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Archive for Jason Freeman

Freeman Law: The Tax Court in Brief

Freeman Law: The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

The Week of September 12 – September 18, 2020

Deckard v. Comm’r, 155 T.C. No. 8  | September 17, 2020 | Thornton, J. | Dkt. No. 11859-17

Short Summary:  Waterfront Fashion Week, Inc. (Waterfront) was organized under Kentucky law as a nonstock, nonprofit corporation in 2012.  Mr. Deckard was Waterfront’s president and one of its three directors.  Waterfront never applied for recognition of tax-exempt status with the IRS.

On October 28, 2014, Waterfront mailed to the IRS Form 2553, Election by a Small Business Corporation.  In the Form 2553, Waterfront sought to elect to be an S corporation retroactively as of the date of its incorporation in 2012.  Mr. Deckard signed the Form 2553 in his capacity as Waterfront’s president.  In addition, Mr. Deckard signed the Form 2553 shareholder’s consent statement, indicating that he owned 100% of Waterfront.

In 2015, Waterfront filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for its taxable years 2012 and 2013, reporting operating losses.  Mr. Deckard reported these flow-through losses on his 2012 and 2013 returns.

The IRS disallowed the losses on the ground that Waterfront filed to make a valid S corporation election and alternatively that Mr. Deckard was not a shareholder of Waterfront.  Mr. Deckard filed a timely petition with the United States Tax Court.

Key Issue:  Whether Mr. Deckard can claim the losses from Waterfront on his 2012 and 2013 tax returns?

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Recent IRS Cryptocurrency Memorandum: Surprise, Surprise, It’s Still Taxable

Recent IRS Cryptocurrency Memorandum: Surprise, Surprise, It’s Still Taxable

As tax time approaches for many, taxpayers and tax professionals alike are engaging in the annual ritual of gathering their cryptocurrency transactions and seeking out the latest and greatest guidance from the IRS on the subject.  As luck would have it, the IRS recently released an internal memorandum fleshing out its stance on the taxation of virtual currency received in exchange for providing services.  The memorandum describes the taxation of virtual currency received in the “crowdsourcing labor market”—for example, for performing microtasks or other projects—but its principles are applicable much more broadly.

The IRS memorandum was quietly made public on August 28.  It is a reminder that the IRS continues to receive requests for additional cryptocurrency tax guidance.  In the memorandum, the IRS lays out its view that convertible virtual currency is “property” for federal tax purposes, and that its receipt in exchange for performing services gives rise to gross income.  But let’s look a little deeper at the IRS’s reasoning.  For starters, the IRS memorandum poses the following question:

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Freeman Law’s: The Tax Court In Brief

Tax Court In Brief

The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

The Week of September 5 – September 11, 2020

Sutherland v. Comm’r, 155 T.C. No. 6 | September 8, 2020 | Lauber, J. | Dkt. No. 3634-18

Short Summary:  In 2010, Ms. Sutherland’s husband was indicted for tax crimes.  He pled guilty, and as part of his plea agreement he was required to submit delinquent tax returns for 2005 and 2006 (among other years).  Ms. Sutherland signed the returns for 2005 and 2006.

Later, Ms. Sutherland filed an IRS Form 8857, Request for Innocent Spouse Relief, for 2005 and 2006.  The IRS reached a preliminary determination to deny her request for innocent spouse relief, and she appealed.  During the IRS Appeals process, Ms. Sutherland’s attorney determined that the Appeals Officer (AO) was not properly applying the innocent spouse factors.  Because no progress was being made, her attorney chose not to submit additional evidence on the belief that Ms. Sutherland would receive de novo review in the Tax Court.

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Everything That You Need to Know About Federal Tax Liens

Everything That You Need to Know About Federal Tax Liens

How The IRS Decides When Tax Liens Arise

The Internal Revenue Code (IRC) governs when and how a federal tax lien arises.  The federal tax lien—sometimes referred to as a “statutory lien” or “silent lien”—is often confused with the notice of the lien’s existence, which is generally filed by the IRS at a later date (i.e. a Notice of Federal Tax Lien or NFTL).

A Notice of Federal Tax Lien is a document that is publicly filed with state and local jurisdictions in order to put other creditors on notice of the IRS’s lien interest.  As a result, the NFTL itself does not actually create the lien—it merely informs others of a lien that already exists by statute.  However, the date of the NFTL filing is important for determining the IRS’s priority against other creditors.

Tax liens are one of the primary tools that the IRS uses to collect outstanding taxes.  The IRS also uses the levy process or seizures to collect taxes where available.  See our separate post on IRS Seizures: The Good, the Bad, and The Ugly for more on topics related to levies and seizures.

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A Pair Of Tax Whistleblower Cases From The Past Week

A Pair of Tax Whistleblower Cases From The Past Week

The Internal Revenue Service’s Whistleblower Office oversees the IRS’s Whistleblower Program. It is responsible for processing thousands of tax whistleblower claims every year.   The IRS Whistleblower Program is designed to offer financial incentives and rewards to individuals—“whistleblowers”—who help the government collect taxes by providing information that assists in detecting violations of the internal revenue laws.  The IRS Whistleblower Program provides a reward to qualifying whistleblowers of between 15 to 30% of the amount recovered as a result of the whistleblower’s report.  This past year, the Whistleblower Office made awards to whistleblowers totaling more than $120,000,000.

For additional information on The IRS Whistleblower Program, click here.

For more on the past week’s tax whistleblower cases, see below for a summary of the opinions:

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The Collective Knowledge Doctrine Generally

The Collective Knowledge Doctrine Generally

In white-collar criminal cases, the government often uses the collective knowledge doctrine to impose criminal liability against a corporation based upon the so-called collective knowledge of its agents.  The collective knowledge doctrine provides that the individual knowledge of a corporation’s agents can be aggregated—to provide the “collective” knowledge of those agents—for purposes of criminal liability.  The doctrine’s origins stem from an attempt to prevent a corporation from avoiding criminal liability by merely compartmentalizing the duties of its agents.

A corporation, of course, is incapable of actually forming the mens rea necessary to commit a criminal act.  Its knowledge and intent—in other words, its mens rea—must be imputed from that of its agents.  But as noted below, the law has drawn a distinction between utilizing the collective knowledge doctrine as a foundation for inferring “knowledge” and “intent,” respectively.

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A Short Primer On Tax Treaties

A Short Primer On Tax Treaties

In addition to the U.S. and foreign statutory rules for the taxation of foreign income of U.S. persons and U.S. income of foreign persons, bilateral income tax treaties limit the amount of income tax that may be imposed by one treaty partner on residents of the other treaty partner. Treaties also contain provisions governing the creditability of taxes imposed by the treaty country in which income was earned in computing the amount of tax owed to the other country by its residents with respect to such income. Treaties further provide procedures under which inconsistent positions taken by the treaty countries with respect to a single item of income or deduction may be mutually resolved by the two countries.

The preferred tax treaty policies of the United States have been expressed from time to time in model treaties and agreements. The Organization for Economic Cooperation and Development (the “OECD”) also has published model tax treaties. In addition, the United Nations has published a model treaty for use between developed and developing countries. The Treasury Department, which together with the State Department is responsible for negotiating tax treaties. The OECD has published a model income tax treaty (“the OECD model”). The United Nations has also published a model income tax treaty (“the U.N. model”).

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FCPA Compliance And Red Flags

FCPA Compliance And Red Flags
FCPA Compliance

In order to avoid the consequences of an FCPA violation, it is imperative for companies to enact and maintain detailed compliance policies aimed at the detection and prevention of unethical business practices. Given that there are a wide variety of corruption risks, it is important that a business educate its employees and management about the specific corruption risks relevant to their industry and the countries in which they conduct business. Employees, particularly management-level, should generally be required to undergo updated FCPA compliance training annually. Thorough training on these topics ensures that employees will be able to recognize red flags and understand their reporting responsibilities.

Additionally, a business should conduct an in-depth FCPA risk assessment on an annual basis to ensure strong compliance standards and improve areas of weakness. An effective assessment will include confirmation that internal whistleblowing systems are accessible, as well as ensuring that third-parties are also keeping up with enforcement. In order to maintain an effective compliance program, it is recommended that companies appoint an internal FCPA compliance officer in order to manage the program and ensure its functionality.

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IRS Assures Congress: Aggressive Enforcement Efforts Are Ahead

IRS Assures Congress: Aggressive Enforcement Efforts Are Ahead

The Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee.  His message was a clear one: He is an enforcement-minded commissioner and “the IRS is committed to pursuing those who . . . intentionally evade their tax obligations.”  Mr. Rettig did not mince words. His IRS will “aggressively pursue non-compliant taxpayers . . . [with] visible civil and criminal enforcement efforts.”  But the message, though a stern one, is also one of fairness: Honest taxpayers need to believe—to feel confident—that others are paying their fair share, whether voluntarily or through enforcement efforts.

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Potential Consequences And Penalties Failing To Maintain Adequate Business Records

Penalties From Failure To Maintain Adequate Business Records

A recent United States Tax Court decision, issued on December 12, 2019, demonstrates the potential consequences and penalties that can arise from failing to maintain adequate business records to substantiate claimed income and deductions.

The case of McRae v. Commissioner, T.C. Memo 2019-163, was decided against the taxpayers, Randy and Shelby McRae, leaving them with a tax bill of $84,544 for unreported income and additional accuracy-related penalties for the tax years of 2013–2015.

The McRaes’ tax returns for 2013–2015 were selected by the IRS for audit. Because of inadequate records for their Schedule C (sole proprietorship) business activities, the IRS performed a bank deposit analysis, and determined that income was substantially underreported.

The IRS issued a Notice of Deficiency to the taxpayers and disallowed various deductions claimed on the McRae’s Schedule C’s, as well as itemized deductions for mortgage interest expenses and all NOL deductions. Accuracy-related penalties were also proposed for the tax years of 2013–2015. The McRaes filed a Tax Court Petition against the IRS, challenging its decision.
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Tax Court Clarifies Burden Of Production In Section 6751(b) Cases

Burden of Production in Section 6751(b)

A. An Overview

On January 7, 2020, the United States Tax Court issued its division opinion in Frost v. Commissioner, 152 T.C. No. 2. For tax professionals who practice in the Tax Court, the decision in Frost is worth a quick read as it discusses the proper allocation (and shifting) of the burden of production in Section 6751(b) penalty cases, the latter of which is currently a hot issue.

B. Background

Mr. Frost was a former IRS collections officer. After his employment with the IRS, he set off on his own to become a self-employed salesman and consultant. He also prepared federal income tax returns. On his 2010 through 2012 returns, he reported his business income and expenses on Schedule C. He also reported a partnership loss on Schedule E of his 2011 return.

The IRS selected Mr. Frost’s returns for examination, resulting in the IRS Office of Appeals issuing a notice of deficiency (“NOD”) for the years at issue. The NOD disallowed many of Mr. Frost’s Schedule C deductions and his loss on Schedule E. In addition, the NOD determined that Mr. Frost was liable for accuracy-related penalties under Section 6662 for negligence and/or substantial understatements of income tax.

Mr. Frost timely filed a petition with the Tax Court. During those proceedings, the IRS produced a Civil Penalty Approval Form (“Approval Form”). The Approval Form was necessary to support the IRS’ burden of production on the penalties issue. See also Section 7491(c). However, the Approval Form indicated the accuracy-related penalty had been approved only for substantial understatement of income tax (and not negligence) for 2012. Thus, the Approval Form did not address the 2010 and 2011 penalties.

Because many of the deductions claimed by Mr. Frost required strict substantiation under Section 274(d), the Tax Court wasted little time in disallowing Mr. Frost’s Schedule C deductions. Moreover, because Mr. Frost was unable to substantiate his basis in the partnership, the Tax Court similarly disallowed his loss claimed on Schedule E.
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