SCOTUS Reports

Tag: U.S. Tax Court

  • Oropeza v. Commissioner, 155 T.C. No. 9 (2020): Timeliness of Supervisory Approval for Penalties Under IRC Section 6751(b)(1)

    Oropeza v. Commissioner, 155 T. C. No. 9 (2020)

    In Oropeza v. Commissioner, the U. S. Tax Court ruled that the IRS failed to secure timely supervisory approval for penalties asserted against the taxpayer, as required by IRC Section 6751(b)(1). The court found that the initial determination of penalties occurred when the IRS sent the taxpayer a Letter 5153 and Revenue Agent Report (RAR), not when the notice of deficiency was issued. This decision underscores the importance of timely supervisory approval in the penalty assessment process and impacts how the IRS must proceed in similar cases.

    Parties

    Jesus R. Oropeza, the Petitioner, filed a petition in the U. S. Tax Court against the Commissioner of Internal Revenue, the Respondent, challenging the imposition of penalties for the 2011 tax year. The case was designated as Docket No. 15309-15 and was filed on October 13, 2020.

    Facts

    The IRS opened an examination of Jesus R. Oropeza’s 2011 tax year. On January 14, 2015, as the period of limitations was about to expire, a revenue agent (RA) sent Oropeza a Letter 5153 and a Revenue Agent Report (RAR). The RAR proposed adjustments increasing Oropeza’s income and asserted a 20% accuracy-related penalty under IRC Section 6662(a), citing four potential bases for the penalty: negligence, substantial understatement of income tax, substantial valuation misstatement, and transaction lacking economic substance. Oropeza declined to extend the limitations period or agree to the proposed adjustments. On January 29, 2015, the RA’s supervisor signed a Civil Penalty Approval Form authorizing a 20% penalty for a substantial understatement of income tax. On May 1, 2015, the RA recommended a 40% penalty under IRC Section 6662(b)(6) for a nondisclosed noneconomic substance transaction, which was approved by the supervisor. The IRS issued a notice of deficiency on May 6, 2015, asserting the 40% penalty and, in the alternative, a 20% penalty for negligence or substantial understatement.

    Procedural History

    Oropeza timely petitioned the U. S. Tax Court for redetermination of the deficiency and penalties. The Commissioner filed a motion for partial summary judgment, contending that timely supervisory approval was obtained for the 40% and the alternative 20% penalty for a substantial understatement. Oropeza filed a cross-motion arguing that timely approval was not obtained for any penalties. The Tax Court granted Oropeza’s motion and denied the Commissioner’s cross-motion, finding that the IRS failed to secure timely supervisory approval for the penalties.

    Issue(s)

    Whether the IRS’s supervisory approval of the 20% penalty under IRC Section 6662(a) and the 40% penalty under IRC Section 6662(i) was timely as required by IRC Section 6751(b)(1)?

    Rule(s) of Law

    IRC Section 6751(b)(1) requires that no penalty shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination. The initial determination is considered to be embodied in the document by which the IRS formally notifies the taxpayer that the Examination Division has completed its work and made a definite decision to assert penalties.

    Holding

    The Tax Court held that the IRS did not satisfy the requirements of IRC Section 6751(b)(1) because written supervisory approval was not given for any penalties until after the Letter 5153 and RAR had been issued to Oropeza. Consequently, the court granted Oropeza’s motion for partial summary judgment and denied the Commissioner’s cross-motion.

    Reasoning

    The Tax Court reasoned that the initial determination of the penalties was made when the Letter 5153 and RAR were sent to Oropeza on January 14, 2015, not when the notice of deficiency was issued on May 6, 2015. The court relied on the precedent set in Belair Woods, LLC v. Commissioner, where the initial determination was considered to be embodied in the document that formally notified the taxpayer of the Examination Division’s definite decision to assert penalties. The court found that the RAR asserted a 20% penalty on four alternative grounds, including a substantial understatement of income tax and a transaction lacking economic substance, and that no timely supervisory approval was obtained for these penalties. Furthermore, the court clarified that IRC Section 6662(i) does not impose a distinct penalty but increases the rate of the penalty imposed under IRC Section 6662(a) and (b)(6). Since the base-level penalty under Section 6662(a) and (b)(6) was not timely approved, the IRS could not later secure approval for the rate increase under Section 6662(i). The court emphasized the importance of timely supervisory approval to prevent the unapproved threat of penalties being used as a bargaining chip.

    Disposition

    The Tax Court granted Oropeza’s motion for partial summary judgment and denied the Commissioner’s cross-motion, ruling that no penalties could be assessed due to the lack of timely supervisory approval.

    Significance/Impact

    This decision reaffirms the strict requirement of timely supervisory approval under IRC Section 6751(b)(1) and clarifies that the initial determination of a penalty occurs when the IRS formally communicates a definite decision to assert penalties to the taxpayer. It has significant implications for IRS penalty assessment procedures, particularly in cases involving the assertion of alternative penalties and rate enhancements. The ruling also underscores the importance of clear communication to taxpayers regarding penalty determinations and reinforces the statutory intent to prevent the use of penalties as a negotiation tool.

  • Clinton Deckard v. Commissioner of Internal Revenue, 155 T.C. No. 8 (2020): Shareholder Status in Nonprofit S Corporations

    Clinton Deckard v. Commissioner of Internal Revenue, 155 T. C. No. 8 (U. S. Tax Court 2020)

    In Clinton Deckard v. Commissioner, the U. S. Tax Court ruled that Clinton Deckard, who was an officer and director of a Kentucky nonstock, nonprofit corporation, was not considered a shareholder for the purposes of subchapter S. The court emphasized that under Kentucky law, nonprofit corporations cannot have shareholders, and thus Deckard could not claim passthrough losses from the corporation on his individual income tax returns. This decision underscores the importance of corporate form and state law in determining shareholder status for tax purposes.

    Parties

    Clinton Deckard, the petitioner, was the president and one of the directors of Waterfront Fashion Week, Inc. (Waterfront), a Kentucky nonstock, nonprofit corporation. The respondent was the Commissioner of Internal Revenue.

    Facts

    Waterfront Fashion Week, Inc. was organized on May 8, 2012, under Kentucky law as a nonstock, nonprofit corporation. Its primary mission was to raise money for the conservation and maintenance of the Louisville Waterfront Park and to provide economic development opportunities in the fashion industry. Clinton Deckard was Waterfront’s president and one of its three directors. In 2014, Deckard attempted to elect S corporation status for Waterfront retroactively to the date of its incorporation and claimed passthrough losses from Waterfront on his 2012 and 2013 individual income tax returns. The Commissioner disallowed these losses, leading to the present dispute.

    Procedural History

    The Commissioner issued a notice of deficiency disallowing the passthrough losses claimed by Deckard. Deckard filed a petition in the U. S. Tax Court challenging the deficiency. Both parties filed motions for partial summary judgment. The Tax Court granted the Commissioner’s motion and denied Deckard’s motions.

    Issue(s)

    Whether Clinton Deckard, as an officer and director of a Kentucky nonstock, nonprofit corporation, was a shareholder of the corporation for purposes of claiming passthrough losses under subchapter S of the Internal Revenue Code.

    Rule(s) of Law

    The court applied the rule that the determination of shareholder status for purposes of subchapter S is governed by federal law, which requires beneficial ownership of shares. However, state law determines whether a person is a beneficial owner. Under Kentucky law, a nonstock, nonprofit corporation cannot have shareholders or distribute profits to its members, directors, or officers.

    Holding

    The U. S. Tax Court held that Clinton Deckard was not a shareholder of Waterfront Fashion Week, Inc. for the purposes of subchapter S, and therefore, he was not entitled to claim passthrough losses from the corporation on his individual income tax returns.

    Reasoning

    The court’s reasoning was grounded in the distinction between nonprofit and for-profit corporations under Kentucky law. The court found that Waterfront, as a nonstock, nonprofit corporation, could not issue stock and was prohibited from distributing profits to its officers or directors. Thus, Deckard, despite being president and a director, did not possess an ownership interest equivalent to that of a shareholder. The court also rejected Deckard’s substance-over-form argument, stating that taxpayers are bound by the form of the transaction they choose. Furthermore, the court noted that Waterfront’s lack of tax-exempt status did not change its status as a nonprofit corporation under state law. The court relied on federal regulations and case law that emphasize the need for beneficial ownership to be treated as a shareholder under subchapter S, which Deckard did not have under Kentucky law.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for partial summary judgment and denied Deckard’s motions for partial summary judgment, affirming the disallowance of the claimed passthrough losses.

    Significance/Impact

    This case clarifies the application of subchapter S to nonprofit corporations and the importance of state law in determining shareholder status. It reinforces the principle that the form of a corporation, as dictated by state law, cannot be disregarded for federal tax purposes without clear evidence of abuse or misrepresentation. The decision impacts individuals who attempt to claim passthrough losses from nonprofit corporations on their personal tax returns, highlighting the need to understand the legal constraints of corporate form under state law.

  • Fowler v. Commissioner, 155 T.C. No. 7 (2020): Statute of Limitations and Electronic Filing Requirements

    Fowler v. Commissioner, 155 T. C. No. 7 (2020)

    In Fowler v. Commissioner, the U. S. Tax Court ruled that the statute of limitations for tax assessments began when a taxpayer electronically filed a return, even though it was rejected for lacking an Identity Protection Personal Identification Number (IP PIN). This decision underscores that the filing of a return, despite subsequent rejection, triggers the three-year limitations period, impacting how the IRS must handle electronic submissions and the timeliness of deficiency notices.

    Parties

    Robin J. Fowler, the Petitioner, filed a petition against the Commissioner of Internal Revenue, the Respondent, in the United States Tax Court. Fowler was the taxpayer, and the Commissioner represented the IRS in this matter.

    Facts

    Robin J. Fowler timely filed Form 4868 to extend the due date of his 2013 federal income tax return to October 15, 2014. On that date, Fowler’s tax preparer, Bennett Thrasher, LLP, electronically filed (efiled) his 2013 Form 1040. The efiled return was rejected by the IRS’ Modernized e-File (MeF) system due to the absence of an IP PIN. Fowler had been a victim of identity theft and was issued an IP PIN, but he claimed not to have received it before the October 15 submission. Following the rejection, Fowler’s tax preparer submitted the return on paper on October 28, 2014, which the IRS also did not process. Finally, on April 30, 2015, Fowler efiled the return again, this time including the IP PIN, and it was accepted by the IRS. On April 5, 2018, the IRS issued a notice of deficiency for the 2013 tax year. Fowler challenged this notice, arguing that the statute of limitations had expired.

    Procedural History

    Fowler filed a petition in the U. S. Tax Court challenging the IRS’s notice of deficiency for the 2013 tax year. The Commissioner moved for partial summary judgment, asserting that the statute of limitations had not expired. Fowler cross-moved for summary judgment, arguing that the October 15, 2014, submission triggered the statute of limitations. The Tax Court granted Fowler’s motion for summary judgment and denied the Commissioner’s motion, holding that the statute of limitations had expired before the issuance of the deficiency notice.

    Issue(s)

    Whether the October 15, 2014, submission of Fowler’s 2013 tax return, which was rejected for not including an IP PIN, triggered the running of the three-year statute of limitations under I. R. C. § 6501(a).

    Rule(s) of Law

    The three-year statute of limitations for tax assessments under I. R. C. § 6501(a) begins when a taxpayer files a return that meets the requirements of a “return” as defined by the Beard test and is “properly filed”. The Beard test requires that: (1) the document purports to be a return and provides sufficient data to calculate tax liability; (2) the taxpayer makes an honest and reasonable attempt to satisfy the requirements of the tax law; and (3) the taxpayer executes the document under penalties of perjury. A return is “properly filed” when it is physically delivered to the correct IRS office.

    Holding

    The Tax Court held that Fowler’s October 15, 2014, submission constituted a “required return” under the Beard test and was “properly filed,” thereby triggering the statute of limitations. The court determined that the omission of an IP PIN did not preclude the return from starting the limitations period.

    Reasoning

    The court’s reasoning hinged on the Beard test and the concept of “proper filing. ” The October 15 submission satisfied the Beard test because it purported to be a return, included sufficient data to calculate tax liability, represented an honest and reasonable attempt to comply with the tax law, and was signed electronically with a Practitioner PIN as instructed by the 2013 Form 1040 Instructions. The court rejected the Commissioner’s argument that the IP PIN was part of the signature requirement, noting that IRS guidance did not explicitly characterize it as such. Regarding proper filing, the court found that the October 15 submission was delivered to the IRS’ MeF system, and the IRS’ subsequent rejection did not negate the fact that the return was filed. The court emphasized that the filing inquiry focuses on the mode of filing, not what the IRS received or understood. The court also considered policy implications, highlighting the importance of the statute of limitations in providing taxpayers with finality and protecting them from indefinite IRS action.

    Disposition

    The Tax Court granted Fowler’s motion for summary judgment and denied the Commissioner’s motion for partial summary judgment, holding that the statute of limitations had expired before the issuance of the notice of deficiency.

    Significance/Impact

    This case significantly impacts the treatment of electronic tax filings and the application of the statute of limitations. It clarifies that a taxpayer’s efiled return triggers the statute of limitations upon delivery to the IRS, regardless of whether the IRS accepts or processes it. This ruling may lead to changes in IRS procedures for handling rejected electronic submissions and emphasizes the importance of timely processing to avoid statute of limitations issues. The case also underscores the need for clear IRS guidance on what constitutes a valid electronic signature and the role of IP PINs in the filing process. Subsequent courts and tax practitioners will likely refer to this case when addressing similar issues of electronic filing and the statute of limitations.

  • Sutherland v. Commissioner, 155 T.C. No. 6 (2020): Scope of Review in Innocent Spouse Relief Cases

    Sutherland v. Commissioner, 155 T. C. No. 6 (2020)

    In Sutherland v. Commissioner, the U. S. Tax Court ruled that the new scope of review under I. R. C. section 6015(e)(7), which limits review to the administrative record, does not apply to petitions filed before July 1, 2019. The court maintained a de novo review for Donna Sutherland’s case, filed in 2018, rejecting her motion to remand to the IRS for additional evidence. This decision underscores the importance of filing dates in determining applicable legal standards and impacts how taxpayers manage evidence during IRS proceedings.

    Parties

    Donna M. Sutherland, Petitioner, v. Commissioner of Internal Revenue, Respondent. At the trial court level, Sutherland was the petitioner and the Commissioner was the respondent. This designation continued through the appeal to the U. S. Tax Court.

    Facts

    In 2010, Donna Sutherland’s husband was convicted of tax crimes and required to file delinquent returns for 2005 and 2006 as part of his plea agreement. Before his sentencing, Sutherland signed joint returns for those years. In August 2016, she filed a request for innocent spouse relief under I. R. C. section 6015 for the tax years 2005 and 2006, claiming she signed the returns during an emotional period and had no input in their preparation. The IRS Appeals officer reviewed her case and denied her request on November 15, 2017. Sutherland timely petitioned the U. S. Tax Court on February 20, 2018, seeking review of the IRS’s denial.

    During the administrative process, Sutherland’s representative believed the Appeals officer was not correctly applying the factors for determining her eligibility for relief. Believing that a de novo review would be more favorable, the representative did not submit additional evidence to the IRS. After the Taxpayer First Act was enacted on July 1, 2019, adding I. R. C. section 6015(e)(7), which limits the Tax Court’s review to the administrative record and newly discovered evidence, Sutherland moved to remand the case to the IRS to submit additional evidence concerning her mental state when signing the returns.

    Procedural History

    Sutherland filed her request for innocent spouse relief with the IRS in August 2016. After the IRS issued a preliminary denial on April 24, 2017, Sutherland appealed, and her case was assigned to an IRS Appeals officer. Following the officer’s final determination letter denying relief on November 15, 2017, Sutherland timely petitioned the U. S. Tax Court on February 20, 2018. The Tax Court considered the case under the standard of de novo review applicable at the time of filing. Sutherland then filed a motion to remand on November 11, 2019, after the enactment of the Taxpayer First Act, which she argued should apply to her case.

    Issue(s)

    Whether I. R. C. section 6015(e)(7), which limits the Tax Court’s review of innocent spouse relief determinations to the administrative record and newly discovered or previously unavailable evidence, applies to petitions filed before its enactment on July 1, 2019?

    Rule(s) of Law

    I. R. C. section 6015(e)(7) provides that the Tax Court’s review of a determination under section 6015 shall be de novo and based upon the administrative record established at the time of the determination and any additional newly discovered or previously unavailable evidence. The Taxpayer First Act, which added this section, specified that these amendments “shall apply to petitions or requests filed or pending on or after the date of the enactment of this Act,” which was July 1, 2019.

    Holding

    The U. S. Tax Court held that I. R. C. section 6015(e)(7) does not apply to petitions filed before July 1, 2019. Because Sutherland’s petition was filed on February 20, 2018, the court maintained a de novo review standard for her case and denied her motion to remand.

    Reasoning

    The court’s reasoning focused on interpreting the effective date provision of the Taxpayer First Act. The court determined that the phrase “petitions or requests filed or pending” was structurally ambiguous but concluded that “filed” modified only “petitions” and “pending” modified only “requests. ” This interpretation was supported by the absence of the phrase “petitions pending” in the Code, Congress’s typical usage of “cases pending” or “proceedings pending” when referring to ongoing matters in the Tax Court, and the logical structure of the Act’s amendments.

    The court also applied the canon against superfluity, arguing that interpreting “filed” and “pending” to modify both “petitions” and “requests” would render “filed” superfluous. The court noted that applying the new scope of review retroactively to cases like Sutherland’s would be inequitable, as taxpayers would be disadvantaged for not having fully developed the administrative record under the belief that de novo review would apply.

    The court rejected Sutherland’s motion to remand because, with de novo review still applicable, remanding the case to the IRS for additional evidence would serve no useful purpose. The court did not need to reconsider its holding in Friday v. Commissioner, which declined to remand stand-alone innocent spouse cases, as the premise for Sutherland’s motion was invalidated by the inapplicability of section 6015(e)(7).

    Disposition

    The U. S. Tax Court denied Sutherland’s motion to remand, maintaining that her case would proceed under the de novo standard of review.

    Significance/Impact

    This decision clarifies that the scope of review under I. R. C. section 6015(e)(7) applies only to petitions filed on or after July 1, 2019, and not retroactively to cases filed before that date. It underscores the importance of the filing date in determining the applicable legal standard and highlights the potential inequity of retroactive application of new review standards. The ruling impacts how taxpayers and their representatives manage evidence during IRS proceedings, emphasizing the need to fully develop the administrative record in anticipation of potential limitations on judicial review. Subsequent courts have followed this interpretation, ensuring consistency in the application of section 6015(e)(7).

  • Thompson v. Commissioner, 155 T.C. No. 5 (2020): Supervisory Approval of Penalties Under I.R.C. § 6751(b)(1)

    Thompson v. Commissioner, 155 T. C. No. 5 (U. S. Tax Ct. 2020)

    In Thompson v. Commissioner, the U. S. Tax Court ruled that the IRS’s settlement offers during an ongoing audit do not constitute the “initial determination” of a penalty assessment, thus not requiring prior supervisory approval under I. R. C. § 6751(b)(1). The court also affirmed that approval by an acting immediate supervisor is sufficient under the statute. This decision clarifies the timing and nature of supervisory approval needed for penalty assessments, impacting how the IRS must proceed in audits involving penalties.

    Parties

    Douglas M. Thompson and Lisa Mae Thompson (Petitioners) filed a petition in the U. S. Tax Court against the Commissioner of Internal Revenue (Respondent). The case proceeded through the Tax Court with no further appeals noted in the provided text.

    Facts

    Douglas M. and Lisa Mae Thompson participated in a distressed asset trust (DAT) transaction, which they reported on their 2005 tax return. The IRS assigned Revenue Agent James Damasiewicz to examine their tax returns for multiple years, including 2005. During the examination, Damasiewicz sent the Thompsons two letters offering settlements related to the DAT transaction. The 2007 letter proposed a settlement with a reduced accuracy-related penalty of 10% under I. R. C. § 6662, while the 2009 letter offered a 15% penalty and waived the I. R. C. § 6662A penalty. The Thompsons did not accept either offer. After completing the examination, Damasiewicz concluded the Thompsons owed tax and penalties for 2003 through 2007. His acting immediate supervisor, Linda Barath, approved the penalties in writing before the IRS issued a notice of deficiency to the Thompsons on December 18, 2012, asserting the penalties under I. R. C. §§ 6662(h) and 6662A.

    Procedural History

    The Thompsons filed a petition in the U. S. Tax Court seeking redetermination of the deficiencies and penalties asserted in the notice of deficiency. They moved for partial summary judgment, arguing that the IRS failed to comply with I. R. C. § 6751(b)(1) because the penalties were not approved by Damasiewicz’s supervisor before the settlement offers were made. The Tax Court considered the motion for partial summary judgment, applying the standard of review for summary judgment, which requires no genuine dispute of material fact and that a decision may be rendered as a matter of law.

    Issue(s)

    Whether the IRS’s settlement offers during an ongoing audit constitute the “initial determination” of a penalty assessment, thus requiring prior supervisory approval under I. R. C. § 6751(b)(1)?

    Whether the supervisory approval requirement of I. R. C. § 6751(b)(1) was satisfied when the revenue agent’s acting immediate supervisor approved the penalties?

    Rule(s) of Law

    I. R. C. § 6751(b)(1) states that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination. ” The Tax Court has interpreted the “initial determination” to mean a formal communication that the Examination Division has completed its work and made an unequivocal decision to assert penalties, as established in Belair Woods, LLC v. Commissioner, 154 T. C. ___ (2020).

    Holding

    The Tax Court held that the IRS’s settlement offers to the Thompsons did not constitute the “initial determination” of a penalty assessment under I. R. C. § 6751(b)(1), and thus did not require prior supervisory approval. The court further held that the supervisory approval requirement was satisfied when Damasiewicz’s acting immediate supervisor approved the penalties before the IRS issued the notice of deficiency. Consequently, the Thompsons’ motion for partial summary judgment was denied.

    Reasoning

    The Tax Court reasoned that the settlement offers were not “determinations” but rather preliminary proposals within an ongoing examination. The court emphasized that the offers did not reflect the IRS’s completion of its work and did not assert specific penalties based on a completed audit but rather offered reduced penalties based on Announcement 2005-80. The court cited Belair Woods, LLC v. Commissioner, which defined the “initial determination” as a formal communication of the Examination Division’s completed work and unequivocal decision to assert penalties. The court also rejected the Thompsons’ argument that approval by an acting supervisor was insufficient, stating that the statute requires only the approval of the immediate supervisor, without mandating a “meaningful review. ” The court further dismissed the Thompsons’ invocation of the rule of lenity, finding no ambiguity in the statute that would require a construction in favor of the taxpayer.

    Disposition

    The Tax Court denied the Thompsons’ motion for partial summary judgment.

    Significance/Impact

    Thompson v. Commissioner clarifies the application of I. R. C. § 6751(b)(1) by distinguishing between settlement offers and formal penalty determinations. It establishes that settlement offers during an ongoing examination do not trigger the supervisory approval requirement, thus allowing the IRS flexibility in negotiating with taxpayers. The decision also affirms that approval by an acting supervisor is sufficient under the statute, providing clarity on the scope of “immediate supervisor” in this context. This ruling impacts IRS procedures for penalty assessments and may influence future cases involving similar issues of supervisory approval timing and authority.

  • Van Bemmelen v. Commissioner, 155 T.C. No. 4 (2020): Judicial Review of IRS Whistleblower Office Determinations

    Van Bemmelen v. Commissioner, 155 T. C. No. 4 (2020)

    In Van Bemmelen v. Commissioner, the U. S. Tax Court upheld the IRS Whistleblower Office’s (WBO) rejection of Michael Van Bemmelen’s claim for an award under I. R. C. sec. 7623(b). The court found the WBO’s decision to be supported by the administrative record and not an abuse of discretion. Van Bemmelen alleged tax evasion by a global insurance company but failed to provide specific, credible information. The ruling reinforces the IRS’s broad discretion in handling whistleblower claims and clarifies the scope of judicial review in such cases.

    Parties

    Michael Van Bemmelen, as the petitioner, sought review of the IRS Whistleblower Office’s determination to reject his claim for a whistleblower award. The respondent was the Commissioner of Internal Revenue. Throughout the litigation, Van Bemmelen represented himself pro se, while the Commissioner was represented by Nicole M. Connelly.

    Facts

    In March 2018, Michael Van Bemmelen, through his attorney Linda J. Stengle, submitted a Form 211 to the IRS Whistleblower Office (WBO), alleging tax violations by a global insurance company (the target). Van Bemmelen’s claim referenced an earlier submission from 2012, which related to the target and other taxpayers. The 2018 Form 211 included a narrative asserting the target’s involvement in a tax evasion scheme involving investments in life insurance policies and money laundering. Van Bemmelen alleged that the target improperly deducted interest on borrowed funds used to finance these investments, resulting in significant tax underpayments. The WBO forwarded the claim to a classifier in the Large Business & International Division (LB&I), who recommended rejection due to the speculative nature of the allegations and lack of specific, credible information. On September 11, 2018, the WBO issued a final determination rejecting Van Bemmelen’s claim under I. R. C. sec. 7623(a).

    Procedural History

    After the WBO’s rejection, Van Bemmelen timely petitioned the U. S. Tax Court for review. The Commissioner moved for summary judgment, supported by declarations from the LB&I classifier and an employee in the WBO’s Initial Claim Evaluation Unit. Van Bemmelen moved to supplement the administrative record with his 2012 submission and a 2019 document reflecting a presentation to IRS Criminal Investigation Division agents. The Tax Court granted the motion to supplement the record with the 2012 submission but denied it regarding the 2019 document. The court reviewed the case under the Administrative Procedure Act’s standard of review, focusing on whether the WBO’s action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

    Issue(s)

    Whether the IRS Whistleblower Office abused its discretion in rejecting Michael Van Bemmelen’s claim for a whistleblower award under I. R. C. sec. 7623(b) on the grounds that the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws?

    Rule(s) of Law

    The Tax Court’s review of the WBO’s determination is governed by the standard of review under section 706(2)(A) of the Administrative Procedure Act (APA), which requires the court to reverse agency action found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. ” I. R. C. sec. 7623(b) mandates whistleblower awards if certain statutory requirements are met, including that the proceeds in dispute exceed $2 million. The WBO may reject claims that fail to meet threshold criteria, such as containing specific, credible information about tax underpayments or violations of internal revenue laws. The WBO has sole discretion to request additional assistance from the whistleblower or their legal representative.

    Holding

    The Tax Court held that the IRS Whistleblower Office did not abuse its discretion in rejecting Michael Van Bemmelen’s claim for a whistleblower award. The court found that the WBO’s determination was supported by the administrative record and that the allegations in Van Bemmelen’s claim were speculative and lacked specific, credible information regarding tax underpayments or violations of internal revenue laws by the target.

    Reasoning

    The court’s reasoning focused on the WBO’s discretion to reject claims that fail to meet statutory and regulatory criteria. The court analyzed the information provided by Van Bemmelen and found it to be speculative, particularly with respect to the target’s alleged involvement in money laundering and improper interest deductions. The court noted that the 2012 submission, which was added to the administrative record, did not contain specific allegations against the target that would have affected the WBO’s analysis. The court also considered the WBO’s discretion to limit the scope of investigations and its authority to reject claims without further investigation if they do not meet threshold requirements. The court rejected Van Bemmelen’s arguments about procedural irregularities and the WBO Director’s alleged improper redelegation of authority, finding no merit in these claims. The court emphasized that it could not compel the IRS to commence an audit or explain its decision not to do so, and that the WBO’s rejection of Van Bemmelen’s claim was not arbitrary, capricious, or an abuse of discretion.

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment, affirming the WBO’s rejection of Van Bemmelen’s claim for a whistleblower award.

    Significance/Impact

    The Van Bemmelen decision reinforces the broad discretion afforded to the IRS Whistleblower Office in evaluating and rejecting whistleblower claims. It clarifies that the Tax Court’s review is limited to determining whether the WBO’s action was arbitrary, capricious, or an abuse of discretion, and that the court cannot compel the IRS to commence an audit or explain its decision not to do so. The case also highlights the importance of providing specific, credible information in whistleblower claims to meet the threshold criteria for further consideration. Subsequent courts have cited Van Bemmelen in upholding the WBO’s discretion and the limited scope of judicial review in whistleblower cases.

  • Whistleblower 21276-13W v. Commissioner of Internal Revenue, 155 T.C. No. 2 (2020): Enforcement and Interpretation of Tax Court Decisions

    Whistleblower 21276-13W v. Commissioner of Internal Revenue, 155 T. C. No. 2 (U. S. Tax Court 2020)

    In a significant ruling, the U. S. Tax Court upheld the enforceability of its decisions while denying whistleblowers’ motions to enforce payment of awards without sequester reductions. The case clarified that judicial decisions must be interpreted in light of parties’ settlements, impacting how future litigants approach agreements and court orders in tax disputes.

    Parties

    Whistleblower 21276-13W and Whistleblower 21277-13W, petitioners, sought whistleblower awards against the Commissioner of Internal Revenue, respondent, in the U. S. Tax Court.

    Facts

    Whistleblowers claimed awards under I. R. C. § 7623(b) for information leading to the collection of approximately $74 million from a targeted business. Following two prior Tax Court opinions, the parties reached a partial settlement agreeing on a 24% award on certain collected proceeds and stipulating to a sequester reduction. The settlement left one issue unresolved regarding the classification of $54 million as collected proceeds. The Tax Court’s second opinion resolved this issue in favor of the whistleblowers, calculating their awards based on the full amount of collected proceeds. The Commissioner subsequently paid the awards, applying the agreed-upon sequester reduction and withholding taxes. More than eight months after the final payments, the whistleblowers moved the Court to enforce the January 2017 decisions without the sequester reductions.

    Procedural History

    The case began with two prior Tax Court opinions addressing eligibility and the scope of collected proceeds for whistleblower awards. After the first opinion, the parties partially settled, resolving some issues and leaving others for judicial determination. The second opinion ruled on the remaining issue, leading to the entry of decisions in January 2017 specifying the gross award amounts. The Commissioner appealed these decisions, but the appeal was dismissed upon the parties’ stipulation. Following payment of the awards with sequester reductions, the whistleblowers filed motions to enforce the decisions, which the Court addressed in its final opinion.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to enforce its decisions, and whether the whistleblowers are entitled to the award amounts specified in the January 2017 decisions without the sequester reductions?

    Rule(s) of Law

    The U. S. Tax Court, established as a court of record under I. R. C. § 7441, possesses the authority to enforce its decisions as per I. R. C. § 7456(c). Whistleblower awards are subject to the Budget Control Act of 2011, which mandates sequester reductions on discretionary spending, including whistleblower awards.

    Holding

    The Tax Court held that it has jurisdiction to enforce its decisions and that the whistleblowers’ motions to enforce the January 2017 decisions without sequester reductions were denied, as the motions ignored the terms of the partial settlement and misinterpreted the decisions.

    Reasoning

    The Court reasoned that, as a court of record, it inherently possesses the authority to enforce its decisions, aligning with longstanding Supreme Court precedent. The decisions in question were interpreted as calculating gross award amounts based on the parties’ stipulations, not as mandating payment without regard to sequester reductions agreed upon in the settlement. The Court emphasized the importance of adhering to the terms of settlements, which the whistleblowers’ motions disregarded. The Court’s analysis also considered the futility of remanding the case to the IRS Whistleblower Office, given the parties’ stipulations and the clear legal outcome. The Court further clarified that the motions sought enforcement, not mere clarification of the decisions, necessitating an examination of the Court’s enforcement powers. The Court’s decision to deny the motions was based on the interpretation of the January 2017 decisions in light of the settlement agreement.

    Disposition

    The Tax Court denied the whistleblowers’ motions to enforce the January 2017 decisions without sequester reductions.

    Significance/Impact

    This decision underscores the enforceability of Tax Court decisions and the binding nature of settlement agreements in tax disputes. It serves as a reminder to litigants of the importance of fully disclosing settlement terms to the Court to avoid post-decision litigation. The case also reaffirms the application of sequester reductions to whistleblower awards, affecting future claims and settlements in this area. Furthermore, it clarifies the scope of the Tax Court’s jurisdiction to enforce its decisions, providing guidance for practitioners and litigants on the interplay between court orders and settlement agreements.

  • Rickey B. Barnhill v. Commissioner of Internal Revenue, 155 T.C. No. 1 (2020): Opportunity to Dispute Trust Fund Recovery Penalty Liability

    Rickey B. Barnhill v. Commissioner of Internal Revenue, 155 T. C. No. 1 (2020)

    In Rickey B. Barnhill v. Commissioner, the U. S. Tax Court denied the IRS’s motion for summary judgment, ruling that a taxpayer’s inability to participate in an Appeals conference due to non-receipt of notification did not preclude a subsequent challenge to the Trust Fund Recovery Penalty (TFRP) liability at a Collection Due Process (CDP) hearing. This decision underscores the importance of a meaningful opportunity to dispute tax liabilities before the IRS can bar such challenges in later proceedings, ensuring taxpayers are not denied due process rights.

    Parties

    Rickey B. Barnhill, as the Petitioner, challenged the assessment of Trust Fund Recovery Penalties by the Commissioner of Internal Revenue, the Respondent, in the U. S. Tax Court. The case originated from Barnhill’s appeal of the proposed TFRP assessments and subsequent CDP hearing request following the IRS’s filing of a notice of federal tax lien.

    Facts

    Rickey B. Barnhill was a director at Iron Cross, Inc. , which failed to pay over employment withholding taxes for ten quarters from 2010 to 2012. The IRS sent Barnhill a Letter 1153 proposing to assess TFRPs against him as a responsible person. Barnhill timely filed an appeal with the IRS Office of Appeals (Appeals). Appeals then sent a Letter 5157 to schedule a conference, which Barnhill alleges he never received. As a result, he did not participate in the scheduled conference. Appeals rejected Barnhill’s appeal, assessed the penalties, and filed a notice of federal tax lien. Barnhill requested a CDP hearing to challenge the underlying TFRP liability, but Appeals rejected this challenge, citing the prior opportunity provided by the Letter 1153.

    Procedural History

    The IRS assessed TFRPs against Barnhill after Appeals rejected his initial appeal. Upon receiving a notice of federal tax lien, Barnhill requested a CDP hearing, where he attempted to dispute his underlying liability for the TFRPs. Appeals sustained the lien filing, determining that Barnhill had a prior opportunity to dispute his liability due to his receipt of Letter 1153. Barnhill then filed a petition in the U. S. Tax Court, which denied the Commissioner’s motion for summary judgment, holding that the absence of a meaningful opportunity to dispute the TFRP liability in the initial Appeals conference did not preclude a subsequent challenge at the CDP hearing.

    Issue(s)

    Whether a taxpayer who received a Letter 1153 but did not receive subsequent correspondence (Letter 5157) scheduling an Appeals conference has had an “opportunity,” for purposes of I. R. C. sec. 6330(c)(2)(B), to dispute his underlying TFRP liability, thereby precluding a challenge to that liability at a later CDP hearing?

    Rule(s) of Law

    Under I. R. C. sec. 6330(c)(2)(B), a taxpayer may challenge the existence or amount of the underlying tax liability at a CDP hearing if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. ” A prior conference with Appeals, whether pre- or post-assessment, constitutes an “opportunity” to dispute the liability. See 26 C. F. R. sec. 301. 6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs.

    Holding

    The U. S. Tax Court held that if a taxpayer received a Letter 1153 but did not receive the subsequent Letter 5157, thereby missing the Appeals conference, the taxpayer did not have an “opportunity” to dispute the underlying TFRP liability within the meaning of I. R. C. sec. 6330(c)(2)(B). Therefore, the taxpayer should not be precluded from challenging that liability at a subsequent CDP hearing.

    Reasoning

    The Tax Court reasoned that the mere receipt of Letter 1153 does not constitute an “opportunity” to dispute the TFRP liability; rather, it is the Appeals conference that provides the actual opportunity. The court distinguished between the receipt of a notice and the opportunity it occasions, emphasizing that the statutory text of I. R. C. sec. 6330(c)(2)(B) bars a liability challenge at a CDP hearing only if the taxpayer had a genuine chance to dispute the liability. In Barnhill’s case, the absence of the Letter 5157 meant he was not informed of the conference and thus did not have a meaningful opportunity to participate. The court rejected the Commissioner’s argument that merely receiving the Letter 1153 was sufficient to preclude a subsequent challenge, finding that the lack of participation in the Appeals conference due to non-receipt of the scheduling letter constituted a denial of the opportunity to dispute the liability. The court also found that any error in the TFRP appeal process could not be considered harmless, as it potentially affected the outcome of the appeal and the subsequent CDP hearing.

    Disposition

    The U. S. Tax Court denied the Commissioner’s motion for summary judgment, holding that the absence of a meaningful opportunity to dispute the TFRP liability in the initial Appeals conference did not preclude a subsequent challenge at the CDP hearing.

    Significance/Impact

    This decision clarifies the requirement for a meaningful opportunity to dispute tax liabilities before such challenges can be barred in subsequent proceedings. It reinforces the importance of due process in tax collection actions, ensuring that taxpayers are not denied the right to challenge their liabilities based on procedural deficiencies in the IRS’s appeals process. The case may influence future IRS procedures and taxpayer rights in TFRP assessments and CDP hearings, emphasizing the necessity of effective communication and the provision of actual opportunities for taxpayers to engage in the appeals process.

  • Vivian Ruesch v. Commissioner of Internal Revenue, 154 T.C. No. 13 (2020): Jurisdiction and Mootness in Passport Revocation Cases Under I.R.C. § 7345

    Vivian Ruesch v. Commissioner of Internal Revenue, 154 T. C. No. 13 (2020)

    In Ruesch v. Commissioner, the U. S. Tax Court ruled it had no jurisdiction to challenge underlying tax penalties in a passport revocation case, but could review the certification of a seriously delinquent tax debt. The court dismissed the case as moot after the IRS reversed its erroneous certification, thus nullifying the controversy over the certification itself. This decision clarifies the scope of judicial review under I. R. C. § 7345, emphasizing the limited relief available to taxpayers in passport-related disputes.

    Parties

    Vivian Ruesch, the Petitioner, challenged the Commissioner of Internal Revenue, the Respondent, in the U. S. Tax Court. Ruesch sought to contest both the certification of her tax debt as seriously delinquent and her underlying liability for penalties assessed under I. R. C. § 6038. The Commissioner moved to dismiss for lack of jurisdiction regarding the underlying liability and on grounds of mootness following the reversal of the certification.

    Facts

    Vivian Ruesch was assessed $160,000 in penalties under I. R. C. § 6038 for failing to file information returns related to foreign corporations for tax years 2005-2010. After failing to pay these penalties, the IRS certified Ruesch’s liability as a “seriously delinquent tax debt” under I. R. C. § 7345(b). Ruesch filed a timely request for a collection due process (CDP) hearing, which suspended collection of her tax debt, rendering it no longer “seriously delinquent. ” The IRS subsequently reversed its certification as erroneous and notified the Secretary of State. Ruesch challenged both the certification and her underlying liability in the Tax Court.

    Procedural History

    Ruesch filed a petition with the U. S. Tax Court on April 8, 2019, challenging the IRS’s certification of her debt as seriously delinquent and her underlying liability for the penalties. The IRS moved to dismiss the case for lack of jurisdiction regarding the underlying liability challenge, as well as on grounds of mootness after reversing the certification. The Tax Court reviewed these motions and held a hearing on January 13, 2020. The court determined it lacked jurisdiction to review Ruesch’s underlying liability challenge and found the case moot regarding the certification issue after the IRS’s reversal.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under I. R. C. § 7345 to consider a taxpayer’s challenge to the underlying liability for penalties in a passport revocation case?

    Whether the case becomes moot when the IRS reverses its certification of a seriously delinquent tax debt and notifies the Secretary of State?

    Rule(s) of Law

    The jurisdiction of the U. S. Tax Court in passport revocation cases is narrowly defined by I. R. C. § 7345(e), which permits the court to determine whether the Commissioner’s certification of a seriously delinquent tax debt was erroneous or whether the Commissioner failed to reverse the certification. The court may order the Secretary of the Treasury to notify the Secretary of State if a certification is found erroneous, but no other relief is authorized under the statute. A “seriously delinquent tax debt” under I. R. C. § 7345(b) excludes a debt with respect to which collection is suspended because a CDP hearing is requested or pending.

    Holding

    The U. S. Tax Court held that it lacked jurisdiction to consider Ruesch’s challenge to her underlying liability for the penalties under I. R. C. § 6038 in this passport revocation case. The court also held that it had jurisdiction to review the Commissioner’s certification of the seriously delinquent tax debt, but found the case moot after the IRS reversed its certification as erroneous and notified the Secretary of State, thereby providing Ruesch with all the relief she sought.

    Reasoning

    The court’s reasoning focused on the statutory limits of its jurisdiction under I. R. C. § 7345(e), which does not authorize the court to redetermine a taxpayer’s underlying liability for assessed penalties. The court emphasized the legislative history of § 7345, which intended to provide “limited judicial review” of certifications or failures to reverse certifications. The court determined that Ruesch’s challenge to the underlying liability did not fit within the scope of review authorized by § 7345(e). Regarding mootness, the court applied the principle that a case becomes moot when a party has obtained all the relief sought and no effective remedy remains available. The court found that the IRS’s reversal of the certification and notification to the Secretary of State eradicated the effect of the alleged violation, satisfying the conditions for mootness. The court rejected Ruesch’s arguments for continued jurisdiction based on the potential for future certification or financial hardship, as these were outside the scope of the current controversy and the court’s jurisdiction.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction regarding Ruesch’s underlying liability challenge and granted the motion to dismiss on grounds of mootness for the certification issue, as Ruesch had received all the relief she sought under I. R. C. § 7345(e).

    Significance/Impact

    The decision in Ruesch v. Commissioner clarifies the limited scope of judicial review under I. R. C. § 7345 in passport revocation cases, emphasizing that the Tax Court’s jurisdiction is confined to reviewing the certification of a seriously delinquent tax debt, not the underlying tax liability. This ruling reinforces the statutory framework designed to limit judicial intervention in passport-related disputes to specific instances of certification errors. The case underscores the importance of the CDP process as the appropriate venue for challenging underlying tax liabilities, providing taxpayers with a clear pathway for contesting such assessments. The decision may influence future cases by highlighting the procedural and jurisdictional boundaries of the Tax Court in handling disputes related to passport revocation due to tax debts.

  • Jason B. Sage v. Commissioner of Internal Revenue, 154 T.C. No. 12 (2020): Application of Grantor Trust Rules to Liquidating Trusts

    Jason B. Sage v. Commissioner of Internal Revenue, 154 T. C. No. 12 (2020)

    In Jason B. Sage v. Commissioner of Internal Revenue, the U. S. Tax Court ruled that Sage’s real estate company could not claim losses from transferring properties to liquidating trusts in 2009. The court held that the company remained the owner of the trusts under the grantor trust rules, as the trusts’ proceeds were used to discharge the company’s liabilities in subsequent years. This decision impacts how liquidating trusts are treated for tax purposes, clarifying that such trusts are not automatically separate taxable entities.

    Parties

    Jason B. Sage, the Petitioner, was the taxpayer and real estate developer. The Respondent was the Commissioner of Internal Revenue. At the trial level, Sage was represented by attorneys Craig R. Berne, Milton R. Christensen, and Dan Eller. The Commissioner was represented by Nhi T. Luu, Kelley A. Blaine, and Janice B. Geier.

    Facts

    Jason B. Sage, an Oregon real estate developer, owned three parcels of land through his wholly owned subchapter S corporation, Integrity Development Group, Inc. (IDG), and its single-member limited liability company, Gales Creek Terrace LLC. Facing financial difficulties due to the 2008 economic recession, Sage transferred these parcels in December 2009 to three liquidating trusts established for the benefit of the mortgage holders, Sterling Savings Bank and Community Financial Corp. The trusts were set up to liquidate the properties and distribute the proceeds to the mortgage holders. Between 2010 and 2012, the trusts disposed of the properties, and the proceeds were applied to discharge IDG’s and Gales Creek Terrace LLC’s liabilities. Sage claimed significant losses from these transactions on his 2009 tax return, leading to a net operating loss (NOL) that he carried back to 2006 and forward to 2012. The IRS disallowed these losses, resulting in deficiencies for 2006 and 2012.

    Procedural History

    The IRS issued statutory notices of deficiency to Sage for the tax years 2006 and 2012, disallowing the losses reported by IDG and claimed by Sage for 2009. The IRS’s initial basis for disallowance was that the losses were attributable to nonbusiness expenses. However, at trial, the IRS presented a new theory that the 2009 transactions were not closed and completed, thus not producing realizable losses for that year. Sage timely filed a petition in the U. S. Tax Court seeking redetermination of the deficiencies and an accuracy-related penalty for 2012.

    Issue(s)

    Whether the transfers of the real estate parcels to the liquidating trusts in 2009 constituted closed and completed transactions that produced bona fide losses for that year under I. R. C. sections 165 and 671-679 and the accompanying regulations?

    Rule(s) of Law

    Under I. R. C. section 165(a), a deduction is allowed for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 1. 165-1(b) of the Income Tax Regulations specifies that such a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year. The grantor trust rules (I. R. C. sections 671-679) treat the grantor as the owner of any portion of a trust if certain conditions are met, including if trust income is used to discharge a legal obligation of the grantor (section 1. 677(a)-1(d), Income Tax Regs. ).

    Holding

    The court held that IDG and Gales Creek Terrace LLC were the owners of the respective liquidating trusts beyond the close of the 2009 taxable year under the grantor trust rules, as the trusts’ proceeds were used to discharge the companies’ liabilities between 2010 and 2012. Consequently, the transfers to the trusts did not produce bona fide losses in 2009, and the deductions claimed were properly disallowed.

    Reasoning

    The court’s reasoning was based on the application of the grantor trust provisions, specifically section 677(a)(1) and its regulations. The court found that IDG and Gales Creek Terrace LLC remained liable for the loans secured by the properties even after transferring them to the trusts. When the trusts disposed of the properties in subsequent years, the proceeds were used to discharge these liabilities, triggering the grantor trust rules. The court rejected Sage’s arguments that the nature of liquidating trusts or the beneficiaries’ status as grantors under the regulations should alter this outcome. The court emphasized that the grantor trust rules apply regardless of the existence of a bona fide nontax reason for creating the trust, and that the trusts were not separate taxable entities from IDG and Gales Creek Terrace LLC during the relevant years. The court also noted that the IRS’s new theory at trial shifted the burden of proof to the Commissioner, but found the evidence supported the application of the grantor trust rules.

    Disposition

    The court sustained the IRS’s deficiency determinations for Sage’s 2006 and 2012 taxable years, as modified by the Commissioner’s concession. The court also upheld the accuracy-related penalty for 2012, which Sage had conceded would apply if the court resolved the loss issue in the Commissioner’s favor.

    Significance/Impact

    The Sage decision clarifies the application of the grantor trust rules to liquidating trusts, particularly when the trust’s proceeds are used to discharge the grantor’s liabilities. This ruling has significant implications for taxpayers using liquidating trusts as part of their financial strategies, as it underscores that such trusts may not automatically be treated as separate taxable entities. The case also highlights the importance of the timing and completeness of transactions in claiming tax deductions, and the potential for the IRS to introduce new theories at trial, shifting the burden of proof. The decision may influence future tax planning involving liquidating trusts and reinforce the IRS’s ability to challenge such arrangements under existing tax laws and regulations.