SCOTUS Reports

Tag: U.S. Tax Court

  • Prince Amun-Ra Hotep Ankh Meduty v. Commissioner of Internal Revenue, 160 T.C. No. 13 (2023): Certification of Seriously Delinquent Tax Debt Under I.R.C. § 7345

    Prince Amun-Ra Hotep Ankh Meduty v. Commissioner of Internal Revenue, 160 T. C. No. 13 (U. S. Tax Ct. 2023)

    The U. S. Tax Court upheld the IRS’s certification of Prince Amun-Ra Hotep Ankh Meduty’s tax debt as ‘seriously delinquent’ under I. R. C. § 7345, affirming the IRS’s authority to notify the State Department for potential passport actions. The court clarified its limited jurisdiction, unable to review IRS notification procedures, emphasizing the statutory focus on the validity of the certification itself.

    Parties

    Prince Amun-Ra Hotep Ankh Meduty, Petitioner, pro se, v. Commissioner of Internal Revenue, Respondent, represented by Susan K. Bollman.

    Facts

    Prince Amun-Ra Hotep Ankh Meduty (formerly Steven Bell) failed to timely file federal income tax returns for the years 2003-2007, 2009, and 2012. The IRS prepared substitute returns for these years (except 2007) and assessed taxes, penalties, and interest. For 2007, Mr. Meduty filed a late return, and the IRS assessed the reported amount. Additionally, the IRS assessed frivolous return penalties for tax years 2005-2008. In attempts to collect these liabilities, the IRS levied against Mr. Meduty’s state income tax refunds. On July 3, 2018, the IRS sent a notice of intent to levy, and after receiving a signed return receipt, recorded initial levy transactions on August 31, 2018. On October 1, 2018, the IRS certified Mr. Meduty’s debt as ‘seriously delinquent’ under I. R. C. § 7345 and notified him accordingly. Mr. Meduty’s assessed liabilities totaled $106,346 at the time of certification.

    Procedural History

    Mr. Meduty petitioned the U. S. Tax Court to review the certification under I. R. C. § 7345(e)(1). The Commissioner filed a motion for summary judgment, asserting that the certification was proper and that he was entitled to judgment as a matter of law. The court considered the administrative record and the parties’ pleadings, applying the summary judgment standard under Rule 121 of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether the IRS’s certification of Prince Amun-Ra Hotep Ankh Meduty’s tax debt as ‘seriously delinquent’ under I. R. C. § 7345 was erroneous?

    Whether the Tax Court has jurisdiction under I. R. C. § 7345(e) to review challenges to the IRS’s compliance with the notification requirement set forth in I. R. C. § 7345(d)?

    Rule(s) of Law

    I. R. C. § 7345(a) authorizes the Commissioner to certify a ‘seriously delinquent tax debt’ to the Secretary of State for potential passport actions. I. R. C. § 7345(b)(1) defines a ‘seriously delinquent tax debt’ as an assessed federal tax liability exceeding $50,000 (adjusted for inflation), unpaid, and legally enforceable, where either a notice of lien has been filed or a levy has been made. I. R. C. § 7345(e)(1) allows taxpayers to petition the Tax Court to determine whether the certification was erroneous or whether the IRS failed to reverse the certification. I. R. C. § 7345(d) mandates the IRS to notify the taxpayer of the certification.

    Holding

    The IRS’s certification of Mr. Meduty’s tax debt as ‘seriously delinquent’ under I. R. C. § 7345 was not erroneous. The Tax Court lacks jurisdiction under I. R. C. § 7345(e) to review challenges to the IRS’s compliance with the notification requirement set forth in I. R. C. § 7345(d).

    Reasoning

    The court found that Mr. Meduty’s liabilities met the statutory definition of ‘seriously delinquent tax debt’ under I. R. C. § 7345(b)(1). The IRS had assessed and recorded the liabilities, and the total exceeded the inflation-adjusted threshold of $51,000 for 2018. The court also found that the IRS had made a levy pursuant to I. R. C. § 6331, as evidenced by the Forms 4340 and the declaration of a senior program analyst regarding the Integrated Data Retrieval System (IDRS) transcripts. The court dismissed Mr. Meduty’s arguments regarding the validity of the underlying liabilities and the necessity of implementing regulations for I. R. C. § 7345, citing established precedents. The court also rejected the argument that levies under I. R. C. § 6331 were limited to certain individuals, and dismissed the claim that Mr. Meduty had satisfied his debt with a ‘bonded promissory note’. On the issue of jurisdiction, the court interpreted I. R. C. § 7345(e) to focus solely on the validity of the certification, not on the IRS’s compliance with notification requirements under I. R. C. § 7345(d). The court found that a lack of proper notification did not prejudice Mr. Meduty’s ability to challenge the certification under I. R. C. § 7345(e).

    Disposition

    The court granted the Commissioner’s motion for summary judgment, affirming the certification of Mr. Meduty’s tax debt as ‘seriously delinquent’ under I. R. C. § 7345.

    Significance/Impact

    This case clarifies the scope of the Tax Court’s jurisdiction under I. R. C. § 7345(e), limiting it to reviewing the validity of the certification of a ‘seriously delinquent tax debt’ and not extending to the IRS’s compliance with notification requirements. It reinforces the IRS’s authority to certify tax debts as ‘seriously delinquent’ and underscores the importance of timely compliance with tax obligations to avoid potential passport restrictions. The decision also reflects the court’s stance on rejecting frivolous tax protester arguments, emphasizing the enforceability of tax liabilities and the IRS’s collection powers.

  • Nutt v. Commissioner, 160 T.C. No. 10 (2023): Timeliness of Electronic Filing in Tax Court

    Nutt v. Commissioner, 160 T. C. No. 10 (U. S. Tax Ct. 2023)

    In Nutt v. Commissioner, the U. S. Tax Court ruled that electronic filings must be received by the court before the deadline in the court’s time zone. Roy and Bonnie Nutt filed their petition one minute past midnight Eastern Time, which was still the previous day in their Central Time Zone. The court dismissed their case for lack of jurisdiction, emphasizing the importance of adhering to the court’s time zone for filing deadlines. This ruling clarifies the jurisdictional limits on electronic filing times in tax disputes.

    Parties

    Roy A. Nutt and Bonnie W. Nutt, petitioners, filed their case against the Commissioner of Internal Revenue, respondent, in the United States Tax Court. They represented themselves (pro se) throughout the proceedings.

    Facts

    The Commissioner of Internal Revenue mailed a notice of deficiency to Roy and Bonnie Nutt on April 14, 2022, which was dated April 18, 2022, and stated that the last day to file a petition with the Tax Court was July 18, 2022. On June 7, 2022, the Commissioner sent another letter reducing the deficiency amount but reaffirming the July 18, 2022, deadline. The Nutts, residing in Alabama (Central Time Zone), electronically filed their petition via the Tax Court’s electronic case management system (DAWSON) at 12:05 a. m. Eastern Time on July 19, 2022, which was still 11:05 p. m. on July 18, 2022, in their time zone. The Commissioner moved to dismiss the case for lack of jurisdiction due to the untimely filing of the petition.

    Procedural History

    The Commissioner mailed the notice of deficiency to the Nutts on April 14, 2022, setting a deadline of July 18, 2022, for filing a petition. On July 19, 2022, the Nutts electronically filed their petition, which was received by the Tax Court at 12:05 a. m. Eastern Time. The Commissioner filed a Motion to Dismiss for Lack of Jurisdiction on September 1, 2022, arguing that the petition was untimely under I. R. C. § 6213(a). The Tax Court ordered the Nutts to file an objection, which they did not do. The court ultimately dismissed the case for lack of jurisdiction due to the untimely filing of the petition.

    Issue(s)

    Whether a petition filed electronically with the United States Tax Court is considered timely when it is filed after the deadline in the court’s time zone but before the deadline in the petitioner’s time zone?

    Rule(s) of Law

    Under I. R. C. § 6213(a), a petition must be filed within 90 days after the notice of deficiency is mailed, or by the date specified in the notice if later. The timely mailing rule under I. R. C. § 7502 does not apply to electronic filings. Rule 22(d) of the Tax Court Rules of Practice and Procedure states that a paper is considered timely filed if it is electronically filed at or before 11:59 p. m. , Eastern Time, on the last day of the applicable period for filing.

    Holding

    The Tax Court held that the Nutts’ petition was untimely because it was filed after the deadline in the court’s Eastern Time Zone, despite being filed before the deadline in the Nutts’ Central Time Zone. Therefore, the court lacked jurisdiction over the case and dismissed it.

    Reasoning

    The Tax Court’s reasoning focused on the statutory and regulatory framework governing the timeliness of petitions. The court emphasized that the timely mailing rule under I. R. C. § 7502 does not apply to electronic filings, and therefore, the petition must be received by the court before the deadline as specified in the court’s time zone. The court cited Rule 22(d), which explicitly states that electronic filings must be received by 11:59 p. m. Eastern Time to be considered timely. The court also drew parallels with Federal Rule of Civil Procedure 6(a) and other federal court decisions, such as Justice v. Town of Cicero, Ill. , and McCleskey v. CWG Plastering, LLC, which similarly held that electronic filings must adhere to the time zone of the court where the case is pending. The court rejected the notion that extending the filing deadline based on the petitioner’s time zone would be permissible, as it would effectively extend the number of days available for filing, contrary to established legal principles.

    Disposition

    The Tax Court dismissed the case for lack of jurisdiction due to the untimely filing of the petition.

    Significance/Impact

    Nutt v. Commissioner establishes a clear precedent for the timeliness of electronic filings in the United States Tax Court, emphasizing that such filings must adhere to the court’s Eastern Time Zone deadline. This ruling has significant implications for taxpayers who file electronically, as it underscores the need to be aware of and comply with the court’s time zone when filing petitions. The decision also aligns with broader federal court practices regarding electronic filing deadlines, ensuring consistency in the application of time-sensitive filing requirements across different jurisdictions. This case may influence future Tax Court rules and practices regarding electronic filing, potentially leading to further clarification or amendments to ensure clarity and fairness in the filing process.

  • Gerhardt v. Commissioner, 160 T.C. No. 9 (2023): Taxation of Charitable Remainder Annuity Trust Distributions

    Gerhardt v. Commissioner, 160 T. C. No. 9 (2023)

    In Gerhardt v. Commissioner, the U. S. Tax Court ruled that payments received by taxpayers from annuities purchased by their charitable remainder annuity trusts (CRATs) are taxable as ordinary income under IRC § 664. The decision underscores the tax implications of using CRATs to sell appreciated assets and invest in annuities, emphasizing that such transactions do not provide tax-free income to beneficiaries.

    Parties

    Plaintiffs: Gladys L. Gerhardt et al. (Petitioners), including Alan A. Gerhardt, Audrey M. Gerhardt, Jack R. Gerhardt, Shelley R. Gerhardt, Tim L. Gerhardt, and Pamela J. Holck Gerhardt. Defendant: Commissioner of Internal Revenue (Respondent).

    Facts

    The Gerhardts contributed high-value, low-basis real estate and other property to CRATs. The CRATs sold the contributed properties and used most of the proceeds to purchase five-year single premium immediate annuities (SPIAs), naming the Gerhardts as recipients of the annuity payments. The Gerhardts reported minimal interest income from the CRAT-funded SPIAs on their 2016 and 2017 tax returns, asserting that the majority of the payments were not taxable. The Commissioner examined the returns and determined deficiencies, asserting that the payments were taxable as ordinary income under IRC §§ 664 and 1245. Additionally, Jack and Shelley Gerhardt engaged in a like-kind exchange under IRC § 1031 and sold another property, while Tim and Pamela Gerhardt faced an accuracy-related penalty under IRC § 6662(a).

    Procedural History

    The Commissioner issued notices of deficiency to the Gerhardts for 2016 and 2017, determining that the annuity payments were taxable as ordinary income. The Gerhardts petitioned the U. S. Tax Court for a redetermination of the deficiencies. The cases were consolidated for trial. The parties submitted the cases fully stipulated under Tax Court Rule 122. The court addressed the main issue of the taxability of CRAT-funded annuity payments and additional issues related to Jack and Shelley Gerhardt’s like-kind exchange and Tim and Pamela Gerhardt’s penalty.

    Issue(s)

    1. Whether the annuity payments received by the Gerhardts from CRAT-funded SPIAs in 2016 and 2017 are taxable as ordinary income under IRC § 664? 2. Whether Jack and Shelley Gerhardt’s gain from the disposition of the Armstrong Site in a like-kind exchange under IRC § 1031 should be recognized as ordinary income under IRC § 1245? 3. Whether Tim and Pamela Gerhardt are liable for an accuracy-related penalty under IRC § 6662(a) for 2016?

    Rule(s) of Law

    1. IRC § 664(b) governs the taxation of distributions from charitable remainder trusts, stipulating that distributions are taxed to beneficiaries in the order of ordinary income, capital gain, other income, and trust corpus. 2. IRC § 1245(a) requires recognition of gain as ordinary income when depreciated property is disposed of, including in like-kind exchanges under IRC § 1031. 3. IRC § 6662(a) imposes a penalty for substantial understatements of income tax, which can be avoided if the taxpayer shows reasonable cause and good faith under IRC § 6664(c)(1).

    Holding

    1. The annuity payments received by the Gerhardts from CRAT-funded SPIAs in 2016 and 2017 are taxable as ordinary income under IRC § 664. 2. Jack and Shelley Gerhardt’s gain from the disposition of the Armstrong Site in a like-kind exchange is taxable as ordinary income under IRC § 1245. 3. Tim and Pamela Gerhardt are liable for the accuracy-related penalty under IRC § 6662(a) for 2016 as they did not establish reasonable cause and good faith.

    Reasoning

    The court’s reasoning focused on the statutory framework of IRC § 664, which requires that distributions from CRATs follow a specific ordering rule for taxation. The court rejected the Gerhardts’ argument that the basis of assets donated to a CRAT should be their fair market value, citing IRC § 1015, which states that the basis in the hands of the CRAT is the same as in the hands of the donor. The court also dismissed the Gerhardts’ reliance on IRC § 72, as the SPIAs were purchased by the CRATs, not the Gerhardts directly, and thus did not alter the tax treatment under IRC § 664. The court found that the CRATs’ sale of contributed properties resulted in ordinary income under IRC § 1245, which was then distributed to the Gerhardts. For Jack and Shelley Gerhardt’s like-kind exchange, the court upheld the Commissioner’s determination that the gain from the Armstrong Site was subject to IRC § 1245 and thus taxable as ordinary income. Regarding Tim and Pamela Gerhardt’s penalty, the court found that they did not meet their burden to prove reasonable cause and good faith reliance on tax advisors, as they failed to provide sufficient evidence of the advisors’ qualifications and the nature of their reliance.

    Disposition

    The court upheld the Commissioner’s determinations on all issues and entered decisions under Rule 155, reflecting the findings and the parties’ concessions.

    Significance/Impact

    Gerhardt v. Commissioner reinforces the principle that distributions from CRATs are taxable to beneficiaries according to the ordering rules under IRC § 664. It clarifies that the use of CRATs to sell appreciated assets and invest in annuities does not provide a tax-free income stream to beneficiaries. The decision also underscores the application of IRC § 1245 in like-kind exchanges and the stringent requirements for avoiding accuracy-related penalties under IRC § 6662(a). This case is significant for tax practitioners and taxpayers utilizing CRATs, as it highlights the need to carefully consider the tax implications of such trusts and the importance of documenting reliance on professional advice to avoid penalties.

  • Tice v. Commissioner, 160 T.C. No. 8 (2023): Statute of Limitations and Filing Requirements under I.R.C. § 932

    Tice v. Commissioner, 160 T. C. No. 8 (2023)

    In Tice v. Commissioner, the U. S. Tax Court ruled that a U. S. citizen who claimed residency in the U. S. Virgin Islands (USVI) but was not a bona fide resident must file tax returns with both the U. S. and the USVI to trigger the statute of limitations. The court denied the taxpayer’s motion for summary judgment, affirming that without filing with the IRS, the statute of limitations does not begin, and the IRS can issue a notice of deficiency at any time.

    Parties

    David W. Tice, the Petitioner, was the taxpayer in this case. The Commissioner of Internal Revenue, the Respondent, represented the interests of the U. S. government in the proceedings. Tice was the plaintiff at the trial level, and the Commissioner was the defendant.

    Facts

    David W. Tice, a U. S. citizen, filed income tax returns for the years 2002 and 2003 with the Virgin Islands Bureau of Internal Revenue (VIBIR), claiming residency in the U. S. Virgin Islands (USVI). The Internal Revenue Service (IRS) determined that Tice was not a bona fide resident of the USVI under I. R. C. § 932(c) but rather a U. S. citizen required to file returns with both the United States and the USVI under I. R. C. § 932(a). Consequently, the IRS issued a notice of deficiency in 2015, asserting that Tice owed additional taxes for those years.

    Procedural History

    Tice filed a motion for summary judgment in the U. S. Tax Court, arguing that the statute of limitations under I. R. C. § 6501(a) began to run upon his filing of returns with the VIBIR, thereby making the 2015 notice of deficiency untimely. The court considered the motion under the assumption that Tice was not a bona fide USVI resident. The Tax Court reviewed the case de novo, applying the standard of review for summary judgment motions.

    Issue(s)

    Whether a U. S. citizen, who is not a bona fide resident of the USVI under I. R. C. § 932(c), triggers the statute of limitations under I. R. C. § 6501(a) by filing income tax returns only with the VIBIR for taxable years ending before December 31, 2006?

    Rule(s) of Law

    Under I. R. C. § 932(a)(2), U. S. citizens who are not bona fide residents of the USVI and have USVI-source income must file their income tax returns “with both the United States and the Virgin Islands. ” I. R. C. § 6501(a) provides that the IRS must assess tax within three years after the return was filed, but this period does not begin unless the return is filed in the place required by the statute or regulations. If a return is not filed, the tax may be assessed “at any time” under I. R. C. § 6501(c)(3).

    Holding

    The U. S. Tax Court held that a U. S. citizen who is not a bona fide resident of the USVI under I. R. C. § 932(c) does not trigger the statute of limitations under I. R. C. § 6501(a) by filing returns only with the VIBIR for taxable years ending before December 31, 2006. Consequently, the notice of deficiency could be issued “at any time” under I. R. C. § 6501(c)(3), and Tice’s motion for summary judgment was denied.

    Reasoning

    The court’s reasoning focused on the statutory text and structure of I. R. C. § 932, which differentiates filing requirements based on the taxpayer’s residency status. For U. S. citizens who are not bona fide residents of the USVI, the statute mandates dual filing with both the U. S. and the USVI under § 932(a)(2). The court emphasized that filing only with the VIBIR does not satisfy this requirement, as it does not constitute filing with the IRS. The court rejected Tice’s argument that merely claiming to be a bona fide resident should be sufficient to trigger the statute of limitations, citing Cooper v. Commissioner and other precedents that require actual residency status to apply § 932(c). The court also considered but dismissed Tice’s arguments regarding the Administrative Procedure Act and due process, noting that the statutory filing requirement under § 932(a)(2) was clear and that the absence of applicable regulations for the years in issue did not alter the statutory obligation.

    Disposition

    The U. S. Tax Court denied Tice’s motion for summary judgment, ruling that the notice of deficiency issued by the IRS in 2015 was timely under I. R. C. § 6501(c)(3) because Tice did not file the required returns with the IRS.

    Significance/Impact

    This decision reaffirms the strict interpretation of filing requirements under I. R. C. § 932, particularly for U. S. citizens with USVI-source income who are not bona fide residents of the USVI. It underscores the importance of meticulous compliance with statutory filing requirements to trigger the statute of limitations, impacting how taxpayers and the IRS approach similar cases. The ruling aligns with precedents from other circuits and may influence future legislative or regulatory efforts to clarify filing obligations for taxpayers with territorial income.

  • Alon Farhy v. Commissioner of Internal Revenue, 160 T.C. No. 6 (2023): Statutory Authority for Assessment of Penalties under I.R.C. § 6038(b)

    Alon Farhy v. Commissioner of Internal Revenue, 160 T. C. No. 6 (2023)

    In a landmark ruling, the U. S. Tax Court held that the IRS lacks statutory authority to assess penalties under I. R. C. § 6038(b) for failure to file information returns on foreign corporations. This decision clarifies that such penalties, while enforceable, cannot be administratively assessed and collected by the IRS, marking a significant limitation on the IRS’s collection powers and affirming the importance of explicit statutory authorization for IRS actions.

    Parties

    Alon Farhy, the petitioner, sought review of a determination by the Commissioner of Internal Revenue, the respondent, to proceed with a proposed levy to collect penalties assessed under I. R. C. § 6038(b). Farhy was the plaintiff at the trial level, and the Commissioner was the defendant.

    Facts

    Alon Farhy, a resident of Israel, owned 100% of two foreign corporations incorporated in Belize, Katumba Capital, Inc. , and Morningstar Ventures, Inc. , during his 2003-2010 taxable years. Farhy participated in an illegal tax reduction scheme, for which he was granted immunity from prosecution. He failed to file required Forms 5471 for each year in question, a violation of I. R. C. § 6038(a). The IRS assessed initial and continuation penalties under I. R. C. § 6038(b) against Farhy for each year, totaling significant amounts. Farhy contested the IRS’s authority to assess these penalties, leading to the present case.

    Procedural History

    The IRS issued a notice of intent to levy against Farhy for the unpaid penalties, prompting him to request a collection due process hearing under I. R. C. § 6330. The IRS issued a notice of determination sustaining the proposed levy, and Farhy timely petitioned the U. S. Tax Court for review. The court’s jurisdiction was established under I. R. C. § 6330(d)(1), and the case was fully stipulated under Tax Court Rule 122. The court reviewed the underlying liability de novo and the IRS’s determinations for abuse of discretion.

    Issue(s)

    Whether the IRS has statutory authority to assess penalties provided by I. R. C. § 6038(b) against a taxpayer who failed to file Forms 5471 as required by I. R. C. § 6038(a)?

    Rule(s) of Law

    I. R. C. § 6201(a) authorizes the Secretary of the Treasury to assess all taxes, including interest, additional amounts, additions to tax, and assessable penalties imposed by the Code. I. R. C. § 6038(b) imposes penalties for failure to file required information returns, but it does not explicitly authorize assessment of these penalties. I. R. C. § 6671(a) and § 6665(a)(1) specify that certain penalties are to be assessed and collected in the same manner as taxes, but I. R. C. § 6038(b) penalties are not included in these provisions.

    Holding

    The U. S. Tax Court held that the IRS lacks statutory authority to assess penalties under I. R. C. § 6038(b) against Farhy. Consequently, the IRS may not proceed with the collection of these penalties from Farhy via the proposed levy.

    Reasoning

    The court’s reasoning centered on the absence of explicit statutory authorization for the IRS to assess I. R. C. § 6038(b) penalties. The court noted that while I. R. C. § 6201(a) authorizes the assessment of taxes and assessable penalties, the term “assessable penalties” is not defined and does not automatically include all penalties not subject to deficiency procedures. The court emphasized that numerous other penalty provisions in the Code explicitly authorize assessment, but I. R. C. § 6038(b) does not. The court rejected the IRS’s arguments that the term “taxes” in I. R. C. § 6201(a) encompasses I. R. C. § 6038(b) penalties and that the penalties’ exclusion from deficiency procedures implies their assessability. The court also distinguished its prior holding in Ruesch v. Commissioner, which did not address the issue of assessment authority. The court concluded that without explicit statutory authorization, the IRS cannot assess I. R. C. § 6038(b) penalties.

    Disposition

    The U. S. Tax Court entered a decision in favor of Farhy, holding that the IRS may not proceed with the collection of the I. R. C. § 6038(b) penalties via the proposed levy.

    Significance/Impact

    This decision significantly limits the IRS’s authority to assess and collect certain penalties without explicit statutory authorization. It clarifies that the IRS must adhere strictly to the statutory framework when assessing penalties, even if they are not subject to deficiency procedures. The ruling may impact future IRS enforcement actions and could prompt legislative action to clarify the assessment authority for I. R. C. § 6038(b) penalties. It also underscores the importance of clear statutory language in delineating the scope of IRS powers, potentially affecting the interpretation of other penalty provisions in the Code.

  • Thomas Shands v. Commissioner of Internal Revenue, 160 T.C. No. 5 (2023): Jurisdiction in Whistleblower Award Claims under I.R.C. § 7623(b)

    Thomas Shands v. Commissioner of Internal Revenue, 160 T. C. No. 5 (2023)

    In Thomas Shands v. Commissioner of Internal Revenue, the U. S. Tax Court ruled it lacked jurisdiction to review a whistleblower’s claim for a nondiscretionary award under I. R. C. § 7623(b). The court determined that the creation of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) and taxpayer participation in it did not constitute an “administrative or judicial action” required for the court’s jurisdiction. This decision clarifies the scope of the Tax Court’s authority over whistleblower claims, emphasizing the necessity of IRS action based on the whistleblower’s information.

    Parties

    Thomas Shands (Petitioner) v. Commissioner of Internal Revenue (Respondent). Shands was the appellant at the Tax Court level, seeking review of the IRS Whistleblower Office’s denial of his claim for a whistleblower award.

    Facts

    Thomas Shands filed a whistleblower claim with the IRS Whistleblower Office (WBO) seeking a nondiscretionary award under I. R. C. § 7623(b) for his alleged contribution to the success of the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Shands claimed his cooperation with federal agents in the arrest and subsequent guilty plea of Swiss banker Renzo Gadola spurred widespread participation in OVDI, leading to significant tax collections. The WBO denied Shands’s claim, asserting that the IRS did not proceed with an administrative or judicial action based on information Shands provided. Shands appealed the denial to the Tax Court.

    Procedural History

    Shands filed his whistleblower claim in 2012, and the WBO denied it in 2016. Shands appealed to the Tax Court in 2016. The Commissioner moved to dismiss for lack of jurisdiction, arguing that the IRS did not proceed with an action based on Shands’s information. The Tax Court granted the Commissioner’s motion to dismiss, finding it lacked jurisdiction under I. R. C. § 7623(b)(4) because no administrative or judicial action was taken by the IRS based on Shands’s information.

    Issue(s)

    Whether the creation of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) and taxpayer participation in OVDI constitute an “administrative or judicial action” under I. R. C. § 7623(b)(1), thereby conferring jurisdiction on the Tax Court to review the WBO’s denial of Shands’s whistleblower claim?

    Rule(s) of Law

    I. R. C. § 7623(b)(1) provides for nondiscretionary whistleblower awards when the IRS proceeds with an “administrative or judicial action” based on information provided by the whistleblower. Treasury Regulation § 301. 7623-2(a) defines “administrative action” as a civil or criminal proceeding that may result in collected proceeds and “judicial action” as a proceeding in any court that may result in collected proceeds. The Tax Court’s jurisdiction to review whistleblower award determinations is limited to cases where the IRS has proceeded with such an action.

    Holding

    The Tax Court held that it lacked jurisdiction to review the WBO’s denial of Shands’s whistleblower claim because the creation of OVDI and taxpayer participation in it did not constitute an “administrative or judicial action” under I. R. C. § 7623(b)(1) and Treasury Regulation § 301. 7623-2(a).

    Reasoning

    The court’s reasoning centered on the statutory and regulatory definitions of “administrative or judicial action. ” The court relied on the D. C. Circuit’s decision in Li v. Commissioner, which held that the Tax Court lacks jurisdiction over a whistleblower claim if the IRS has not proceeded with an administrative or judicial action based on the whistleblower’s information. The court found that the creation of OVDI did not constitute a “proceeding against any person” as required by the regulation, nor did taxpayer participation in OVDI constitute such an action. The court also rejected Shands’s argument that the regulations should not apply retroactively to his claim, citing the D. C. Circuit’s ruling in Bergerco Canada v. U. S. Treasury Department, which upheld the application of new regulatory criteria to pending applications. The court concluded that Shands failed to meet his burden of proving jurisdiction, and thus, the court could not review the WBO’s denial.

    Disposition

    The Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction and dismissed Shands’s appeal.

    Significance/Impact

    This decision clarifies the jurisdictional limits of the Tax Court in reviewing whistleblower award claims under I. R. C. § 7623(b). It underscores that the creation of IRS programs like OVDI and taxpayer participation in such programs do not constitute the requisite “administrative or judicial action” for Tax Court jurisdiction. The ruling may deter future whistleblower claims based on the indirect effects of their information on IRS programs, focusing instead on direct enforcement actions. It also reinforces the deference given to Treasury Regulations in defining statutory terms, impacting how whistleblower claims are evaluated and processed by the IRS and the Tax Court.

  • Thomas v. Commissioner, 160 T.C. No. 4 (2023): Interpretation of ‘Newly Discovered Evidence’ Under I.R.C. § 6015(e)(7)(B)

    Thomas v. Commissioner, 160 T. C. No. 4 (U. S. Tax Ct. 2023)

    In Thomas v. Commissioner, the U. S. Tax Court ruled that blog posts discovered after an administrative proceeding could be considered ‘newly discovered evidence’ under I. R. C. § 6015(e)(7)(B), allowing their admission in court despite not being part of the initial record. This decision interprets the statute’s scope broadly, impacting how evidence is considered in innocent spouse relief cases and emphasizing the court’s de novo review authority.

    Parties

    Sydney Ann Chaney Thomas (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case was filed in the United States Tax Court, with Megan L. Brackney representing the Petitioner and Julie V. Skeen and Sharon Ortega representing the Respondent.

    Facts

    Sydney Ann Chaney Thomas and her late husband, Tracy A. Thomas, filed joint federal income tax returns for the years 2012, 2013, and 2014. After Tracy’s death in 2016, Sydney sought relief from joint and several liability under I. R. C. § 6015(f). The IRS denied her request on September 8, 2020, leading Sydney to petition the U. S. Tax Court on November 9, 2020. During the trial on April 4, 2022, the Commissioner introduced Exhibit 13-R, consisting of Sydney’s blog posts from November 2, 2016, to January 5, 2022, which were not part of the administrative record but were relevant to her lifestyle, assets, and relationship with her husband.

    Procedural History

    The IRS denied Sydney Thomas’s request for innocent spouse relief on September 8, 2020. Following the denial, Sydney filed a petition in the U. S. Tax Court on November 9, 2020. The trial took place on April 4, 2022, in San Francisco, where the Commissioner introduced Sydney’s blog posts as evidence. Sydney objected to their admission, arguing they were not ‘newly discovered’ under I. R. C. § 6015(e)(7)(B). The court admitted the blog posts on April 26, 2022, and subsequently denied Sydney’s motion to strike them from the record.

    Issue(s)

    Whether blog posts discovered after the administrative proceeding constitute ‘newly discovered evidence’ within the meaning of I. R. C. § 6015(e)(7)(B), allowing their admission in the U. S. Tax Court’s de novo review of an innocent spouse relief claim?

    Rule(s) of Law

    I. R. C. § 6015(e)(7) provides that the Tax Court’s review of an innocent spouse relief determination shall be conducted de novo based on the administrative record established at the time of the determination and any additional newly discovered or previously unavailable evidence. The statute does not define ‘newly discovered evidence,’ necessitating interpretation based on its ordinary meaning.

    Holding

    The U. S. Tax Court held that the blog posts from Sydney Thomas’s personal blog were ‘newly discovered evidence’ within the meaning of I. R. C. § 6015(e)(7)(B) because they were recently obtained by the Commissioner after the administrative proceedings concluded. Consequently, the blog posts were properly admitted into evidence.

    Reasoning

    The court reasoned that ‘newly discovered’ should be interpreted according to its ordinary meaning, which is ‘recently obtained sight or knowledge of for the first time. ‘ The Commissioner discovered the blog posts after the administrative proceedings, which satisfied this definition. The court rejected the petitioner’s argument that the standard from Federal Rule of Civil Procedure 60(b)(2), which includes a ‘reasonable diligence’ requirement, should apply, noting that Congress did not include such a qualifier in I. R. C. § 6015(e)(7)(B). Furthermore, the court emphasized that the use of ‘any additional’ in the statute suggested a broad interpretation, supporting the admission of evidence unknown to a participant in the administrative proceeding if offered in court. The court also noted that the de novo standard of review under § 6015(e)(7) supports a broad construction of evidence admissibility to ensure a comprehensive review of the case’s merits.

    Disposition

    The U. S. Tax Court denied Sydney Thomas’s Motion to Strike the blog posts from the record, affirming their admissibility as ‘newly discovered evidence’ under I. R. C. § 6015(e)(7)(B).

    Significance/Impact

    This decision clarifies the scope of ‘newly discovered evidence’ under I. R. C. § 6015(e)(7)(B), allowing evidence discovered after administrative proceedings to be considered in the Tax Court’s de novo review of innocent spouse relief claims. The ruling may impact how both taxpayers and the IRS approach the collection and presentation of evidence in such cases, emphasizing the importance of thorough evidence gathering post-administrative proceedings. The decision also underscores the Tax Court’s broad authority to consider evidence in its de novo review, potentially affecting the strategic considerations of parties in innocent spouse litigation.

  • Michael Johnson et al. v. Commissioner of Internal Revenue, 160 T.C. No. 2 (2023): Energy Efficient Commercial Building Property Deduction under I.R.C. § 179D

    Michael Johnson et al. v. Commissioner of Internal Revenue, 160 T. C. No. 2 (U. S. Tax Court 2023)

    In a significant ruling, the U. S. Tax Court upheld the eligibility of Edwards Engineering, Inc. , for a $304,640 deduction under I. R. C. § 179D for energy-efficient upgrades at a Veterans Affairs hospital. The decision clarifies the criteria for claiming the Energy Efficient Commercial Building Property (EECBP) deduction, affirming that contractors can claim the deduction when designated by government entities, and that the deduction is limited to the cost of property placed in service during the tax year.

    Parties

    Michael Johnson and Cynthia Johnson, Brant Lieske and Laura Lieske, Scott Lieske, and Todd Lieske (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Petitioners were shareholders in Edwards Engineering, Inc. , which sought the deduction at issue.

    Facts

    Edwards Engineering, Inc. , an S corporation, entered into a maintenance contract with the U. S. Department of Veterans Affairs (VA) for the Edward Hines, Jr. VA Hospital. In 2013, Edwards was tasked with updating control systems for air handling units (S4/S5 project) and emergency replacement of temperature control systems for several floors (emergency project) in Building 200 of the hospital. Edwards modified the sequence of operations, programmed new Johnson Controls systems, and ensured functionality through simulation tests. Alliantgroup conducted an Energy Efficient Commercial Building Tax Deduction Study, which included a certification of compliance and an allocation letter signed by the VA’s Chief of Maintenance and Operations, allocating the full I. R. C. § 179D deduction to Edwards. The Petitioners, as shareholders, claimed their proportionate shares of the deduction on their individual tax returns, which were subsequently disallowed by the IRS.

    Procedural History

    The Commissioner of Internal Revenue issued notices of deficiency to the Petitioners, disallowing the § 179D deductions claimed by Edwards for 2013. The Petitioners filed petitions with the U. S. Tax Court, contesting the deficiencies. The cases were consolidated for trial, briefing, and opinion. The court had jurisdiction to determine the correctness of the adjustments, as they involved both S corporation items and other adjustments in the shareholder-level deficiency proceedings.

    Issue(s)

    Whether the property installed by Edwards in Building 200 qualified as Energy Efficient Commercial Building Property (EECBP) under I. R. C. § 179D(c)(1)?

    Whether the VA’s Chief of Maintenance and Operations properly allocated the § 179D deduction to Edwards as the person primarily responsible for designing the EECBP?

    Whether the EECBP was placed in service during the 2013 tax year?

    What is the amount of the § 179D deduction to which Edwards is entitled for the 2013 tax year?

    Rule(s) of Law

    I. R. C. § 179D(a) allows a deduction equal to the cost of EECBP placed in service during the taxable year. I. R. C. § 179D(c)(1) defines EECBP as property that is depreciable, installed in a U. S. building within the scope of Standard 90. 1-2001, part of specified building systems, and certified as reducing energy costs by 50% or more compared to a reference building. I. R. C. § 179D(d)(4) allows government entities to allocate the deduction to the person primarily responsible for designing the property. I. R. S. Notice 2006-52 provides interim guidance on certification requirements, and I. R. S. Notice 2008-40 provides guidance on allocation for government-owned buildings.

    Holding

    The court held that the installed property qualified as EECBP under I. R. C. § 179D(c)(1), the VA’s chief maintenance officer properly allocated the deduction to Edwards as the designer, the property was placed in service during the 2013 tax year, and Edwards was entitled to a § 179D deduction of $304,640.

    Reasoning

    The court reasoned that Edwards’s modification of the sequence of operations and programming of the new control systems constituted designing the EECBP, as per Notice 2008-40’s definition of a “designer. ” The court rejected the Commissioner’s argument that the projects were not part of a plan to achieve energy savings, relying on the plain text of Notice 2006-52, which did not require such intent. The energy modeling by Alliantgroup, using the Performance Rating Method, showed a 50. 01% reduction in energy costs, satisfying the certification requirement under § 179D(c)(1)(D). The court also found that the VA’s allocation letter, signed by an authorized representative, properly allocated the full deduction to Edwards. The property was deemed placed in service in 2013, as it was ready and available for its assigned function by the end of that year. The court determined the deduction amount based on the cost of EECBP placed in service in 2013, which was $304,640, the amount billed by Edwards to the VA.

    Disposition

    The court ruled that Edwards is entitled to a § 179D deduction of $304,640 for the 2013 tax year. Decisions were to be entered under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    This decision provides crucial guidance on the application of the § 179D deduction for contractors working on government-owned buildings. It clarifies that the deduction can be allocated to the contractor as the designer, even when the project involves maintenance or replacement rather than new construction. The ruling also emphasizes the importance of proper certification and allocation procedures, as outlined in IRS Notices, in claiming the deduction. The case may influence future interpretations of what constitutes “designing” EECBP and the criteria for property being “placed in service. ” It also highlights the need for clear documentation and adherence to IRS guidelines to substantiate the deduction claim.

  • Blake M. Adams v. Commissioner of Internal Revenue, 160 T.C. No. 1 (2023): Judicial Review of Certification of Seriously Delinquent Tax Debt Under I.R.C. § 7345

    Blake M. Adams v. Commissioner of Internal Revenue, 160 T. C. No. 1 (2023)

    The U. S. Tax Court ruled that it lacks jurisdiction to review underlying tax liabilities certified as seriously delinquent under I. R. C. § 7345. The court upheld the Commissioner’s certification against Blake Adams, who owed over $1. 2 million in unpaid federal income taxes. The decision clarifies the court’s limited role to assessing the certification’s validity, not the underlying tax liabilities, and reinforces the statutory framework for tax debt enforcement.

    Parties

    Blake M. Adams, the petitioner, filed pro se against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court, docket number 1527-21P.

    Facts

    Blake M. Adams had unpaid federal income tax liabilities exceeding $1. 2 million for the tax years 2007, 2009, 2010, 2011, 2012, 2013, 2014, and 2015. Adams failed to file federal income tax returns for these years, prompting the Commissioner to prepare substitutes for returns under I. R. C. § 6020(b). The Commissioner assessed the taxes, penalties, and interest based on these substitutes. Efforts to collect these debts were largely unsuccessful. Consequently, the Commissioner certified Adams as having a “seriously delinquent tax debt” to the Secretary of State under I. R. C. § 7345(b), triggering potential passport-related actions. Adams petitioned the Tax Court to challenge the certification’s validity.

    Procedural History

    Adams filed a petition in the U. S. Tax Court to challenge the certification under I. R. C. § 7345(e)(1). Both parties filed motions for summary judgment. The Commissioner argued that Adams had a seriously delinquent tax debt at the time of certification, while Adams contended that the certification was erroneous due to improper assessment and unconstitutional denial of his right to international travel. The Tax Court reviewed the case based on the administrative record and applicable law, ultimately granting the Commissioner’s motion for summary judgment and denying Adams’s motion.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the underlying tax liabilities certified as seriously delinquent under I. R. C. § 7345?
    Whether the certification of Blake M. Adams as having a seriously delinquent tax debt was erroneous because the underlying liabilities were not properly assessed?
    Whether the Tax Court has jurisdiction to review the constitutionality of passport-related actions taken by the Secretary of State under the Fixing America’s Surface Transportation Act?

    Rule(s) of Law

    I. R. C. § 7345(b) defines a “seriously delinquent tax debt” as an unpaid, legally enforceable federal tax liability of an individual that has been assessed, exceeds $50,000 (adjusted for inflation), and for which a notice of lien has been filed or a levy made. I. R. C. § 7345(e)(1) grants the Tax Court jurisdiction to determine whether the certification was erroneous or whether the Commissioner failed to reverse the certification. The court does not have jurisdiction to review the underlying tax liabilities. The Fixing America’s Surface Transportation Act, Pub. L. No. 114-94, § 32101, authorizes the Secretary of State to take passport-related actions upon certification of a seriously delinquent tax debt.

    Holding

    The U. S. Tax Court lacks jurisdiction to review the underlying tax liabilities certified as seriously delinquent under I. R. C. § 7345. The certification of Blake M. Adams was not erroneous because the underlying liabilities were assessed, satisfying I. R. C. § 7345(b)(1)(A). The court also lacks jurisdiction to review the constitutionality of passport-related actions taken by the Secretary of State under the Fixing America’s Surface Transportation Act.

    Reasoning

    The Tax Court’s reasoning is based on statutory interpretation and the legislative framework of I. R. C. § 7345. The court emphasized that its jurisdiction under § 7345(e)(1) is limited to reviewing the certification’s validity, not the underlying tax liabilities. The court relied on the plain text of § 7345(b)(1)(A), which requires only that the tax liability “has been assessed,” not that it was “properly assessed. ” This interpretation was supported by the absence of “pursuant to” language in § 7345(b)(1)(A), unlike in § 7345(b)(1)(C), which specifies that liens and levies must be pursuant to certain Code sections. The court also considered the overall structure of the tax code, noting that Adams had multiple prior opportunities to challenge the assessments through deficiency notices and collection due process proceedings. Regarding the constitutional challenge, the court held that it lacks jurisdiction to review the Secretary of State’s actions under the FAST Act, as § 7345(e) does not authorize such review. The court’s decision reaffirmed its role in reviewing only the certification process, not the substantive tax liabilities or passport actions, and highlighted the statutory separation of responsibilities between the Commissioner and the Secretary of State.

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment, denied Adams’s motion for summary judgment, and sustained the certification of Adams as having a seriously delinquent tax debt.

    Significance/Impact

    This case clarifies the Tax Court’s limited jurisdiction under I. R. C. § 7345, emphasizing that it cannot review the underlying tax liabilities certified as seriously delinquent. It reinforces the statutory framework for enforcing tax debts through certification to the Secretary of State and potential passport actions. The decision may impact taxpayers seeking to challenge such certifications by limiting their avenues for judicial review. It also underscores the separation of powers between the Commissioner, responsible for certification, and the Secretary of State, responsible for passport actions, under the FAST Act. Subsequent courts have generally followed this interpretation, affirming the Tax Court’s role in reviewing only the certification process.

  • Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022): Administrative Procedure Act and IRS Rulemaking

    Green Valley Investors, LLC v. Commissioner, 159 T. C. No. 5 (U. S. Tax Court 2022)

    The U. S. Tax Court ruled that IRS Notice 2017-10, which classified certain conservation easement transactions as listed, was a legislative rule requiring notice and comment under the APA. The Court invalidated the notice and barred the imposition of penalties under section 6662A, impacting how the IRS identifies tax avoidance transactions.

    Parties

    Green Valley Investors, LLC, et al. , with Bobby A. Branch as Tax Matters Partner, were the petitioners. The Commissioner of Internal Revenue was the respondent. The case included consolidated actions involving Vista Hill Investments, LLC, Big Hill Partners, LLC, and Tick Creek Holdings, LLC, all with Bobby A. Branch as Tax Matters Partner.

    Facts

    Green Valley Investors, LLC, and other related entities, granted conservation easements to Triangle Land Conservancy in 2014 and 2015, claiming substantial charitable deductions on their tax returns. The IRS issued Notice 2017-10, identifying syndicated conservation easement transactions as listed transactions subject to reporting requirements and potential penalties. The IRS later disallowed these deductions and asserted penalties under sections 6662 and 6662A, among others, following audits.

    Procedural History

    The petitioners timely challenged the IRS’s adjustments and penalties through petitions to the U. S. Tax Court. Both parties moved for partial summary judgment, with the petitioners arguing against the retroactive application of penalties and the IRS’s failure to comply with the APA’s notice-and-comment rulemaking procedures for Notice 2017-10.

    Issue(s)

    Whether Notice 2017-10, which identified syndicated conservation easement transactions as listed transactions, was a legislative rule requiring notice-and-comment rulemaking under the Administrative Procedure Act?

    Rule(s) of Law

    The Administrative Procedure Act (APA) mandates that agencies follow notice-and-comment rulemaking for legislative rules, which have the force of law and impose new duties or rights. See 5 U. S. C. § 553. The APA does not apply to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice. 5 U. S. C. § 553(b)(A).

    Holding

    The Court held that Notice 2017-10 was a legislative rule because it imposed new reporting obligations and potential penalties on taxpayers and advisors, thus requiring notice-and-comment rulemaking under the APA. As the IRS did not comply with these requirements, the Court set aside Notice 2017-10 and prohibited the imposition of section 6662A penalties in these cases.

    Reasoning

    The Court’s reasoning focused on distinguishing between legislative and interpretative rules. It concluded that Notice 2017-10 was a legislative rule because it created new substantive reporting obligations and penalties, not merely interpreting existing law. The Court rejected the IRS’s argument that Congress had implicitly exempted the IRS from APA requirements when it enacted section 6707A, which cross-referenced section 6011 regulations. The Court emphasized that Congress must expressly override APA requirements, and the mere reference to existing regulations did not suffice. The Court also noted that the IRS had not invoked the good cause exception to bypass notice and comment, which could have been an alternative approach.

    Disposition

    The Court granted the petitioners’ Cross-Motions for Summary Judgment in part, setting aside Notice 2017-10 and prohibiting the imposition of section 6662A penalties in these consolidated cases.

    Significance/Impact

    This decision has significant implications for the IRS’s ability to identify and regulate tax avoidance transactions. It clarifies that the IRS must follow APA notice-and-comment procedures when issuing rules that impose new obligations or penalties. The ruling may affect the IRS’s future use of notices to identify listed transactions and could lead to challenges against other IRS notices issued without notice and comment. The decision underscores the importance of procedural compliance in administrative rulemaking and could influence how tax shelters and similar transactions are regulated.