Luxury Tax law

The Finance Court docket in Transient – August 2021 # 3 | Freeman law

August 28, 2021
Jason Wilson

Freeman Law's "The Tax Court in Brief" covers every substantive opinion of the tax court and provides a weekly summary of its decisions in clear, concise prose.

You can find a link to our podcast on the Finanzgericht in brief here or watch other episodes of. at The Freeman Law Project.

The week of August 9th – August 13th, 2021

Manuelito B. Rodriguez & Paz Rodriguez v. Comm’r, No. 19122-19 | August 9, 2021 | Kerrigan, J. | Dkt. No. 19122-19

Short Summary: The case, which was based on oral findings and expert opinions, concerned whether taxpayers were entitled to deduct business expenses, COGS, a loss of capital and a penalty under Section 6662.

Manuelito B. Rodriguez and Paz Rodriguez (the taxpayers) filed a Schedule C for an automotive repair company for the 2014-2016 period. For 2014-2015, they filed a List C for owning a Seven-Eleven business that was sold in 2015 and on which they claimed a loss of $ 98,217. The IRS has not recognized rental expenses and COGS for the automotive repair business.

The tax court found that taxpayers failed to meet their onus to prove the inaccuracy of the IRS's findings and maintain the deficiencies.

It should be noted that this case has no precedent.

Key problems: Whether the taxpayers have complied with their burden of proof in relation to the various disputed objects.

Primary holdings: Taxpayers have failed to provide evidence of the IRS's failure to recognize various items, including expenses, NOLs, and capital losses.

Corner points of the right:

The IRS's determinations are assumed to be correct and the burden of proof is on the taxpayer to prove that these determinations are incorrect. Rule 142 (a); See Welch v. Helvering, 290 U.S. 111, 115. COGS is not a deduction but rather an offset that is subtracted from gross income to determine gross income. See Metra Chem Corp. v Commissioner, 88 T.C. 654, 661 (1987). COGS must be proven by the taxpayer. Ordinary and necessary expenses are deductible when incurred in any trade or business under Section 162 (a), and deductions are a matter of legal grace and must be proven by the taxpayer. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79: 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). However, in certain cases, the court may estimate the amount of deductible expenses when the taxpayer has determined that the expenses are deductible but cannot substantiate the exact amount, known as the "Cohan Rule". See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2nd Cir. 1930); Vanicek v Commissioner, 85 T.C. 731: 742-743 (1985).

In this case, the taxpayers have not provided any evidence of their deductions, their undisclosed income and loss of assets and have therefore not met their burden of proof. Finally, as for the penalties imposed under Section 6662 (a), that penalty was imposed because the taxpayers failed to show up.

insight: While this case has no precedent, it serves as a clear example of the need for taxpayers to justify all expenses they claim on a tax return. Failure to do this will clearly lead to a fatal result before the tax court.

Christian D. Silver v. Comm’r, T.C. Note 2021-98 | August 9, 2021 | Copeland, J. | Dkt. No. 8805-18.

Short Summary: The case involved analyzing a tax demonstrator's arguments to uphold non-reporting of income. More interestingly, this case is discussing whether a Section 6673 penalty should be imposed in the circumstances of the case.

In 2012, Mr. Silver (the taxpayer) worked for 11 different companies for which he was paid wages and one additional company for which he was paid as an independent contractor (1099-Misc). When filing his tax return, he enclosed 11 forms (one for each job he had), Forms 4852, Replacement for Form W-2, Payroll and Tax Returns, or Form 1099-R, Distribution of Annuities, Annuities, Retirement or profit plans, IRA insurance contracts, etc. The Independent Contractor submitted a "corrected" Form 1099-Misc. On 4852, the taxpayer claimed that he received $ 0.00 in income. On the “corrected” 1099 misc, the taxpayer stated that such a document was intended to “refute” the 1099 misc submitted by the payer. In other words, the taxpayer argued that the remuneration he received for his work / service was not taxable.

The court found that the taxpayer's arguments were those of a tax demonstrator, and clearly dismissed them, classifying them as "baseless and frivolous". However, the court analyzed whether a penalty was imposed under Section 6673 – Penalties for Frivolous or Unreasonable Positions – and ruled that such a penalty was not applicable in this case.

Key problems: Whether wages or remuneration for self-employed services are taxable. Whether a taxpayer should be punished with a penalty under Section 6673 if they have not been informed of the applicability of the penalty prior to the procedure.

Primary holdings: Wages represent income. A Section 6673 penalty requires the taxpayer to be aware of the applicability of the penalty in advance of the trial so that the court can impose it.

Corner points of the right:

The basic rule of income tax is that gross income includes all income from any source. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 pp. Ct. 473, 99 L. Ed. 483, 1955-1 C. B. 207 (1955) (cited Helvering v. Clifford, 309 U.S. 331, 334, 60 S. Ct. 554, 84 L. Ed. 788, 1940-1 C. B. 105 (1940)). A payment that represents an undeniable increase in wealth is taxable income. Wages are seen as an increase in wealth and are therefore subject to tax income.

In the present case, the taxpayer does not deny receiving income, but rather argues that he is not a taxpayer or that he has not received any taxable compensation, but has exchanged his services for remuneration paid to him. The tax court found that such arguments were unfounded and dubious. See Wnuck versus Commissioner, 136 T.C. 498 (2011). The court did not even disprove the taxpayer's arguments because they had no coloring authority.

Section 6673 provides for a fine of no more than $ 25,000 if the taxpayer's position is found to be reckless or unfounded. Such a sanction is entirely at the discretion of the court. In that case, the court stated that although the taxpayer had two other pending claims with the court, he was not warned that he could face the penalty. Also relevant is the fact that the criminal complaint was not filed before the trial. In these circumstances, the court decided not to impose the fine, but warned the taxpayer that advancing similar positions would result in the imposition of a fine in future cases.

insight: A Section 6673 penalty for frivolous or gratuitous positions is an additional weapon the IRS may require against the taxpayer. This case shows that the tax court will not simply impose such sanctions, but that the threshold for imposing them is quite high.

Wathen v. Comm & # 39; r, No. 4310-18, T.C. Note 2021-100 | August 11, 2021 | Pugh | Dkt. No. 4310-18

Short Summary: In this case, there was a combination of undisclosed income and unfounded deductions. The petitioner, a bankruptcy attorney, has not adequately reported certain gross earnings for 2010 and 2011. After all, he was unable to substantiate most of his claimed expenses – including some that countered the I.R.C. §274 (d) and even some that were only subject to the general justification requirement. Finally, the petitioner argued, in a slightly different factual pattern, that a Chapter 13 bankruptcy case filed in 2012 and for which the petitioner received discharge in 2017 served legal basis, preventing the IRS from assessing the amounts in dispute. The court finally found that there was no legal force, as the disputes before the tax court in this case were not before the bankruptcy court.

Key question: The court has identified seven (7) discrete points for the decision in this case:

  • Whether the petitioner's previous bankruptcy process prevents the defendant from pursuing the above deficiencies, tax increases and penalties;
  • Whether the petitioner failed to report gross receipts of $ 59,726 and $ 15,833 for 2010 and 2011, respectively, in Appendix C, Profit or Loss on Business;
  • Whether the petitioner failed to include a 2010 partnership income of US $ 1,951 in Appendix E, Supplemental Income and Loss;
  • Whether the petitioner is entitled to deduct travel expenses of US $ 8,732 and US $ 21,980 for 2010 and 2011, respectively, as set out in Appendix C;
  • Whether the petitioner is entitled to deduct office expenses of US $ 46,717 and US $ 53,420 for 2010 and 2011, respectively, as set out in Annexes C;
  • Whether the petitioner is liable for tax increases under Section 6651 (a) (1) for failing to submit tax returns in due time for both of the disputed years; and
  • Whether the petitioner is liable for section 6662 (a) and (b) (2) penalties for significant income tax undervaluation in both years of the dispute.

Primary holdings:

  • The petitioner's previous bankruptcy case did not preclude the IRS 's assessment of deficiency based on res judicata, collateral remedy or judicial remedy. Citing the opinion of the tax court in Breland v. Comm’r, 152 T.C. 156 (2019), the Court ruled that the res judicata was inapplicable because the reassessment of the entire federal tax liability of a taxpayer for the years covered by the notification of defects and the settlement of the objection of the IRS in an insolvency plan confirmation procedure did not provide the same reason for action.
  • The court also found that a collateral remedy was inapplicable because there was no evidence that the petitioner's entire federal tax liability was ever actually litigated or even challenged in bankruptcy court.
  • In relation to unreported income, the court found the IRS to use the bank deposit method to be appropriate. This approach assumes that all funds deposited into a taxpayer's bank account during a given period of time constitute taxable income. Since the applicant did not keep books and records in this case, the defendant's reconstruction of the applicant's income using the bank deposit method was appropriate. This analysis supported the Respondent's finding that the petitioner received undisclosed income. In addition, the petitioner has failed to fulfill his onus to prove that the Annex C adjustments to his gross receipts were incorrect. Not only did he seem to admit they were correct, but he also didn't provide any evidence to disprove them.
  • Similarly, in relation to unreported Schedule E partnership income, the taxpayer did not dispute the allegation made by the IRS in the process.
  • As for expenses, the taxpayer was unable to cover the required burden. In relation to certain business expenses – including travel, accommodation and subsistence expenses – the I.R.C. an increased burden of proof. Section 274 (d). The taxpayer could not meet this requirement because he did not keep books and records.
  • As for the general burden of proof, courts can apply the Cohan Rule, which allows a court to estimate the amount of an expense if the taxpayer is unable to prove that he has paid or has accrued a deductible expense, but cannot substantiate the exact amount as long as he presents credible evidence to provide a basis for the court. Since the taxpayer did not keep books or records and therefore could not provide evidence of the services for which his bank payments were being made, the court found that he could not even meet the general burden of proof and therefore rejected the application of the Cohan rule to most of his general expenses. The court made an exception for a small number of issues – including bankruptcy filing fees, PACER fees, and LexisNexis expenses, which were fairly clear from the documentation.
  • The court was able to determine without difficulty that the failure to timely lodge a sanction under Section 6651 (a) (1) was properly applied. The IRS had its onus to prove that the taxpayer failed to file their tax returns in a timely manner, and the taxpayer has failed to provide evidence that their failure to file on time was due to a reasonable cause and not willful negligence.
  • Similarly, the court found that accuracy-related penalties under Section 6662 (a) were adequately assessed because the IRS had fulfilled its obligation to demonstrate that the underpayment occurred and that it met the requirement for management approve the penalty permit. In addition, the taxpayer has again failed to demonstrate that he acted in good faith and with valid reason in relation to part of the underpayment.

Corner points of the right:

  • Legal force is not tied to a bankruptcy certification plan as confirming a bankruptcy plan and resolving an IRS tax deficiency are not the same cause of action. Breland v Commissioner, 152 T.C. 156, 161-62 (2019).
  • The limitation period for collateral does not apply if the federal tax liability of a taxpayer has never actually been litigated in a bankruptcy court or has even been disputed. Breland v. Commissioner, 152 T.C. 156, 171-72 (2019).
  • The taxpayer bears the burden of proving that the IRS's findings in a notice of defects are incorrect. Tax Court Rule 142 (a); What v. Helvering, 290 U.S. 111, 115 (1933).
  • If a taxpayer presents credible evidence relating to a factual issue that is relevant to determining a taxpayer's tax liability, the burden of proof is on the IRS in relation to that factual issue. 26 USC § 7491 (a) (1)
  • In cases of unreported income, the IRS must provide some evidence of predicate to support the determination that the taxpayer received unreported income in order to attach the presumption of correctness to the notice of deficiency. Portillo v Commissioner, 932 F.2d 1128, 1133-34 (5th 1991).
  • Gross income includes "all income from whatever source". 26 USC § 61 (a).
  • A taxpayer is responsible for keeping sufficient books and records sufficient to determine their income. 26 USC § 6001; DiLeo v Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959 F.2d 16 (2nd Cir. 1992).
  • For taxpayers who fail to keep adequate books and records, Section 446 (b) transfers to the Secretary and His Assistant; H. the Commissioner, extensive powers to calculate taxable income. Registration number. 1.446-1 (b) (1).
  • One method of calculating taxable income is the bank deposit method. All funds deposited into a taxpayer's bank account during a given period of time are considered to constitute taxable income. Price against USA, 335 F.2d 671, 677 (5th 1964).
  • The taxpayer bears the burden of proof for the deductions claimed. Rule 142 (a); INDOPCO, Inc. v Commissioner, 503 U.S. 79, 84 (1992). Therefore, they must provide evidence of the underlying expenses of any deduction claimed by keeping sufficient records to determine the amount of the deduction and to enable the agent to determine the correct tax liability. 26 USC § 6001
  • Under the Cohan rule, the court can estimate the amount of the expense if the taxpayer can show that he has paid or incurred a deductible expense but cannot prove the exact amount, provided that he can provide credible evidence on which to base the court make up to do this. Cohan v Commissioner, 39 F.2d 540, 543-44 (2nd Cir. 1930).
  • Certain business expenses (including travel, lodging, and subsistence expenses) are subject to the increased reporting requirements of Section 274 (d). Section 274 (d) supersedes the Cohan Rule with respect to such expenditure.
  • To meet the requirements of Section 274 (d), a taxpayer must provide adequate records or evidence to support the taxpayer's own declaration: (1) the amount of the costs, (2) the time and place the travel or use and (3) the business purpose of the issue.
  • In order to substantiate this with adequate records, the taxpayer must provide: (1) an account book, log or similar record; and (2) documentary evidence that, taken together, is sufficient to support every element relating to an expense. Sec. 1.274-5T (c) (2) (i), Temporary Income Tax Registers, 50 Fed. Registration number. 46017 (November 6, 1985).
  • The IRS has the burden of proof regarding an individual's liability for tax increases. Sec. 7491 (c). The taxpayer bears the burden of proving that the late filing was due to a reasonable cause and not to willful negligence. See sec. 6651 (a) (1).
  • The Commissioner bears the burden of proving a person's liability for a sentence. Sec. 7491 (c). This includes demonstrating compliance with Section 6751 (b) (1), which requires certain penalties to be personally approved in writing by the immediate manager of the person making the decision. The taxpayer bears the burden of proof that the agent's statement is false or that he or she has an affirmative defense, such as See rule 142 (a).

insight: This case is another example of the benefits of good bookkeeping. It is likely that much of this taxpayer's expense was legitimate, but it is up to the taxpayer to demonstrate the legality of that expense.

Kidz University, Inc. v Comm’r, T.C. Memo. 2021-101 | August 12, 2021 | Urda, J. | Dkt. No. 23866-18L

Short Summary: The petitioner Kidz University, an Arkansas childcare company, belatedly filed certain Forms 941 for the 2012 and 2013 tax years between June 2014 and October 2015); 6651 (a) (2); and 6656 (a). The IRS issued a letter of intent for delivery to Kidz University and the petitioner filed a due debit hearing request.

The Kidz University representative and the IRS Appeals Officer communicated by phone and fax for several months. IRS appeals requested verification of current tax return and payment compliance more than once. In addition, the IRS Complaints required Forms 433-A and 433-B to be completed. After the agent remained silent in August, September, and October 2018 and failed to respond to attempted communications from IRS Appeals, IRS Appeals issued a ruling stating that Kidz University did not qualify for a debt collection alternative. Kidz University filed its motion in the tax court, and the defendant filed a motion for a preliminary judgment.

Key problems:

  • (1) Whether the rejection of the petitioner's request for a debt collection alternative by IRS Appeals was an abuse of power.

Primary holdings:

  • (1) Based on the administrative files, the rejection of the petitioner's application for a collection alternative by IRS Appeals was not an abuse of power.

Corner points of the right:

  • If the validity of the underlying tax liability is not in dispute, the tax court will review the commissioner's administrative assessment for abuse of power. See Goza v. Comm’r, 114 T.C. 176: 182 (2000).
  • When reviewing for abuse of power, the court must uphold the administrative decision unless it is arbitrary, arbitrary or without a solid factual or legal basis. See e.g. B. Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
  • The tax court reviews the records to determine that the settlement agent: (1) has properly verified that the requirements of applicable law or administrative procedure have been met; (2) take into account any relevant issues raised by the taxpayer; and (3) assessed that "any proposed collection measure reconciles the need for efficient collection of taxes with the individual's legitimate concern that collection be no more intrusive than necessary". See I.R.C. Section 6330 (c) (3); Ludlam v. Comm’r, T.C. Memo. 2019-21, at * 9- * 10.
  • A taxpayer must “meet current filing and estimated tax payment requirements to be eligible for collection alternatives”. Coastal Luxury Mgmt. Inc. v Comm’r, T.C. Memo. 2019-43, at * 9.

insight: As noted in other recent Tax Court rulings, tax returns and compliance with payments should be viewed by taxpayers as the minimum threshold for pursuing collection alternatives. In addition, a taxpayer should be selective in choosing a representative before the Internal Revenue Service. A lack of communication is hardly a recipe for success when dealing with the IRS.

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