SCOTUS Reports

Tag: U.S. Tax Court

  • Toulouse v. Commissioner, 157 T.C. No. 4 (2021): Application of Foreign Tax Credits Against Net Investment Income Tax Under U.S. Income Tax Treaties

    Toulouse v. Commissioner, 157 T. C. No. 4 (2021)

    In Toulouse v. Commissioner, the U. S. Tax Court ruled that U. S. citizens residing abroad cannot use foreign tax credits to offset the Net Investment Income Tax (NIIT) under U. S. income tax treaties with France and Italy. The decision clarifies that treaty-based credits are subject to the limitations of U. S. tax law, which does not provide for such credits against NIIT, impacting how international taxpayers manage their tax liabilities.

    Parties

    Catherine S. Toulouse, the petitioner, was a U. S. citizen residing in France during the relevant period. She filed her petition against the Commissioner of Internal Revenue, the respondent, challenging the assessment of the Net Investment Income Tax (NIIT) under I. R. C. sec. 1411 for the tax year 2013 and an addition to tax under I. R. C. sec. 6651(a)(2) for failure to pay.

    Facts

    Catherine S. Toulouse, a U. S. citizen residing in France, filed her 2013 federal income tax return claiming a foreign tax credit carryover to offset her regular tax liability. She also attempted to use this credit to offset her NIIT, which is a 3. 8% tax on net investment income imposed under I. R. C. sec. 1411. Toulouse reported a net investment income tax of $11,540 on Form 8960 but modified the form to reflect a foreign tax credit of the same amount, resulting in no NIIT due. She based her claim for the offset on Article 24(2)(a) of the U. S. -France Income Tax Treaty and Article 23(2)(a) of the U. S. -Italy Income Tax Treaty, asserting that these treaty provisions independently allowed for a foreign tax credit against the NIIT.

    Procedural History

    Following the filing of her 2013 return, the IRS issued a notice of a math error to Toulouse, adjusting her return by $11,540 due to the disallowed foreign tax credit against the NIIT. Toulouse contested this assessment, but the IRS upheld its position that no such credit was allowable. Subsequently, the IRS assessed the NIIT and an addition to tax under I. R. C. sec. 6651(a)(2) for failure to pay the tax shown on her return. Toulouse received notices of intent to levy and federal tax lien filing, leading her to request a Collection Due Process (CDP) hearing under I. R. C. secs. 6320 and 6330. After the hearing, the IRS issued a notice of determination sustaining the levy action but not the lien filing. Both parties filed cross-motions for summary judgment in the U. S. Tax Court, with Toulouse conceding that the Internal Revenue Code does not provide for a foreign tax credit against the NIIT but arguing that the treaties did.

    Issue(s)

    Whether Article 24(2)(a) of the U. S. -France Income Tax Treaty and Article 23(2)(a) of the U. S. -Italy Income Tax Treaty entitle a U. S. citizen residing abroad to use a foreign tax credit to offset the Net Investment Income Tax imposed under I. R. C. sec. 1411?

    Rule(s) of Law

    The Internal Revenue Code, under I. R. C. sec. 27 and sec. 901, provides for a foreign tax credit against the regular tax imposed by chapter 1 but does not extend this credit to the Net Investment Income Tax under chapter 2A. The treaties with France and Italy, while intended to reduce double taxation, subject any allowable foreign tax credit to the provisions and limitations of U. S. tax law, as per Article 24(2)(a) of the U. S. -France Treaty and Article 23(2)(a) of the U. S. -Italy Treaty.

    Holding

    The U. S. Tax Court held that Toulouse was not entitled to use a foreign tax credit to offset the Net Investment Income Tax under the provisions of the U. S. -France and U. S. -Italy Income Tax Treaties, as these treaties are subject to the limitations of U. S. tax law, which does not provide for such a credit against the NIIT.

    Reasoning

    The court’s reasoning focused on the plain text of the treaties, which expressly state that any foreign tax credit must be in accordance with and subject to the limitations of U. S. law. The court found that the Internal Revenue Code clearly allows a foreign tax credit only against taxes imposed under chapter 1, not chapter 2A, where the NIIT is located. The court rejected Toulouse’s argument that the treaties provide an independent basis for a credit, emphasizing that the treaties’ language ties the credit to U. S. law’s provisions. The court also considered the legislative history and structure of the Internal Revenue Code, noting that the placement of the NIIT in a separate chapter was a deliberate legislative choice that did not extend the foreign tax credit to this tax. The court further analyzed the Treasury Department’s Technical Explanation of the U. S. -France Treaty, which reinforced that the terms of any credit are determined by U. S. statutory law. The court concluded that since the Code does not provide for a foreign tax credit against the NIIT, the treaties could not independently provide such a credit.

    Disposition

    The court denied Toulouse’s motion for summary judgment and granted the Commissioner’s motion for partial summary judgment on the issue of the foreign tax credit against the NIIT. The court did not resolve the issue of the addition to tax under I. R. C. sec. 6651(a)(2), finding a dispute of material fact as to whether Toulouse’s failure to pay was due to reasonable cause.

    Significance/Impact

    This case is significant for its clarification of the interaction between U. S. income tax treaties and domestic tax law, particularly concerning the application of foreign tax credits against the Net Investment Income Tax. It underscores the principle that treaty-based credits are not independent of U. S. tax law but are instead subject to its provisions and limitations. This ruling may impact U. S. citizens residing abroad who seek to use foreign tax credits to mitigate their U. S. tax liabilities, particularly with respect to the NIIT. The decision also highlights the importance of the specific language in treaties and how it is interpreted in light of domestic law, potentially affecting future cases involving the interplay between treaties and the Internal Revenue Code. Subsequent treatment by other courts and practical implications for legal practice will depend on how taxpayers and the IRS navigate the complexities of international taxation and treaty interpretation.

  • Bobby Lee Rogers v. Commissioner of Internal Revenue, 157 T.C. No. 3 (2021): Whistleblower Award Determinations and Regulatory Compliance

    Bobby Lee Rogers v. Commissioner of Internal Revenue, 157 T. C. No. 3 (2021)

    In Bobby Lee Rogers v. Commissioner of Internal Revenue, the U. S. Tax Court ruled that the IRS Whistleblower Office (WBO) abused its discretion by rejecting a whistleblower’s claim using a rationale associated with a denial under the regulations. The court found that the WBO’s decision to reject the claim because the IRS chose not to pursue the information provided was inconsistent with regulatory requirements, thus entitling the whistleblower to further consideration and transparency in the decision-making process.

    Parties

    Bobby Lee Rogers, the petitioner, filed a claim for a whistleblower award against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court under docket number 17985-19W.

    Facts

    Bobby Lee Rogers submitted nine claims to the IRS Whistleblower Office (WBO) asserting that certain individuals had conspired to commit “grand theft through conversion” of his mother’s assets. The claims were reviewed by a classifier from the IRS Small Business Self-Employed (SBSE) operating division, who recommended rejection because the claims failed to meet threshold criteria outlined in the regulations under I. R. C. sec. 7623. However, the WBO issued a letter purporting to reject the claims on the alternative ground that the IRS decided not to pursue the information provided.

    Procedural History

    Rogers timely appealed the WBO’s determination to the U. S. Tax Court under I. R. C. sec. 7623(b)(4). The Commissioner filed an answer that did not address the monetary thresholds required under I. R. C. sec. 7623(b)(5). Subsequently, the Commissioner filed a motion for summary judgment, arguing that the WBO’s determination should be classified as a rejection and did not represent an abuse of discretion. The Tax Court reviewed the case based on the administrative record and the arguments presented.

    Issue(s)

    Whether the IRS Whistleblower Office abused its discretion by rejecting the whistleblower’s claim using a rationale associated with a denial under the regulations?

    Whether the monetary thresholds under I. R. C. sec. 7623(b)(5) are jurisdictional requirements?

    Rule(s) of Law

    I. R. C. sec. 7623(b) governs whistleblower award determinations and provides for Tax Court review when certain monetary thresholds are met. The regulations under I. R. C. sec. 7623 distinguish between rejections and denials. A rejection relates to the whistleblower’s eligibility and the information provided, while a denial relates to or implicates taxpayer information. The monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses that the Commissioner must plead and prove.

    Holding

    The Tax Court held that the WBO abused its discretion by rejecting Rogers’ claim using a rationale associated with a denial under the regulations. The court also held that the monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses that the Commissioner must plead and prove.

    Reasoning

    The court’s reasoning was based on the regulatory framework for whistleblower award determinations. The WBO’s letter to Rogers purported to reject his claim but used a rationale associated with a denial under the regulations, specifically that the IRS decided not to pursue the information provided. The court found this to be inconsistent with the regulations, which require a rejection to be based on the whistleblower’s eligibility or the information provided, not on the IRS’s decision to pursue or not pursue the information. The court also considered the administrative record, which showed that the SBSE classifier and WBO technician recommended rejection based on the claim’s failure to meet threshold criteria, not on the IRS’s decision not to pursue. The court concluded that the WBO’s determination was an abuse of discretion because it did not follow the regulatory requirements for rejections and denials. The court also addressed the Commissioner’s arguments, rejecting the contention that the WBO’s determination was based solely on the face of the claim and that the involvement of an IRS operating division precluded judicial review. The court emphasized that the substance of the determination, not the identities of the actors involved, governed the analysis.

    Disposition

    The court denied the Commissioner’s motion for summary judgment and remanded the case to the WBO for further consideration.

    Significance/Impact

    This case is significant for its clarification of the regulatory framework governing whistleblower award determinations and the distinction between rejections and denials. It emphasizes the importance of the WBO’s compliance with the regulations and the whistleblower’s right to transparency and candor in the decision-making process. The case also reaffirms that the monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses, which has implications for the Commissioner’s pleading and proof requirements in whistleblower cases. The decision may lead to more careful consideration by the WBO of the grounds for rejecting or denying claims and increased scrutiny of the WBO’s decision-making process by the Tax Court.

  • Mary T. Belair v. Commissioner of Internal Revenue, 157 T.C. No. 2 (2021): Abuse of Discretion in Collection Due Process Hearings

    Mary T. Belair v. Commissioner of Internal Revenue, 157 T. C. No. 2 (2021)

    In Mary T. Belair v. Commissioner, the U. S. Tax Court upheld the IRS’s filing of a tax lien against Belair, ruling that the IRS did not abuse its discretion in denying her an installment agreement due to her failure to file required tax returns. This case underscores the importance of filing compliance in collection due process (CDP) hearings and the limited scope of judicial review in such cases, confined to the administrative record for abuse of discretion.

    Parties

    Mary T. Belair, the petitioner, appeared pro se. The respondent was the Commissioner of Internal Revenue, represented by Joseph E. Conley, Thomas R. Mackinson, and Cameron W. Carr. The case was heard by the United States Tax Court, with appellate venue in the Court of Appeals for the Ninth Circuit.

    Facts

    Mary T. Belair received a notice from the IRS on February 28, 2019, informing her of a Federal tax lien filed against her for unpaid income taxes for the years 2013, 2014, and 2015. Belair requested a collection due process (CDP) hearing and expressed interest in an installment agreement, claiming she expected to receive a large judgment from a lawsuit against a former U. S. Attorney. During the CDP hearing process, the IRS requested Belair to submit her delinquent tax returns for 2016, 2017, and 2018, and a completed Form 433-A. Belair failed to provide the requested documents, leading to the IRS’s determination to uphold the tax lien and deny her request for an installment agreement.

    Procedural History

    Belair timely requested a CDP hearing following the IRS’s notice of a Federal tax lien. After the hearing, the IRS’s Office of Appeals upheld the lien and denied Belair’s request for an installment agreement due to her noncompliance with filing requirements. Belair then petitioned the U. S. Tax Court for review. The Commissioner moved for summary judgment, which was supported by the administrative record. The Tax Court reviewed the case under the abuse of discretion standard, limited to the administrative record, as mandated by the Ninth Circuit’s application of the record rule in CDP cases.

    Issue(s)

    Whether the IRS’s Office of Appeals abused its discretion in upholding the filing of a Federal tax lien and denying Belair’s request for an installment agreement, given her failure to submit required delinquent tax returns?

    Rule(s) of Law

    In reviewing a CDP case where the underlying tax liability is not at issue, the court applies an abuse of discretion standard, limited to the administrative record. The court upholds the administrative determination unless it is arbitrary, capricious, or without sound basis in fact or law. See Keller v. Commissioner, 568 F. 3d 710 (9th Cir. 2009). IRS guidelines require a taxpayer to be in filing and payment compliance to qualify for an installment agreement. See Giamelli v. Commissioner, 129 T. C. 107 (2007).

    Holding

    The Tax Court held that the IRS’s Office of Appeals did not abuse its discretion in upholding the filing of the Federal tax lien and denying Belair’s request for an installment agreement due to her failure to file required tax returns.

    Reasoning

    The court’s reasoning focused on the administrative record and the IRS’s adherence to applicable law and procedures. The IRS verified that all legal and administrative requirements were met in filing the tax lien. Belair’s failure to submit the required delinquent returns and Form 433-A within the specified timeframe justified the IRS’s decision to close the CDP hearing and uphold the lien. The court emphasized that the IRS’s determination was not arbitrary or capricious, as it was based on Belair’s noncompliance with filing requirements, a prerequisite for considering an installment agreement. The court also noted that Belair’s arguments regarding a lawsuit against a former U. S. Attorney were not relevant to the CDP hearing’s scope, which is limited to collection issues. The court concluded that the IRS’s action balanced the need for efficient tax collection with Belair’s concerns, adhering to the statutory requirement under section 6330(c)(3)(C).

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment, affirming the IRS’s determination to uphold the Federal tax lien and deny Belair’s request for an installment agreement.

    Significance/Impact

    This case reinforces the importance of filing compliance in CDP hearings and clarifies the scope of judicial review in such cases, limited to the administrative record for abuse of discretion. It underscores the IRS’s authority to deny installment agreements based on noncompliance with filing requirements, impacting taxpayers’ strategies in collection disputes. The ruling also highlights the Ninth Circuit’s application of the record rule, which may influence the approach of taxpayers and the IRS in CDP proceedings within that jurisdiction.

  • Garcia v. Commissioner, 157 T.C. No. 1 (2021): Mootness and Jurisdictional Limits in Passport Certification Cases

    Garcia v. Commissioner, 157 T. C. No. 1 (2021)

    In Garcia v. Commissioner, the U. S. Tax Court ruled that a case challenging passport certification due to a ‘seriously delinquent tax debt’ became moot after the IRS reversed its certification. The court clarified that married taxpayers can file a joint petition to challenge separate but related certifications. However, it lacked jurisdiction to review the merits of an offer-in-compromise, highlighting the limited scope of judicial review in such cases.

    Parties

    The petitioners, Morris F. Garcia (deceased) and Sharon Garcia, challenged the respondent, the Commissioner of Internal Revenue, in the U. S. Tax Court. They filed a joint petition against separate but substantially identical notices of certification issued to them by the IRS regarding their 2012 joint tax liability.

    Facts

    Morris F. Garcia and Sharon Garcia, married taxpayers, had an unpaid federal income tax liability exceeding $500,000 for the year 2012. On February 10, 2020, and March 2, 2020, the IRS issued separate notices to Sharon and Morris Garcia, respectively, certifying their tax debt as ‘seriously delinquent’ under I. R. C. § 7345(b). The couple submitted an offer-in-compromise, which the IRS later determined to be processable and pending, leading to the reversal of the certifications on November 2, 2020. Morris Garcia died at a time not disclosed in the record, after the petition was filed.

    Procedural History

    The Garcias jointly petitioned the U. S. Tax Court on July 10, 2020, challenging the IRS’s certification. They filed a second joint petition on July 16, 2020, which was later closed as duplicative. After the IRS reversed the certifications and notified the Secretary of State, the Commissioner moved to dismiss the case as moot on January 29, 2021. The court granted this motion, finding that the Garcias had received all the relief to which they were entitled.

    Issue(s)

    Whether married taxpayers can file a joint petition to challenge separate but substantially identical notices of certification under I. R. C. § 7345(e)?

    Whether the case became moot after the IRS reversed its certifications as erroneous and notified the Secretary of State?

    Whether the Tax Court has jurisdiction under I. R. C. § 7345(e) to address the merits of the Garcias’ offer-in-compromise?

    Rule(s) of Law

    I. R. C. § 7345(a) mandates the transmission of certification of a ‘seriously delinquent tax debt’ to the Secretary of State for action regarding the taxpayer’s passport. I. R. C. § 7345(e)(1) allows taxpayers to petition the Tax Court to determine if the certification was erroneous or if the Commissioner failed to reverse it. I. R. C. § 7345(e)(2) authorizes the court to order the Commissioner to notify the Secretary of State if a certification was erroneous. Tax Court Rule 34(a)(1) permits spouses to file a joint petition in deficiency or liability actions regarding separate notices of the same liability.

    Holding

    The Tax Court held that married taxpayers may file a joint petition to challenge separate but substantially identical notices of certification related to the same tax liability, similar to deficiency cases under Tax Court Rule 34(a)(1). The court further held that the case was moot because the IRS had reversed its certifications and notified the Secretary of State, thereby granting the Garcias the relief they sought. Finally, the court held that it lacked jurisdiction under I. R. C. § 7345(e) to address the merits of the Garcias’ offer-in-compromise.

    Reasoning

    The court reasoned that allowing joint petitions in passport certification cases, where separate notices are issued to married taxpayers for the same tax liability, aligns with the efficiency and fairness considerations evident in Tax Court Rule 34(a)(1). The court emphasized that the IRS’s reversal of the certifications as erroneous due to the pending offer-in-compromise rendered the case moot, as the Garcias received all the relief they could obtain under I. R. C. § 7345(e). The court further reasoned that its jurisdiction in passport certification cases is limited to determining the propriety of the certification itself and does not extend to the underlying tax liability or the merits of an offer-in-compromise. The court noted that any further review of the offer-in-compromise would be beyond its authority and would result in an advisory opinion, which it declined to provide.

    Disposition

    The Tax Court dismissed the case on the ground of mootness, as the IRS had reversed its certifications and notified the Secretary of State, thereby granting the Garcias the relief they sought.

    Significance/Impact

    Garcia v. Commissioner clarifies the procedural rights of married taxpayers to file joint petitions in passport certification cases and underscores the limited scope of judicial review under I. R. C. § 7345(e). The decision emphasizes the importance of the IRS’s discretionary authority over offers-in-compromise and the court’s inability to intervene in such matters within the context of passport certification disputes. The case also highlights the potential for mootness in such cases when the IRS reverses its certification, demonstrating the dynamic nature of tax disputes and the need for timely judicial resolution.

  • Hussey v. Commissioner, 156 T.C. No. 12 (2021): Timing of Basis Adjustments for Discharge of Qualified Real Property Business Indebtedness

    Hussey v. Commissioner, 156 T. C. No. 12 (2021)

    In Hussey v. Commissioner, the U. S. Tax Court ruled that Richard S. Hussey must adjust the basis of his depreciable real properties in the same year as the sale of the properties and the discharge of qualified real property business indebtedness (QRPBI), rather than the following year. This decision clarifies the timing of basis reductions under I. R. C. sections 108 and 1017, impacting how taxpayers handle debt discharge and property sales in the same tax year.

    Parties

    Richard S. Hussey, as Petitioner, and the Commissioner of Internal Revenue, as Respondent. Hussey was the taxpayer seeking relief from income tax deficiencies and penalties, while the Commissioner represented the government’s interests in enforcing tax laws.

    Facts

    In 2009, Richard S. Hussey purchased 27 investment properties, assuming loans totaling $1,714,520 from a single bank. By 2012, facing financial difficulties, Hussey sold 16 of these properties, 15 of which were sold at a loss, resulting in a discharge of $754,054 in qualified real property business indebtedness (QRPBI) by the bank. In 2013, he sold seven more properties at a loss. Hussey’s tax returns for 2012, 2013, and 2014 were prepared by a tax law firm, the Kohn Partnership, following advice from his financial adviser and a large accounting firm. The dispute centered on the timing of basis adjustments due to the QRPBI discharge and whether additional debt was discharged in 2013, as well as potential accuracy-related penalties for 2013 and 2014.

    Procedural History

    The Commissioner issued a notice of deficiency to Hussey on July 3, 2018, for tax years 2013 and 2014, asserting deficiencies and accuracy-related penalties. Hussey filed a petition with the U. S. Tax Court challenging these determinations. The court reviewed the case under a de novo standard, focusing on the correct application of the Internal Revenue Code sections in question.

    Issue(s)

    1. Whether, under I. R. C. sections 1017(a) and (b)(3)(F)(iii) and 108(c)(2)(B), Hussey must reduce the bases of his real properties for 2012 or 2013 due to the sale of depreciable real properties in 2012?
    2. Whether Hussey received a discharge of debt in 2013?
    3. Whether Hussey is liable for accuracy-related penalties under I. R. C. section 6662 for tax years 2013 and 2014?

    Rule(s) of Law

    1. I. R. C. section 108(a)(1)(D) allows for the exclusion of discharge of qualified real property business indebtedness (QRPBI) from income if the taxpayer reduces the basis of depreciable real property.
    2. I. R. C. section 1017(a) generally requires basis reductions to occur in the year following the debt discharge, but section 1017(b)(3)(F)(iii) mandates immediate basis reduction if property is sold in the same year as the discharge.
    3. I. R. C. section 6662 imposes accuracy-related penalties for substantial understatements of income tax or negligence, but these can be avoided if the taxpayer shows reasonable cause and good faith reliance on professional advice.

    Holding

    1. Hussey must reduce the bases of his depreciable real properties in 2012, as required by I. R. C. section 1017(b)(3)(F)(iii), because he sold the properties in the same year as the QRPBI discharge.
    2. Hussey did not receive a discharge of debt in 2013, as the bank’s actions were recorded as a charge-off and a loan loss reserve recovery, not a discharge.
    3. Hussey is not liable for accuracy-related penalties under I. R. C. section 6662 for 2013 and 2014 due to his good faith reliance on professional tax advice.

    Reasoning

    The court applied a strict interpretation of the relevant statutes. For the first issue, it relied on the plain language of section 1017(b)(3)(F)(iii), which requires basis reduction immediately before the disposition of property if the property was taken into account under section 108(c)(2)(B) in the same year as the discharge. The court rejected Hussey’s argument that the basis reduction could be deferred to 2013 because his remaining properties’ bases exceeded the discharged amount, finding no such provision in the statute. For the second issue, the court found that the bank’s records indicated a charge-off and a loan loss reserve recovery, not a discharge, and the lack of Forms 1099-C for 2013 supported this finding. On the third issue, the court found that Hussey had reasonable cause and acted in good faith, relying on the expertise of the Kohn Partnership, which had over 30 years of tax law experience. The court considered Hussey’s lack of tax or accounting background and his extensive efforts to seek professional advice, concluding that he was not liable for penalties.

    Disposition

    The court affirmed the requirement for Hussey to reduce the bases of his depreciable real properties in 2012, held that no debt was discharged in 2013, and ruled that Hussey was not liable for accuracy-related penalties for 2013 and 2014. The case was set for further proceedings under Rule 155 to determine the computational adjustments needed.

    Significance/Impact

    This case clarifies the timing of basis reductions under I. R. C. sections 108 and 1017, emphasizing that when a taxpayer sells property in the same year as a QRPBI discharge, the basis reduction must occur immediately before the sale. This ruling impacts how taxpayers and their advisers handle debt discharge and property sales, particularly in the context of short sales and loan modifications. Additionally, the case reinforces the importance of good faith reliance on professional tax advice in avoiding accuracy-related penalties, providing guidance for taxpayers in similar situations. Subsequent courts have cited this case in addressing similar issues, and it has practical implications for tax planning and compliance in real estate transactions involving debt discharge.

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Capitalization and Deductibility of Legal Expenses in Pharmaceutical Industry

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a significant ruling, the U. S. Tax Court determined that Mylan, a generic drug manufacturer, must capitalize legal fees for preparing FDA notice letters but can deduct costs for defending patent infringement suits. This decision impacts how pharmaceutical companies handle legal expenses related to FDA approvals and patent disputes, clarifying the tax treatment of such expenditures.

    Parties

    Mylan, Inc. & Subsidiaries (Petitioner), a U. S. corporation and manufacturer of generic and brand name pharmaceutical drugs, filed petitions against the Commissioner of Internal Revenue (Respondent) to challenge determinations of tax deficiencies for the years 2012, 2013, and 2014. The cases were consolidated in the U. S. Tax Court.

    Facts

    Mylan incurred significant legal expenses from 2012 to 2014 in two categories: (1) preparing notice letters to the FDA, brand name drug manufacturers, and patentees as part of the process for obtaining FDA approval for generic versions of drugs, and (2) defending against patent infringement lawsuits initiated by these manufacturers and patentees. These lawsuits were triggered by Mylan’s submission of Abbreviated New Drug Applications (ANDAs) with paragraph IV certifications, asserting that certain patents listed in the FDA’s Orange Book were invalid or not infringed by Mylan’s generic drugs.

    Procedural History

    Mylan deducted its legal expenses as ordinary and necessary business expenditures on its 2012, 2013, and 2014 tax returns. Following an IRS examination, the Commissioner determined these expenses were capital expenditures required to be capitalized and disallowed Mylan’s deductions, issuing notices of deficiency for tax deficiencies amounting to $16,430,947 for 2012, $12,618,695 for 2013, and $20,988,657 for 2014. Mylan filed timely petitions for redetermination with the U. S. Tax Court, which consolidated the cases and held a trial.

    Issue(s)

    Whether the legal expenses Mylan incurred for preparing notice letters required to be sent as part of the FDA approval process for generic drugs must be capitalized under section 263(a) of the Internal Revenue Code?

    Whether the legal expenses Mylan incurred for defending against patent infringement lawsuits brought by brand name drug manufacturers and patentees are deductible as ordinary and necessary business expenses under section 162(a)?

    Rule(s) of Law

    Section 162(a) of the Internal Revenue Code allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 263(a) mandates capitalization of expenditures that create or enhance a separate and distinct asset or generate significant future benefits for the taxpayer. Section 1. 263(a)-4(b)(1)(v), Income Tax Regs. , requires capitalization of amounts paid to facilitate the acquisition or creation of certain intangibles, including rights obtained from a governmental agency.

    Holding

    The U. S. Tax Court held that the legal expenses Mylan incurred to prepare notice letters are required to be capitalized because they were necessary to obtain FDA approval of Mylan’s generic drugs. Conversely, the legal expenses incurred to defend patent infringement suits are deductible as ordinary and necessary business expenses because the patent litigation was distinct from the FDA approval process.

    Reasoning

    The court’s reasoning differentiated between the two types of legal expenses based on the origin and character of the claims and the applicable legal standards:

    For the notice letter expenses, the court applied the regulation under section 1. 263(a)-4(b)(1)(v), which requires capitalization of expenses facilitating the creation of an intangible asset. The court found that the notice letters were a required step in securing FDA approval, thus facilitating the acquisition of an intangible asset (effective FDA approval).

    For the litigation expenses, the court employed the “origin of the claim” test, focusing on whether the litigation arose from the acquisition, enhancement, or disposition of a capital asset. The court determined that the patent infringement suits were tort claims, not related to the acquisition or enhancement of Mylan’s intangible assets. The court also considered the policy objectives of the Hatch-Waxman Act, which encourages the entry of generic drugs into the market while protecting brand name drug manufacturers’ patent rights. The court found that the litigation was a mechanism for brand name manufacturers to protect their intellectual property rights, not a step in the FDA approval process for Mylan.

    The court also analyzed relevant regulatory examples and the nature of patent infringement litigation, concluding that such litigation expenses are typically deductible as ordinary and necessary business expenses for companies engaged in the business of exploiting and licensing patents.

    Disposition

    The court sustained the IRS’s determinations regarding the capitalization of expenses for preparing notice letters and ruled that the litigation expenses for defending patent infringement suits were deductible as ordinary and necessary business expenses. The court also upheld the IRS’s determination that Mylan’s capitalized expenses were subject to amortization over a 15-year period under section 197 of the Internal Revenue Code.

    Significance/Impact

    This case clarifies the tax treatment of legal expenses in the pharmaceutical industry, particularly for generic drug manufacturers. It establishes that expenses for preparing FDA-required notice letters are capital expenditures due to their role in facilitating FDA approval, whereas expenses for defending patent infringement suits are deductible as ordinary and necessary business expenses. This ruling impacts how pharmaceutical companies structure their legal strategies and manage their tax liabilities. It also underscores the distinction between expenses related to regulatory compliance and those arising from tort claims, which may influence how other industries categorize similar expenses for tax purposes. Subsequent courts and the IRS may refer to this decision when addressing similar issues, potentially affecting the tax treatment of legal expenses across various sectors.

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Deductibility of Legal Expenses in Pharmaceutical Patent Litigation

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a landmark ruling, the U. S. Tax Court held that Mylan, a generic drug manufacturer, must capitalize legal expenses related to preparing FDA-required notice letters for generic drug applications, while expenses defending against patent infringement suits are deductible. This decision clarifies the tax treatment of legal costs incurred by generic drug companies in navigating the complex regulatory landscape of pharmaceutical patents, impacting how such costs are managed in the industry.

    Parties

    Mylan, Inc. & Subsidiaries, the petitioner, is a U. S. corporation engaged in the manufacture of both brand name and generic pharmaceutical drugs. The respondent, the Commissioner of Internal Revenue, represents the Internal Revenue Service (IRS). Mylan challenged the IRS’s disallowance of deductions for legal expenses incurred during 2012, 2013, and 2014.

    Facts

    Mylan incurred significant legal expenses from 2012 to 2014 related to its efforts to bring generic versions of brand name drugs to market. The process involved submitting Abbreviated New Drug Applications (ANDAs) to the Food & Drug Administration (FDA), which required certifications regarding any patents listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) that covered the brand name drugs. Mylan often certified that these patents were invalid or would not be infringed by their generic drugs (paragraph IV certifications), triggering the need to send notice letters to the brand name drug manufacturers and patentees. These certifications also constituted an act of patent infringement, leading to lawsuits against Mylan under 35 U. S. C. § 271(e)(2). Mylan deducted the legal fees incurred for preparing notice letters and defending against these infringement suits as ordinary and necessary business expenses under Internal Revenue Code (IRC) § 162(a). The IRS, however, determined these were nondeductible capital expenditures under IRC § 263(a).

    Procedural History

    Upon examination of Mylan’s 2012, 2013, and 2014 tax returns, the IRS disallowed the deductions for legal expenses, asserting they were capital expenditures to be amortized over 15 years under IRC § 197. The IRS issued notices of deficiency for each year, determining tax deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively. Mylan petitioned the U. S. Tax Court for redetermination, and the cases were consolidated for trial. The Tax Court’s standard of review was de novo.

    Issue(s)

    Whether the legal expenses incurred by Mylan to prepare notice letters required for FDA approval of generic drugs are required to be capitalized under IRC § 263(a)?

    Whether the legal expenses incurred by Mylan to defend against patent infringement suits under 35 U. S. C. § 271(e)(2) are deductible as ordinary and necessary business expenses under IRC § 162(a)?

    Rule(s) of Law

    IRC § 162(a) allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. ” Conversely, IRC § 263(a) mandates the capitalization of expenditures that create or enhance a separate and distinct asset or generate significant future benefits. The regulations under IRC § 1. 263(a)-4(b)(1) require the capitalization of amounts paid to acquire or create certain intangibles, including rights obtained from a governmental agency. The origin of the claim test, established in cases such as Woodward v. Commissioner, 397 U. S. 572 (1970), is used to determine whether legal expenses are deductible or must be capitalized based on the nature of the underlying claim.

    Holding

    The Tax Court held that the legal expenses incurred by Mylan to prepare notice letters required for FDA approval are capital expenditures under IRC § 263(a) because they facilitate the acquisition of FDA approval, an intangible asset. Conversely, the legal expenses incurred by Mylan to defend against patent infringement suits under 35 U. S. C. § 271(e)(2) are deductible as ordinary and necessary business expenses under IRC § 162(a) because such litigation is distinct from the FDA approval process and arises from the protection of business profits.

    Reasoning

    The court’s reasoning hinged on the distinction between the two types of legal expenses. For notice letter expenses, the court applied the rule that amounts paid to facilitate the acquisition of an intangible asset must be capitalized. The court found that the notice letters were a required step in securing FDA approval, thus facilitating the acquisition of the intangible right to market the generic drug. The court rejected Mylan’s argument that these expenses were merely related to potential patent litigation, emphasizing that the notice was a statutory prerequisite for ANDA approval.

    Regarding the litigation expenses, the court applied the origin of the claim test and found that these expenses arose out of patent infringement claims, which are torts aimed at protecting the patent holder’s business profits. The court relied on precedents such as Urquhart v. Commissioner, 215 F. 2d 17 (3d Cir. 1954), which established that expenses incurred in defending patent infringement suits are deductible because they relate to the protection of business profits rather than the acquisition of property rights. The court distinguished these expenses from those incurred in defending title to intellectual property, which are capital expenditures.

    The court also considered regulatory examples under IRC §§ 1. 263(a)-4 and 1. 263(a)-5, finding that the litigation expenses did not facilitate the acquisition of FDA approval but were instead related to resolving patent rights, thus supporting their deductibility.

    Disposition

    The court sustained the IRS’s determination to capitalize the legal expenses incurred for preparing notice letters and upheld the disallowance of deductions for those expenses. Conversely, the court allowed deductions for the legal expenses incurred in defending patent infringement suits. The court’s decisions will be entered under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    This decision has significant implications for the pharmaceutical industry, particularly for generic drug manufacturers. It clarifies that legal expenses related to the regulatory process of obtaining FDA approval must be capitalized, affecting the timing of tax deductions for such costs. Conversely, it affirms the deductibility of expenses incurred in defending against patent infringement suits, providing clarity and potential tax benefits for companies engaged in such litigation. The ruling may influence how generic drug companies structure their legal strategies and manage their tax liabilities, potentially affecting the pace and cost of bringing generic drugs to market. The case also underscores the importance of the origin of the claim test in distinguishing between deductible and capital expenditures in the context of legal fees.

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Capitalization and Deductibility of Legal Expenses in the Pharmaceutical Industry

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a significant ruling, the U. S. Tax Court held that Mylan, a pharmaceutical company, must capitalize legal fees for preparing FDA-required notice letters related to generic drug approvals, but can deduct expenses for defending patent infringement lawsuits. This decision clarifies the treatment of legal costs in the pharmaceutical sector, balancing the need for capitalization of costs directly related to FDA approval processes against the deductibility of litigation costs defending patent rights.

    Parties

    Mylan, Inc. & Subsidiaries, the petitioner, is a U. S. corporation involved in the manufacture of both brand name and generic pharmaceutical drugs. The respondent, the Commissioner of Internal Revenue, represents the Internal Revenue Service (IRS). The case was adjudicated in the U. S. Tax Court.

    Facts

    Mylan incurred legal fees from 2012 to 2014 in connection with applications submitted to the FDA for approval to market and sell generic versions of brand name drugs. As part of the application process, Mylan was required to certify the status of any patents listed in the FDA’s Orange Book as covering the respective brand name drug. Mylan’s certifications often stated that the listed patents were invalid or would not be infringed by their generic drugs, triggering the need to send notice letters to brand name drug manufacturers and patentees. Such certifications also constituted an act of patent infringement, giving the brand name manufacturers and patentees the right to sue Mylan for patent infringement. Mylan deducted these legal expenses on its tax returns as ordinary and necessary business expenditures, but the IRS disallowed these deductions, deeming them capital expenditures required to be capitalized.

    Procedural History

    The IRS, upon examination, determined that Mylan’s legal expenses were nondeductible capital expenditures and issued notices of deficiency for the tax years 2012, 2013, and 2014, with deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively. Mylan filed timely petitions with the U. S. Tax Court for redetermination of these deficiencies. The cases were consolidated, and a trial was held in Washington, D. C.

    Issue(s)

    Whether the legal expenses incurred by Mylan to prepare notice letters for FDA approval of generic drugs are required to be capitalized under section 263(a) of the Internal Revenue Code?

    Whether the legal expenses incurred by Mylan to defend against patent infringement suits under section 271(e)(2) of the U. S. Code are deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code?

    Rule(s) of Law

    Section 162(a) of the Internal Revenue Code allows for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Conversely, section 263(a) mandates that no deduction shall be allowed for capital expenditures, which are to be capitalized. Section 1. 263(a)-4(b)(1), Income Tax Regs. , requires the capitalization of amounts paid to acquire or create certain intangibles, including rights obtained from a governmental agency. Section 1. 263(a)-4(d)(5)(I), Income Tax Regs. , specifies that taxpayers must capitalize amounts paid to a governmental agency to obtain rights under licenses, permits, or similar rights. Section 1. 263(a)-4(e)(1)(I), Income Tax Regs. , further defines that an amount is paid to facilitate the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing the transaction.

    Holding

    The U. S. Tax Court held that the legal expenses incurred by Mylan to prepare notice letters for FDA approval are required to be capitalized under section 263(a) of the Internal Revenue Code because they were necessary to obtain FDA approval of Mylan’s generic drugs. Conversely, the legal expenses incurred to defend against patent infringement suits are deductible as ordinary and necessary business expenses under section 162(a) because the patent litigation was distinct from the FDA approval process.

    Reasoning

    The court’s reasoning was based on the distinction between the legal fees for preparing notice letters, which were directly related to obtaining FDA approval, and the litigation expenses for defending patent infringement suits, which were separate from the FDA approval process. The court applied the ‘origin of the claim’ test to determine the nature of the legal expenses. The notice letters were a required step in securing an FDA-approved Abbreviated New Drug Application (ANDA), thus facilitating the acquisition of an intangible asset, i. e. , the right to market the generic drug upon effective FDA approval. Therefore, these expenses were capital in nature and subject to capitalization under section 263(a). In contrast, the patent infringement litigation arose out of the ordinary and necessary activities of Mylan’s generic drug business and was not directly related to acquiring FDA approval. The court referenced the case of Urquhart v. Commissioner, which established that expenses incurred in defending against patent infringement are deductible as they relate to the protection of business profits rather than the acquisition of property rights. The court also considered the regulatory examples provided in the Income Tax Regulations, which supported the deductibility of litigation expenses separate from the broader project of obtaining FDA approval. The court rejected the Commissioner’s argument that the litigation expenses facilitated the acquisition of FDA approval, emphasizing that such litigation was initiated by patent holders to protect their intellectual property rights and was not a necessary step in the FDA approval process. Furthermore, the court noted that the statutory coordination between patent litigation outcomes and FDA approval does not convert the litigation into a step in the FDA approval chain.

    Disposition

    The court sustained the IRS’ determinations for the amounts incurred to prepare paragraph IV notice letters, affirming the requirement to capitalize these expenses. However, it ruled in favor of Mylan regarding the deductibility of the litigation expenses incurred to defend against patent infringement suits.

    Significance/Impact

    This decision has significant implications for the pharmaceutical industry, particularly for generic drug manufacturers. It clarifies the tax treatment of legal expenses related to the FDA approval process and patent litigation, establishing a clear distinction between costs that must be capitalized and those that can be deducted. The ruling impacts how generic drug manufacturers manage their tax liabilities and plan their legal strategies regarding patent disputes. It also underscores the importance of the ‘origin of the claim’ test in determining the nature of legal expenses, which could influence future cases involving the deductibility of legal fees across various industries. The decision may lead to increased scrutiny by the IRS on the categorization of legal expenses by pharmaceutical companies, potentially affecting their financial planning and reporting.

  • De Los Santos v. Commissioner, 156 T.C. No. 9 (2021): Taxation of Split-Dollar Life Insurance Arrangements in S Corporations

    De Los Santos v. Commissioner, 156 T. C. No. 9 (U. S. Tax Court 2021)

    In a ruling that clarifies the tax treatment of split-dollar life insurance arrangements in S corporations, the U. S. Tax Court determined that benefits received by a shareholder-employee under such a plan are taxable as ordinary income, not as a distribution under Section 301. This decision impacts how S corporations must account for employee fringe benefits, particularly life insurance, and reinforces the importance of distinguishing between compensation and shareholder distributions in tax law.

    Parties

    Plaintiffs (Petitioners): Ruben De Los Santos and Martha De Los Santos, designated as Petitioners at both trial and appeal stages.

    Defendant (Respondent): Commissioner of Internal Revenue, designated as Respondent at both trial and appeal stages.

    Facts

    Ruben De Los Santos, a medical doctor, was the sole shareholder of Dr. Ruben De Los Santos MD, PA, an S corporation. During 2011 and 2012, the S corporation employed Ruben and his wife Martha, who served as the office manager, along with four other employees. The corporation adopted an employee welfare benefit plan known as the Legacy Employee Welfare Benefit Plan, funded through contributions to the Legacy Employee Welfare Benefit Trust. Under this plan, Ruben and Martha were entitled to a $12. 5 million death benefit, while the other employees received a $10,000 death benefit. The plan was classified as a compensatory split-dollar life insurance arrangement under the applicable regulations, and the economic benefits derived from it were deemed taxable income to the De Los Santoses. They did not report these benefits on their tax returns, prompting the IRS to issue a notice of deficiency determining that the benefits were taxable as ordinary income.

    Procedural History

    The De Los Santoses petitioned the U. S. Tax Court for redetermination of the deficiency after receiving the IRS notice. They filed a motion for partial summary judgment arguing that the economic benefits should be treated as a distribution under Section 301 due to Ruben’s status as a shareholder. The Tax Court had previously held in a related memorandum opinion that the arrangement was a compensatory split-dollar life insurance plan, and the economic benefits were taxable. In the current case, the Tax Court denied the De Los Santoses’ motion for partial summary judgment, affirming that the benefits were taxable as ordinary income.

    Issue(s)

    Whether the economic benefits received by Ruben De Los Santos under the compensatory split-dollar life insurance arrangement should be taxable to him as a distribution under Section 301 of the Internal Revenue Code, or as ordinary income?

    Rule(s) of Law

    Section 301 of the Internal Revenue Code governs distributions of property by a corporation to its shareholders, applicable only when the payment is made “with respect to its stock. ” Section 1372 of the Internal Revenue Code treats S corporations as partnerships for the purpose of taxing employee fringe benefits, and any shareholder owning more than 2% of the corporation’s stock is treated as a partner. Under Section 1. 61-22 of the Income Tax Regulations, economic benefits provided under a split-dollar life insurance arrangement are taxable to the non-owner of the policy. In a compensatory arrangement, these benefits are generally treated as compensation.

    Holding

    The court held that the economic benefits received by Ruben De Los Santos under the compensatory split-dollar life insurance arrangement were not taxable as a distribution under Section 301, but rather as ordinary income. This decision was based on the fact that the benefits were provided to Ruben in his capacity as an employee, not as a shareholder. Furthermore, under Section 1372, the S corporation was treated as a partnership for the purposes of taxing employee fringe benefits, and thus the benefits were categorized as “guaranteed payments” under Section 707(c), which are taxable as ordinary income.

    Reasoning

    The court’s reasoning focused on the distinction between payments made to shareholders in their capacity as shareholders versus payments made in another capacity, such as an employee. The court emphasized that Section 301 only applies to distributions made “with respect to its stock,” and thus payments made to shareholders in their capacity as employees are not covered by this section. The court rejected the argument put forth by the De Los Santoses, which was based on a Sixth Circuit decision in Machacek v. Commissioner, that all economic benefits under a split-dollar life insurance arrangement should be treated as distributions under Section 301. The court found this interpretation inconsistent with the statutory language of Section 301 and the broader regulatory framework, particularly noting that the split-dollar regulations differentiate between compensatory and shareholder arrangements. The court further reasoned that treating S corporations as partnerships under Section 1372 for fringe benefit purposes meant that the economic benefits were to be treated as “guaranteed payments” under Section 707(c), which are taxable as ordinary income. The court’s analysis also considered policy implications, noting that a contrary ruling could allow S corporations to avoid employment taxes on fringe benefits, contrary to the intent of the regulations. The court’s decision was influenced by the need to maintain consistency with the statutory and regulatory framework governing the taxation of split-dollar life insurance arrangements and employee fringe benefits in S corporations.

    Disposition

    The court denied the De Los Santoses’ motion for partial summary judgment, maintaining that the economic benefits received under the compensatory split-dollar life insurance arrangement were taxable as ordinary income.

    Significance/Impact

    The De Los Santos decision has significant implications for the taxation of split-dollar life insurance arrangements within S corporations. It reaffirms the principle that benefits received by shareholder-employees under such arrangements are to be treated as ordinary income when provided in the context of employment, rather than as distributions under Section 301. This ruling clarifies the application of Section 1372, which treats S corporations as partnerships for fringe benefit taxation purposes, thereby categorizing these benefits as “guaranteed payments” taxable as ordinary income. The decision also highlights the importance of distinguishing between the capacities in which payments are received from corporations, impacting tax planning and compliance for S corporations and their shareholders. It may influence future cases and regulatory guidance concerning the taxation of similar arrangements, emphasizing the need for clear delineation between compensatory and shareholder benefits. The court’s rejection of the Sixth Circuit’s interpretation in Machacek further underscores the complexity and ongoing debate within the tax law community regarding the treatment of split-dollar life insurance arrangements.

  • Robert Rowen v. Commissioner of Internal Revenue, 156 T.C. No. 8 (2021): Certification of Seriously Delinquent Tax Debt Under I.R.C. § 7345

    Robert Rowen v. Commissioner of Internal Revenue, 156 T. C. No. 8 (2021)

    In Robert Rowen v. Commissioner of Internal Revenue, the U. S. Tax Court upheld the Commissioner’s certification of a seriously delinquent tax debt under I. R. C. § 7345, rejecting claims that the statute violated constitutional rights or international human rights. The court clarified that § 7345 only authorizes certification, not passport revocation, thus not infringing on the right to travel. This ruling reaffirms the IRS’s authority to certify tax debts over $51,000 as a tool for encouraging tax compliance.

    Parties

    Robert Rowen, the petitioner, challenged the certification of his tax debt as seriously delinquent by the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court. Throughout the litigation, Rowen was designated as the petitioner and the Commissioner as the respondent.

    Facts

    Robert Rowen, a U. S. citizen and licensed medical doctor, repeatedly failed to file Federal income tax returns for over two decades. Relevant to this case, Rowen first failed to file for tax year 1994. In 1997, he pleaded guilty to corruptly endeavoring to impede an IRS investigation and, as part of his plea agreement, filed delinquent returns for 1994 and 1996 and a timely return for 1997. Despite this, Rowen did not pay the assessed taxes for these years. The IRS issued notices of deficiency and intent to levy, but Rowen did not seek a hearing with the IRS Office of Appeals. Rowen filed for bankruptcy in 2001, seeking discharge of his tax liabilities for 1992 through 1997, which was denied due to willful failure to file and pay. Rowen again ceased filing returns starting in 2003, only submitting returns for 2003 through 2007 after IRS intervention. The IRS filed notices of Federal tax lien and notices of intent to levy for these years, and after Rowen’s request for a hearing, the IRS Appeals sustained the filings and proposed levies. Rowen petitioned the U. S. Tax Court, which upheld the IRS’s determinations. In 2018, the Commissioner certified Rowen as owing a seriously delinquent tax debt of at least $474,847 under I. R. C. § 7345 for tax years 1994, 1996, 1997, and 2003 through 2007.

    Procedural History

    Rowen filed a petition in the U. S. Tax Court under I. R. C. § 7345(e)(1) to challenge the Commissioner’s certification of his seriously delinquent tax debt. Both parties filed motions for summary judgment. The Tax Court reviewed the administrative record and the arguments presented, focusing on the constitutionality of § 7345 and the correctness of the certification. The court applied a summary adjudication procedure to decide the issues raised by the parties.

    Issue(s)

    Whether I. R. C. § 7345 violates the Due Process Clause of the Fifth Amendment by prohibiting international travel?

    Whether I. R. C. § 7345 violates the right to travel as expressed in the Universal Declaration of Human Rights (UDHR)?

    Whether the Commissioner erred in certifying Rowen’s tax debt as seriously delinquent under I. R. C. § 7345?

    Rule(s) of Law

    I. R. C. § 7345 authorizes the Commissioner to certify to the Secretary of the Treasury that an individual has a seriously delinquent tax debt, defined as an unpaid, legally enforceable Federal tax liability greater than $51,000 for which a notice of lien has been filed or levy has been made. The certification is transmitted to the Secretary of State for action with respect to denial, revocation, or limitation of a passport under FAST Act § 32101. The Tax Court has jurisdiction under I. R. C. § 7345(e)(1) to determine whether the certification was erroneous.

    Holding

    The Tax Court held that I. R. C. § 7345 does not violate the Due Process Clause of the Fifth Amendment or the UDHR because it does not restrict the right to international travel. The court further held that the Commissioner did not err in certifying Rowen’s tax debt as seriously delinquent under I. R. C. § 7345, as Rowen’s debt exceeded $51,000 and met the statutory criteria.

    Reasoning

    The court reasoned that I. R. C. § 7345 merely provides for the certification of tax-related facts and does not authorize any passport-related decisions, which are left to the discretion of the Secretary of State under FAST Act § 32101(e). Therefore, § 7345 cannot be considered to infringe on the right to international travel. The court also rejected Rowen’s UDHR argument, noting that the UDHR does not create enforceable rights in U. S. courts and, regardless, § 7345 does not restrict travel. The court further found that Rowen’s procedural due process and statute of limitations claims were abandoned as he did not pursue them in his motion for summary judgment. The court examined the administrative record, which included certified Forms 4340 showing Rowen’s outstanding tax liabilities and confirmed that the period of limitations on collection remained open for all relevant years. The court concluded that the Commissioner’s certification was proper and consistent with the requirements of I. R. C. § 7345.

    Disposition

    The Tax Court denied Rowen’s motion for summary judgment and granted the Commissioner’s cross-motion for summary judgment, sustaining the certification of Rowen’s seriously delinquent tax debt.

    Significance/Impact

    This case clarifies the scope of I. R. C. § 7345, affirming its constitutionality and the IRS’s authority to certify seriously delinquent tax debts as a means to encourage tax compliance. The ruling may impact taxpayers with significant tax debts by reinforcing the potential consequences of non-compliance, including the certification process that could lead to passport-related actions by the Secretary of State. The decision also highlights the limited nature of the Tax Court’s review under § 7345(e)(1), focusing solely on the correctness of the certification rather than broader constitutional challenges to the entire tax collection mechanism established by the FAST Act.