. Additionally, the court ruled that the IRS failed to timely secure supervisory approval for proposed gross valuation misstatement penalties, thus invalidating them. This decision impacts how conservation easements are structured and how penalties are assessed by the IRS.

    Parties

    Nathaniel A. Carter and Stella C. Carter (Petitioners) and Ralph G. Evans (Petitioner) v. Commissioner of Internal Revenue (Respondent). The cases were consolidated at the trial, briefing, and opinion stages.

    Facts

    In 2005, Dover Hall Plantation, LLC (DHP), owned by Nathaniel Carter, purchased a 5,245-acre tract of land in Glynn County, Georgia. In 2009, Ralph Evans purchased a 50% interest in DHP. In 2011, DHP conveyed a conservation easement to the North American Land Trust (NALT) over 500 acres of the property. The easement generally prohibited construction or occupancy of dwellings but allowed DHP to build single-family dwellings in up to 11 two-acre “building areas,” the locations of which were to be determined subject to NALT’s approval. DHP claimed a charitable contribution deduction for the easement on its 2011 tax return, and the Carters and Evans claimed deductions on their individual returns based on their shares of the partnership’s deduction. The IRS disallowed these deductions and proposed gross valuation misstatement penalties.

    Procedural History

    The IRS issued notices of deficiency to the Carters and Evans on August 18, 2015, disallowing the charitable contribution deductions and determining gross valuation misstatement penalties. The cases were consolidated for trial, briefing, and opinion. The Tax Court reviewed the case de novo, applying the preponderance of the evidence standard.

    Issue(s)

    Whether the conservation easement granted by DHP to NALT qualifies as a “qualified real property interest” under I. R. C. sec. 170(h)(2)(C), thus entitling petitioners to charitable contribution deductions? Whether the IRS timely secured written supervisory approval for the initial determination of the gross valuation misstatement penalties as required by I. R. C. sec. 6751(b)(1)?

    Rule(s) of Law

    I. R. C. sec. 170(h)(2)(C) defines a “qualified real property interest” as including “a restriction (granted in perpetuity) on the use which may be made of real property. ” I. R. C. sec. 170(h)(5)(A) requires that the conservation purpose be protected in perpetuity. I. R. C. sec. 6751(b)(1) mandates that no penalty under the Internal Revenue Code shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination.

    Holding

    The Tax Court held that the conservation easement did not meet the perpetual restriction requirement of I. R. C. sec. 170(h)(2)(C) because the retained development rights in the unspecified building areas allowed uses antithetical to the easement’s conservation purposes. Consequently, petitioners were not entitled to charitable contribution deductions. The court further held that the IRS’s supervisory approval of the gross valuation misstatement penalties was untimely under I. R. C. sec. 6751(b)(1), as it was granted after the initial determination of the penalties had been communicated to petitioners, thus invalidating the penalties.

    Reasoning

    The court followed its precedent in Pine Mountain Pres. , LLLP v. Commissioner, 151 T. C. 247 (2018), which established that retained development rights in unspecified areas violate the perpetual restriction requirement of I. R. C. sec. 170(h)(2)(C). The court reasoned that the building areas allowed for residential development, which is antithetical to the conservation purposes of preserving open space and natural habitats. The court distinguished this case from Belk v. Commissioner, 140 T. C. 1 (2013), where the easement allowed for substitution of property, noting that the issue here was the lack of a defined parcel subject to perpetual use restrictions. Regarding the penalties, the court applied its interpretation of I. R. C. sec. 6751(b)(1) from Clay v. Commissioner, 152 T. C. 223 (2019), requiring supervisory approval before the first communication of the penalty determination. The court found that the IRS’s communication to petitioners via Letters 5153 and accompanying RARs constituted the initial determination of the penalties, and the subsequent supervisory approval was untimely.

    Disposition

    The Tax Court disallowed the charitable contribution deductions claimed by petitioners and invalidated the gross valuation misstatement penalties proposed by the IRS.

    Significance/Impact

    This decision reinforces the strict requirements for conservation easements to qualify for charitable contribution deductions, particularly the need for perpetual use restrictions on a defined parcel of property. It also underscores the importance of timely supervisory approval for penalties under I. R. C. sec. 6751(b)(1), impacting IRS procedures for assessing penalties. The ruling may influence how conservation easements are drafted and how the IRS handles penalty assessments in future cases.

  • Carter v. Commissioner, T.C. Memo. 2020-21: Conservation Easements and the Perpetual Restriction Requirement

    Nathaniel A. Carter and Stella C. Carter v. Commissioner of Internal Revenue, T. C. Memo. 2020-21 (U. S. Tax Court 2020)

    In Carter v. Commissioner, the U. S. Tax Court ruled that a conservation easement did not qualify for a charitable deduction under IRC §170(h) due to the donors’ retained right to build homes in undefined areas, which failed the perpetual restriction requirement. The court also invalidated proposed gross valuation misstatement penalties due to untimely supervisory approval, impacting how such penalties are enforced in future tax cases.

    Parties

    Nathaniel A. Carter and Stella C. Carter, petitioners, and Ralph G. Evans, petitioner, versus Commissioner of Internal Revenue, respondent. The cases were consolidated for trial, briefing, and opinion in the U. S. Tax Court.

    Facts

    In 2005, Dover Hall Plantation, LLC (DHP), owned by Nathaniel Carter, purchased a 5,245-acre tract in Glynn County, Georgia. In 2009, Ralph Evans purchased a 50% interest in DHP. In 2011, DHP conveyed a conservation easement over 500 acres of Dover Hall to the North American Land Trust (NALT), a qualified organization under IRC §170(h)(3). The easement generally prohibited dwellings but allowed DHP to build single-family homes in 11 unspecified two-acre building areas, subject to NALT’s approval. DHP claimed a charitable contribution deduction for the easement on its 2011 tax return, and Carter and Evans claimed their respective shares on their individual returns. The Commissioner disallowed these deductions and proposed gross valuation misstatement penalties under IRC §6662.

    Procedural History

    The Commissioner issued notices of deficiency on August 18, 2015, disallowing the charitable contribution deductions claimed by Carter and Evans for 2011, 2012, and 2013, and proposing gross valuation misstatement penalties. On May 8, 2015, Revenue Agent Christopher Dickerson sent examination reports (RARs) and Letters 5153 to the Carters and Evans, proposing adjustments and penalties. These letters did not include “30-day letters” offering appeal rights because the taxpayers did not agree to extend the period of limitations on assessment. The Tax Court consolidated the cases and held a trial to determine the validity of the claimed deductions and penalties.

    Issue(s)

    Whether the conservation easement granted by DHP to NALT constitutes a “qualified real property interest” under IRC §170(h)(2)(C) when it allows for the construction of single-family homes in unspecified building areas? Whether the gross valuation misstatement penalties under IRC §6662 were timely approved by the Revenue Agent’s immediate supervisor?

    Rule(s) of Law

    IRC §170(h)(1) defines a “qualified conservation contribution” as a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. IRC §170(h)(2)(C) includes a “restriction (granted in perpetuity) on the use which may be made of real property. ” IRC §6751(b)(1) requires that no penalty shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination.

    Holding

    The Tax Court held that the conservation easement did not meet the perpetual restriction requirement of IRC §170(h)(2) because the building areas allowed for uses antithetical to the easement’s conservation purposes. Consequently, the easement was not a “qualified real property interest,” and no charitable contribution deductions were allowed under IRC §170. The court also held that the gross valuation misstatement penalties were not sustained due to untimely supervisory approval under IRC §6751(b)(1).

    Reasoning

    The court relied on Pine Mountain Pres. , LLLP v. Commissioner, 151 T. C. 247 (2018), to determine that the building areas, though subject to some restrictions, were exempt from the easement because they permitted uses antithetical to its conservation purposes, such as the construction of single-family homes. The court found that the residual restrictions within the building areas were not meaningful under IRC §170(h)(2) because they did not prevent the development of homes, which is contrary to the preservation of open space and natural habitats. Regarding the penalties, the court concluded that the initial determination of the penalties was communicated to the taxpayers via the RARs and Letters 5153 on May 8, 2015, before the written approval by the Revenue Agent’s supervisor on May 19, 2015. Thus, the approval was untimely under IRC §6751(b)(1).

    Disposition

    The Tax Court disallowed the charitable contribution deductions claimed by Carter and Evans and did not sustain the gross valuation misstatement penalties. Decisions were entered under Rule 155.

    Significance/Impact

    Carter v. Commissioner reinforces the strict interpretation of the perpetual restriction requirement for conservation easements under IRC §170(h)(2), emphasizing that any retained development rights must not undermine the conservation purposes. The decision also clarifies the timing requirement for supervisory approval of penalties under IRC §6751(b)(1), affecting the IRS’s enforcement of penalties and potentially impacting future tax litigation involving similar issues.

  • Christian Bernd Alber v. Commissioner of Internal Revenue, T.C. Memo. 2020-20: Whistleblower Award Claims and IRS Discretion

    Christian Bernd Alber v. Commissioner of Internal Revenue, T. C. Memo. 2020-20 (U. S. Tax Court 2020)

    In Christian Bernd Alber v. Commissioner, the U. S. Tax Court upheld the IRS Whistleblower Office’s (WBO) decision to reject a whistleblower claim. Alber, a German resident, alleged illegal actions by the German court system and unidentified individuals but failed to provide specific or credible information about U. S. tax law violations. The court ruled that the WBO did not abuse its discretion in summarily rejecting the claim, emphasizing the need for clear, actionable information in whistleblower submissions. This decision reinforces the WBO’s authority to evaluate and reject claims that do not meet statutory thresholds.

    Parties

    Christian Bernd Alber, Petitioner, represented himself. Commissioner of Internal Revenue, Respondent, represented by Ryan Z. Sarazin, Bartholomew Cirenza, and Shari A. Salu.

    Facts

    Christian Bernd Alber, a non-U. S. citizen residing in Germany, filed a whistleblower claim with the IRS Whistleblower Office (WBO) alleging illegal actions by the German court system and unspecified violations by 17 individuals or entities. Alber’s Form 211 claimed that the German government had treated him illegally, stealing his assets through invalid tax laws and other means. However, he provided no specific information linking these allegations to U. S. internal revenue laws or identifying any U. S. tax violations. The WBO reviewed Alber’s claim and, finding it speculative and lacking specific or credible information about U. S. tax underpayments or violations, rejected it without referral to an IRS operating division for further investigation.

    Procedural History

    Alber filed his whistleblower claim on December 11, 2018. The WBO acknowledged receipt on December 19, 2018, and after review, formally rejected the claim on February 8, 2019, citing a lack of specific or credible information regarding U. S. tax violations. Alber petitioned the U. S. Tax Court for review on March 8, 2019. The Commissioner moved for summary judgment, asserting that the WBO’s decision was not an abuse of discretion. The Tax Court, applying an abuse of discretion standard, granted the Commissioner’s motion on January 30, 2020.

    Issue(s)

    Whether the IRS Whistleblower Office abused its discretion in summarily rejecting Alber’s whistleblower claim under section 7623 of the Internal Revenue Code?

    Rule(s) of Law

    Under section 7623 of the Internal Revenue Code, the IRS Whistleblower Office evaluates whistleblower claims to determine their eligibility for an award. The WBO’s regulations at 26 C. F. R. sec. 301. 7623-1(c)(4) require claims to contain specific, credible information about a violation of U. S. internal revenue laws. The Tax Court reviews WBO decisions for abuse of discretion, which occurs if the decision is arbitrary, capricious, or without sound basis in fact or law (Kasper v. Commissioner, 150 T. C. 8 (2018); Murphy v. Commissioner, 125 T. C. 301 (2005)).

    Holding

    The U. S. Tax Court held that the IRS Whistleblower Office did not abuse its discretion in rejecting Alber’s whistleblower claim. The court found that the WBO’s decision was supported by Alber’s failure to provide specific or credible information about violations of U. S. internal revenue laws, as required by the applicable regulations.

    Reasoning

    The court’s reasoning focused on the WBO’s authority to evaluate whistleblower claims for threshold eligibility under section 7623 and the regulations. The court noted that Alber’s claim was speculative and did not provide the necessary specific or credible information about U. S. tax violations. The WBO’s decision to reject the claim without referral to an IRS operating division was within its discretion, as it was based on a reasonable evaluation of the claim’s content. The court emphasized that its review was limited to determining whether the WBO’s decision was an abuse of discretion, not whether the court would have reached the same decision. The court found that the WBO’s decision had a sound basis in fact and law, given Alber’s failure to meet the statutory and regulatory requirements for a whistleblower claim. The court also considered the policy behind allowing the WBO to reject claims that do not meet minimum standards, to prevent the unnecessary expenditure of IRS resources on meritless claims.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for summary judgment, affirming the IRS Whistleblower Office’s rejection of Alber’s whistleblower claim.

    Significance/Impact

    This case reinforces the IRS Whistleblower Office’s authority to evaluate and reject whistleblower claims that do not meet statutory and regulatory thresholds. It underscores the importance of providing specific and credible information about U. S. tax violations in whistleblower submissions. The decision may deter frivolous or speculative claims and encourage whistleblowers to ensure their allegations are well-founded and clearly related to U. S. tax laws. Subsequent courts may cite this case to support the WBO’s discretion in evaluating the sufficiency of whistleblower claims at the initial stage.

  • Lon B. Isaacson v. Commissioner of Internal Revenue, T.C. Memo. 2020-17: Income Recognition and Civil Fraud Penalties in Tax Law

    Lon B. Isaacson v. Commissioner of Internal Revenue, T. C. Memo. 2020-17 (U. S. Tax Court, 2020)

    In Lon B. Isaacson v. Commissioner, the U. S. Tax Court upheld a significant tax deficiency and fraud penalty against attorney Lon B. Isaacson for failing to report over $2. 5 million in income from a clergy abuse settlement in 2007. The court rejected Isaacson’s argument that a fee dispute with clients prevented income recognition, applying judicial estoppel due to his inconsistent positions in prior legal proceedings. The decision underscores the importance of accurate income reporting and the consequences of fraudulent tax practices, particularly for legal professionals.

    Parties

    Lon B. Isaacson, the petitioner, sought a redetermination of his 2007 income tax liability from the Commissioner of Internal Revenue, the respondent. Isaacson was represented by Joseph A. Broyles, while the Commissioner was represented by Cassidy B. Collins, Andrea M. Faldermeyer, Christine A. Fukushima, and Priscilla A. Parrett.

    Facts

    Lon B. Isaacson, a disbarred attorney, represented four clients in a lawsuit against the Catholic Archdiocese of Los Angeles for childhood sexual abuse. In 2007, Isaacson secured a $12. 75 million settlement, asserting a 60% contingency fee. The settlement funds were deposited into an investment account at UBS, which Isaacson controlled and used for personal purposes. Isaacson did not report his claimed fee as income for 2007, despite having dominion and control over the funds. He maintained that no fee dispute existed in prior legal proceedings, which led to favorable outcomes in those cases. However, in the tax court, he argued that a fee dispute with two clients prevented him from recognizing the income, a position inconsistent with his prior representations.

    Procedural History

    The Commissioner determined a deficiency of $2,583,374 and a civil fraud penalty of $1,937,531 for Isaacson’s 2007 tax year. Isaacson petitioned the U. S. Tax Court for a redetermination. The case involved multiple concessions and focused on whether Isaacson failed to report taxable income for 2007 and whether he was liable for the civil fraud penalty. The court reviewed extensive evidence, including Isaacson’s prior legal proceedings and financial records.

    Issue(s)

    Whether Isaacson failed to report taxable income from his contingency fee for the 2007 tax year?

    Whether Isaacson is liable for the civil fraud penalty under section 6663 of the Internal Revenue Code for the 2007 tax year?

    Rule(s) of Law

    Under section 61(a) of the Internal Revenue Code, gross income includes all income from whatever source derived. For cash basis taxpayers, income must be reported in the year it is actually or constructively received. The doctrine of judicial estoppel prevents a party from asserting a position in a legal proceeding that is inconsistent with a position successfully maintained in a prior proceeding. Section 6663 imposes a 75% penalty on any underpayment of tax due to fraud, which must be proven by clear and convincing evidence.

    Holding

    The court held that Isaacson failed to report taxable income from his contingency fee for 2007 and was liable for the civil fraud penalty under section 6663. The court applied judicial estoppel to bar Isaacson’s claim of a fee dispute, as he had previously maintained that no such dispute existed in other legal proceedings. The court found that Isaacson had dominion and control over the settlement funds in 2007 and should have reported his fee as income for that year.

    Reasoning

    The court’s reasoning focused on several key points:

    – Isaacson’s prior representations in legal proceedings that no fee dispute existed were accepted and relied upon by other tribunals, leading to the application of judicial estoppel.

    – Isaacson’s failure to report his fee as income in 2007 was deemed fraudulent, supported by his consistent pattern of underreporting income, inadequate recordkeeping, and false testimony.

    – The court rejected Isaacson’s reliance on a purported tax opinion letter, finding it inadequate and based on false assumptions.

    – Isaacson’s use of the settlement funds for personal purposes and his failure to maintain proper financial records were seen as badges of fraud.

    – The court noted Isaacson’s legal background and experience in tax fraud cases, which informed its analysis of his intent and actions.

    Disposition

    The court entered a decision for the respondent, affirming the deficiency and the civil fraud penalty against Isaacson for the 2007 tax year.

    Significance/Impact

    This case highlights the strict application of income recognition rules for cash basis taxpayers and the severe consequences of tax fraud, particularly for legal professionals. It underscores the importance of consistent positions in legal proceedings and the potential application of judicial estoppel. The decision reinforces the need for accurate reporting of income and the maintenance of proper financial records, especially when handling client funds. The case also serves as a reminder of the rigorous standards applied by the U. S. Tax Court in assessing civil fraud penalties.

  • Manroe v. Commissioner, T.C. Memo. 2020-16: Jurisdictional Limits of the U.S. Tax Court in TEFRA Proceedings

    Manroe v. Commissioner, T. C. Memo. 2020-16, U. S. Tax Court (2020)

    In Manroe v. Commissioner, the U. S. Tax Court ruled it lacked jurisdiction over penalties stemming from partnership-level adjustments under TEFRA, despite having authority over the related income tax deficiencies. The decision clarifies the court’s limited scope in TEFRA cases, impacting how penalties related to partnership items are contested, as taxpayers must now rely on post-payment refund actions to challenge such penalties.

    Parties

    Lori J. Manroe and Robert D. Manroe were the petitioners, represented by Ernest Scribner Ryder. The respondent was the Commissioner of Internal Revenue, represented by Thomas Lee Fenner and Mark J. Miller.

    Facts

    The Manroes participated in a Son-of-BOSS tax shelter transaction through BLAK Investments (BLAK), a partnership subject to TEFRA. They reported losses from offsetting short positions in U. S. Treasury notes and Swiss francs. After the IRS determined BLAK was a sham lacking economic substance, the Manroes received deficiency notices for tax years 2001 and 2002, including penalties for gross valuation misstatement. They challenged the premature assessments and sought to restrain collection.

    Procedural History

    The IRS issued a final partnership administrative adjustment (FPAA) to BLAK, which was upheld in a subsequent Tax Court decision. Following this, the Manroes received notices of deficiency for their individual tax liabilities. They filed timely petitions in the Tax Court and moved to restrain collection of the premature assessments. The court had to determine its jurisdiction over the penalties.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to redetermine penalties assessed under section 6662 in a partner-level proceeding following a TEFRA partnership-level adjustment?

    Rule(s) of Law

    The Tax Court’s jurisdiction is limited to what Congress authorizes. Under TEFRA, the court has jurisdiction over partnership items but not over penalties that relate to adjustments to partnership items unless an exception applies. Section 6230(a)(1) states that normal deficiency procedures do not apply to computational adjustments, with exceptions listed in section 6230(a)(2) and (a)(3).

    Holding

    The U. S. Tax Court held that it lacked jurisdiction over the penalties assessed under section 6662 in the partner-level proceeding, as the penalties related to an adjustment to a partnership item and did not fall within the exceptions provided by section 6230(a)(2) or (a)(3).

    Reasoning

    The court reasoned that the penalties were computational adjustments stemming from the partnership-level determination that BLAK was a sham. The court relied on the Supreme Court’s decision in Woods v. Commissioner, which established that penalties relating to adjustments to partnership items could be determined at the partnership level, even if they also involved affected items requiring partner-level determinations. The court rejected the Manroes’ argument that penalties related to affected items (their outside bases) were distinct from penalties related to partnership items, as this was contrary to Woods. The court also noted that the exception in section 6230(a)(2)(A)(i) for affected items requiring partner-level determinations explicitly excluded penalties related to adjustments to partnership items. The court’s decision was consistent with its prior ruling in Gunther v. Commissioner and the Eleventh Circuit’s decision in Highpoint Tower Tech. Inc. v. Commissioner.

    Disposition

    The court granted the Manroes’ motion to restrain collection and refund amounts related to the income tax deficiencies but denied their motion and granted the Commissioner’s motion to dismiss with respect to the penalties.

    Significance/Impact

    Manroe v. Commissioner clarifies the jurisdictional limits of the U. S. Tax Court in TEFRA proceedings, specifically regarding penalties related to partnership items. The decision reinforces that such penalties must be challenged in post-payment refund actions, not in pre-payment deficiency proceedings. This ruling impacts taxpayers involved in TEFRA partnerships by limiting their ability to contest penalties before payment, potentially affecting their tax planning and litigation strategies. The case aligns with recent judicial interpretations of TEFRA’s jurisdictional framework and may influence future cases involving similar issues.

  • Ugorji Timothy Wilson Onyeani v. Commissioner of Internal Revenue, T.C. Memo. 2020-15: Bank Deposits Analysis and Termination Assessments in Tax Law

    Ugorji Timothy Wilson Onyeani v. Commissioner of Internal Revenue, T. C. Memo. 2020-15 (U. S. Tax Court 2020)

    In a significant ruling, the U. S. Tax Court upheld a termination assessment against Ugorji Timothy Wilson Onyeani, finding he received unreported income of $802,083. The court applied a bank deposits analysis to reconstruct Onyeani’s income, despite uncertainties about the nature of his transactions. However, the court declined to impose civil fraud or accuracy-related penalties, as there was no underpayment of tax due to the termination assessment. This decision underscores the IRS’s authority to use bank deposits analysis in assessing income and the procedural nuances surrounding termination assessments and penalties.

    Parties

    Ugorji Timothy Wilson Onyeani was the petitioner, representing himself pro se. The Commissioner of Internal Revenue was the respondent, represented by Sarah E. Sexton Martinez, Eugene A. Kornel, and Megan E. Heinz.

    Facts

    In early 2015, Ugorji Timothy Wilson Onyeani incorporated American Hope Petroleum & Energy Corp. (AHPE) and received approximately $750,000 from entities allegedly interested in purchasing Nigerian crude oil. Onyeani attempted to wire $300,000 to a foreign bank account, prompting the U. S. Secret Service to alert the IRS. Suspecting Onyeani intended to flee the country or remove assets, the IRS conducted a bank deposits analysis and determined he received taxable income of $802,083 as of May 13, 2015. The IRS made a termination assessment under section 6851(a), assessed tax of $288,546, and collected it by levying Onyeani’s bank account after he unsuccessfully challenged the assessment in Federal District Court. Onyeani filed a 2015 tax return, reporting none of the income subject to the termination assessment. The IRS issued a notice of deficiency, determining unreported income of $802,083, a deficiency of $273,407, and penalties for civil fraud and accuracy-related issues.

    Procedural History

    Onyeani challenged the termination assessment and levy in the U. S. District Court for the Northern District of Illinois, which upheld the IRS’s actions as reasonable. The IRS then issued a notice of deficiency for the 2015 tax year, which Onyeani contested in the U. S. Tax Court. The Tax Court’s jurisdiction was affirmed as the notice was issued within 60 days of the due date of Onyeani’s 2015 return.

    Issue(s)

    Whether the IRS correctly determined that Ugorji Timothy Wilson Onyeani received unreported income of $802,083 for the 2015 tax year, and whether he is liable for civil fraud and accuracy-related penalties?

    Rule(s) of Law

    The IRS is authorized to use the bank deposits method to reconstruct a taxpayer’s income when records do not clearly reflect income. Section 6851(a) allows the IRS to make a termination assessment if it believes a taxpayer intends to leave the country or remove assets. Section 6663(a) imposes a civil fraud penalty if any part of an underpayment is due to fraud, and section 6662(a) imposes an accuracy-related penalty for underpayments due to negligence or substantial understatement of income tax. The IRS must meet its burden of production for penalties under section 7491(c) and prove fraud by clear and convincing evidence under section 7454(a).

    Holding

    The U. S. Tax Court held that the IRS correctly determined Onyeani received unreported income of $802,083 for the 2015 tax year, but reduced this by $400,000 due to a repayment to one of the entities involved. The court found no underpayment of tax due to the termination assessment and thus declined to impose civil fraud or accuracy-related penalties.

    Reasoning

    The court applied the bank deposits method to reconstruct Onyeani’s income, finding that the deposits into his accounts were prima facie evidence of income. The court disregarded AHPE as a separate taxable entity due to its lack of corporate formalities and Onyeani’s use of its funds for personal expenses. The court also considered the possibility that the funds were received illegally but noted that illegally received funds are taxable unless accompanied by an obligation to repay. Onyeani’s $400,000 repayment to LaSalle was offset against his gross income for 2015. The court rejected Onyeani’s claims for deductions due to lack of substantiation. Regarding penalties, the court found no underpayment of tax due to the termination assessment, and even if there were an underpayment, the IRS did not prove fraud by clear and convincing evidence. The court noted that Onyeani’s failure to report income on his 2015 return did not indicate an intent to evade taxes, given the pending litigation over the termination assessment.

    Disposition

    The court directed the parties to submit computations under Rule 155 to determine Onyeani’s final tax liability for 2015, reflecting the court’s findings.

    Significance/Impact

    This case reaffirms the IRS’s authority to use the bank deposits method to reconstruct income and highlights the procedural requirements for termination assessments and penalties. It underscores the importance of corporate formalities in distinguishing between corporate and personal income and the need for clear evidence of fraudulent intent to impose penalties. The decision may influence future cases involving termination assessments and the treatment of allegedly fraudulent income, particularly in contexts where the nature of transactions is uncertain.

  • Williams v. Commissioner, T.C. Memo. 2019-66: Timely Mailing and Jurisdiction Under IRC §§ 6213 and 7502

    Williams v. Commissioner, T. C. Memo. 2019-66 (U. S. Tax Court 2019)

    In Williams v. Commissioner, the U. S. Tax Court ruled it lacked jurisdiction over a taxpayer’s petition due to untimely filing under IRC § 6213(a). The court found that the petition, mailed without a discernible postmark, was not proven to be timely under IRC § 7502’s “timely mailed, timely filed” rule. This case underscores the importance of proving timely mailing with convincing evidence, particularly when relying on the postal service during busy holiday periods.

    Parties

    Curtiss T. Williams, as Petitioner, filed a petition against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court. The case was represented by Paul W. Jones for the Petitioner and Skyler K. Bradbury and David W. Sorensen for the Respondent.

    Facts

    On September 4, 2014, the IRS sent a notice of deficiency to Curtiss T. Williams for tax years 2010, 2011, and 2012. Williams’s attorney, based in Salt Lake City, Utah, prepared and signed a petition dated November 29, 2014, requesting a redetermination of the deficiencies. The petition was required to be filed within 90 days from the notice date, i. e. , by December 3, 2014. The petition was received by the Tax Court on January 8, 2015, without a discernible postmark on the envelope. Williams’s attorney claimed to have mailed the petition on December 2, 2014, late in the evening, citing his daughter’s surgery as a reason for delay in preparation.

    Procedural History

    The IRS moved to dismiss the case for lack of jurisdiction, arguing that the petition was not filed within the 90-day period prescribed by IRC § 6213(a). Williams contended that the petition was timely mailed and should be deemed timely filed under IRC § 7502. The Tax Court considered the motion, and, finding that Williams had not met his burden of proving timely mailing, granted the IRS’s motion to dismiss for lack of jurisdiction.

    Issue(s)

    Whether the Tax Court had jurisdiction over the case under IRC § 6213(a) when the petition was received 36 days after the due date and the envelope lacked a discernible postmark?

    Whether the petition was timely mailed under IRC § 7502, such that it should be deemed timely filed?

    Rule(s) of Law

    IRC § 6213(a) mandates that a petition to the Tax Court must be filed within 90 days after a notice of deficiency is mailed by the IRS. IRC § 7502 provides that a document delivered by U. S. mail is deemed timely filed if the postmark date is on or before the prescribed filing date and the document is mailed in a properly addressed envelope with postage prepaid. If the postmark is missing or illegible, the party invoking IRC § 7502 must provide “convincing evidence” of timely mailing.

    Holding

    The Tax Court held that it lacked jurisdiction over the case because Williams failed to prove that the petition was timely mailed under IRC § 7502. The court found that the petition was not received within the 90-day period prescribed by IRC § 6213(a), and Williams did not present convincing evidence that the petition was mailed on or before December 3, 2014.

    Reasoning

    The court’s reasoning centered on the lack of a discernible postmark on the envelope containing the petition. The court noted that without a postmark, it must rely on extrinsic evidence to determine the mailing date. The court considered the attorney’s declaration, which stated that the petition was mailed on December 2, 2014, but found inconsistencies with the date on the petition itself and the attorney’s recollection of the events. The court also examined the normal delivery time from Salt Lake City to Washington, D. C. , which is approximately seven to eight days, and noted that the petition arrived nearly a month later than expected. The court rejected the attorney’s explanation of holiday-related delays, finding it unpersuasive given the timing and lack of evidence of postal service disruptions. The court emphasized that the burden of proving timely mailing rests with the party invoking IRC § 7502 and that Williams failed to meet this burden with convincing evidence. The court also highlighted the importance of using certified mail to avoid the risk of a missing postmark, as advised by the regulations.

    Disposition

    The Tax Court granted the IRS’s motion to dismiss the case for lack of jurisdiction due to the untimely filing of the petition.

    Significance/Impact

    Williams v. Commissioner reinforces the strict application of the jurisdictional requirements under IRC § 6213(a) and the evidentiary burden under IRC § 7502. The case serves as a reminder to taxpayers and their representatives of the importance of using certified mail and maintaining meticulous records of mailing dates to establish timely filing. It also highlights the challenges of relying on the postal service during busy periods and the need for convincing evidence to overcome such challenges. The decision may influence future cases involving similar issues of timely mailing and jurisdiction, emphasizing the need for clear and consistent evidence of mailing dates.

  • James Anthony Ransom v. Commissioner of Internal Revenue, T.C. Memo. 2018-211: Collection Due Process and Taxpayer Compliance

    James Anthony Ransom v. Commissioner of Internal Revenue, T. C. Memo. 2018-211 (U. S. Tax Court, 2018)

    In Ransom v. Commissioner, the U. S. Tax Court upheld the IRS’s decision to sustain a levy notice against a taxpayer who failed to comply with current estimated tax obligations. The court ruled that the IRS settlement officer did not abuse discretion by denying the taxpayer’s request for a collection alternative, emphasizing the need for taxpayers to remain current on tax liabilities to prevent pyramiding of debt. This decision underscores the importance of taxpayer compliance in negotiating collection alternatives with the IRS.

    Parties

    James Anthony Ransom, the petitioner, proceeded pro se. The respondent was the Commissioner of Internal Revenue, represented by William J. Gregg and Bartholomew Cirenza.

    Facts

    James Anthony Ransom, a contractor for nonprofit organizations, filed Federal income tax returns for 2012, 2013, and 2015. The IRS issued notices of deficiency for 2012 and 2013, which Ransom did not contest within the statutory period, resulting in the IRS assessing his tax liabilities for those years. For 2015, the IRS assessed the tax shown on Ransom’s return, which remained unpaid. As of March 2017, Ransom’s total outstanding liability was $88,418. In response to a notice of intent to levy, Ransom requested a Collection Due Process (CDP) hearing, seeking an installment agreement and claiming he did not owe the full amount for 2012 due to an unprocessed amended return. During the CDP process, Ransom failed to submit required financial information and make full payment toward his 2017 estimated tax liability, despite multiple extensions and opportunities provided by the IRS settlement officer.

    Procedural History

    The IRS mailed Ransom a notice of intent to levy on March 16, 2017, prompting his timely request for a CDP hearing. The IRS Appeals Office settlement officer (SO) reviewed Ransom’s case, confirming the proper assessment of tax liabilities and compliance with applicable laws. After a telephone hearing on August 18, 2017, and despite extensions to September 16, 2017, Ransom failed to fully comply with the SO’s requirements. Consequently, the SO issued a notice of determination on September 28, 2017, sustaining the proposed levy. Ransom petitioned the U. S. Tax Court, where the Commissioner moved for summary judgment, which was granted based on the absence of disputed material facts and the legality of the IRS’s actions.

    Issue(s)

    Whether the IRS settlement officer abused discretion in sustaining the proposed levy action against James Anthony Ransom due to his non-compliance with current estimated tax obligations and failure to provide required financial information?

    Rule(s) of Law

    The IRS’s determination in a CDP case is reviewed for abuse of discretion if the taxpayer’s underlying liability is not at issue. The IRS may deny collection alternatives if the taxpayer fails to comply with current tax obligations, as per Internal Revenue Manual pt. 5. 14. 1. 4. 1(19). The requirement of current compliance helps prevent the pyramiding of tax liabilities.

    Holding

    The U. S. Tax Court held that the IRS settlement officer did not abuse discretion in sustaining the proposed levy action against Ransom. Ransom’s failure to comply with current estimated tax obligations and provide required financial information justified the IRS’s denial of a collection alternative.

    Reasoning

    The court’s reasoning focused on the standard of review for CDP cases, which is abuse of discretion when the underlying tax liability is not contested. Ransom could not challenge his liabilities for 2012, 2013, and 2015 due to prior opportunities to contest them. The court emphasized that the SO properly verified compliance with applicable laws and considered Ransom’s issues. The key factor was Ransom’s non-compliance with his 2017 estimated tax obligations, which the court found to be a legitimate basis for denying a collection alternative. The court cited consistent precedents affirming that non-compliance with current tax obligations can justify the IRS’s refusal to consider collection alternatives. The court rejected Ransom’s argument about the termination of a consulting contract, as it occurred after the CDP hearing and did not excuse his earlier non-compliance. The court’s decision aligned with policy considerations to prevent the pyramiding of tax liabilities and ensure efficient tax collection.

    Disposition

    The U. S. Tax Court granted summary judgment to the Commissioner, affirming the IRS’s proposed collection action through the levy.

    Significance/Impact

    Ransom v. Commissioner reinforces the IRS’s authority to deny collection alternatives to taxpayers who fail to comply with current tax obligations. The decision underscores the importance of taxpayer compliance during the CDP process and the IRS’s discretion in managing tax collection efforts. It serves as a reminder to taxpayers of the need to remain current on tax liabilities when seeking to negotiate collection alternatives. This case may influence future CDP hearings and taxpayer negotiations with the IRS, emphasizing the critical role of compliance in preventing the pyramiding of tax debt.