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.

The Week of March 1 – March 5, 2021

Brian D. Beland and Denae A. Beland | March 1, 2021 | Greaves | Dkt. No. 30241-15

• Opinion

Short Summary:  The Tax Court granted the taxpayers’ motion for partial summary judgment, on a finding that the IRS failed to secure timely written supervisory approval under section 6751(b)(1) of a civil fraud penalty under section 6663(a).

The taxpayer’s joint return was examined by the IRS following which the revenue agent had sent them a summons requiring their attendance at an in-person closing conference. The revenue agent provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. However, the taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period. Thereafter, the revenue agent obtained written approval from her immediate supervisor for the civil fraud penalty and sent the taxpayers a notice of deficiency determining the same.

Key Issue:  Whether petitioners civil fraud penalty was timely approved by the revenue agent’s supervisor?

Primary Holdings: 

• The Court agreed that the revenue agent report coupled with the context surrounding its presentation to the taxpayers was the first formal communications of the “initial determination” by the revenue agent regarding the assertion of the civil fraud penalty, and this had required prior supervisory approval under 6751(b)(1).

Key Points of Law:

• Summary judgement is intended to expedite the litigation and avoid unnecessary and expensive trials.
• The use by the revenue agent of a summons letter requiring the taxpayers’ attendance, the closing conference carried a degree of formality not present in most IRS meetings.
• At the closing conference, the revenue agent provided the RAR to the taxpayers, which formally communicated the agent’s determination that the taxpayers should be subject to the fraud penalty.
• If a revenue agent determines that a taxpayer should be assessed a fraud penalty, she must get approval from a supervisor before communicating or assessing such fraud penalty against the taxpayer.

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McCrory v. Comm’r, 156 T.C. No. 6 | March 2, 2021 | Negra, J. | Dkt. No. 9659-18W

• Opinion

Short Summary: 

Petitioner submitted 21 separate Forms 211, Application for Award for Original Information (whistleblower claims), to the Internal Revenue Service (IRS) Whistleblower Office (WBO).

Petitioner alleged in these whistleblower claims that 21 individual taxpayers underreported their tax obligations with respect to litigation settlement awards they received. The information petitioner provided was based entirely on public records. These whistleblower claims are petitioner’s ninth series of whistleblower claims submitted to the WBO.

On April 10, 2018, the WBO mailed petitioner a Preliminary Award Recommendation under Section 7623(a) . Included with that letter were a Summary Report  and a Response to Summary Report form. The letter stated that the WBO “has reached a preliminary award recommendation under * * * [section] 7623(a) ” and enclosed “a Summary Report that explains our preliminary award recommendation in the amount of $962.92.”

The letter informed petitioner that the award “amount is a preliminary recommendation because the determination of tax is not final and is subject to change”, and “if there are any changes * * * the * * * [WBO] will send * * * [petitioner] a revised Preliminary Award Recommendation Letter.” The letter also stated that this “letter begins the whistleblower award administrative proceeding” and explained that petitioner had two options. If she agreed with the award, she was directed by the letter to “[c]heck the appropriate box, sign and date the Response to Summary Report form indicating * * * [her] agreement,” and “return the signed form” to the WBO. The letter advised her that, “[b]y checking the box that you agree with the preliminary award recommendation, you agree to waive any judicial appeal rights with respect to the award determination, including filing a petition with the U.S. Tax Court.”

On May 9, 2018, petitioner filed a petition with this Court requesting “disclosure of the information that would explain IRS decision-making” with respect to the preliminary award recommendation under section 7623(a) .

The WBO suspended further administrative consideration of petitioner’s whistleblower claims when the claims became subject to the instant litigation. On June 20, 2018, respondent filed a motion to dismiss for lack of jurisdiction on the ground that no determination has been issued to petitioner [*3] with respect to her whistleblower claims that would confer jurisdiction on this Court.

Key Issue:

The sole issue for decision is whether the letter respondent sent to petitioner recommending a preliminary award under section 7623(a) constitutes a “determination” within the meaning of section 7623(b)(4).

Primary Holdings:  hold that the preliminary award recommendation respondent issued to petitioner did not constitute a “determination” within the meaning of section 7623(b)(4) because it was not a “final administrative decision regarding * * * [the] whistleblower claims in accordance with the established procedures.”

Key Points of Law:

Section 7623(b)(4) provides that “[a]ny determination regarding an award under paragraph (1) , (2) , or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).”

The Court held that a letter denying a whistleblower claim, although not labeled a determination, constituted a “determination” within the meaning of section 7623(b)(4) because it was “a final administrative decision regarding * * * [the] whistleblower claims in accordance with the established procedures.” Cooper v. Commissioner, 135 T.C. at 76 ; see Kasper v. Commissioner, 137 T.C. at 41 . Similarly, the Court held that a letter constituted a “determination” when it contained a statement on the merits of a whistleblower claim, referred for the first time in a letter to the whistleblowers to the fact that a determination had been made on their claim, and did not indicate that further administrative procedures [*4] were available to the whistleblowers.  Comparini v. Commissioner, 143 T.C. 274, 279 (2014).

The Court found that neither the WBO’s issuance of the preliminary award recommendation

under section 7623(b) nor the whistleblower’s acceptance of the award constituted a “determination” because the amount of the award remained “subject to conditions subsequent that could cause the award amount to be reduced.” Id. Accordingly, the Court held that, absent an intervening final determination confirming the amount of the award, the WBO “issue[d] a written notice that embodie[d] * * * [its] determination” when it issued the award check and that this action notified the whistleblower of the “final administrative decision regarding * * * [his] * * * claims in accordance with the established procedures.” Id. at 432 (citing Cooper v. Commissioner, 135 T.C. at 75-76)

Insight:  Whistleblower procedural issues continue to make their way through the Tax Court.  Pro set whistleblowers often run afoul of procedural foot-faults.  Such whistleblowers may often be better served through the assistance of a knowledgeable tax attorney with experience representing whistleblowers, given the procedural complexities in the area.

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Chiarelli v. Comm’r, T.C. Memo. 2021-27 | March 3, 2021 | Nega, J. | Dkt. No. 452-16

• Opinion

Short Summary: 

The IRS determined deficiencies against the taxpayer with respect to 2012, 2013, and 2015, as well as penalties for negligence, disregard of rules or regulations, and/or a substantial understatement of income tax

Petitioner prepared and timely filed Form 1040, U.S. Individual Income Tax Return, for each of the years at issue. On Schedules A, Itemized Deductions, petitioner claimed noncash charitable contribution deductions of $89,110, $93,087, and $77,300 for tax years 2012, 2013, and 2015, respectively. Petitioner attached Form 8283, Noncash Charitable Contributions, to his return for each of the years at issue.

Key Issue:

• Did the taxpayer comply with the regulations necessary to allow for a charitable deduction?

Primary Holdings: 

• The receipts petitioner submitted to substantiate his noncash charitable contributions for the years at issue offered no detail with respect to items donated and thus lacked a description of the property in detail reasonable under the circumstances. See sec. 1.170A-13 (b)(2)(ii), Income Tax Regs.
• Because petitioner did not obtain proper receipts, he was required to keep reliable written records meeting the regulatory requirements.
• The Tax Court founds that petitioner did not maintain reliable written records in connection with his noncash charitable contributions.
• petitioner did not meet the information requirements for noncash contributions of $250 or more. See sec. 170(f)(8)(B).
• Petitioner did not strictly comply with the requirements for noncash charitable contributions in excess of $500.
• Because petitioner did not attach completed appraisal summaries to his returns or obtain qualified appraisals as required for the years at issue, he did not strictly comply with the requirements for noncash charitable contributions in excess of $5,000

Key Points of Law:

• Deductions are a matter of legislative grace; the taxpayer must demonstrate his or her entitlement to deductions allowed by the Code and substantiate the amounts underlying claimed deductions.
• Section 170 allows as a deduction any contribution made within the taxable year to a charitable organization. Sec. 170(a)(1), (c). The taxpayer must satisfy certain statutory and regulatory substantiation requirements in order to deduct charitable contributions. See id.; sec. 1.170A-13, Income Tax Regs. The nature of the required substantiation depends on the dollar amount of the contribution and on whether the contribution consists of cash or property.
• Under section 1.170A-13 (b)(1), Income Tax Regs., a taxpayer must maintain for each noncash charitable contribution with a fair market value of $5,000 or less a receipt from the donee organization unless doing so is impractical. The donee receipt must show: (1) the name of the donee organization, (2) the date and location of the contribution, and (3) a description of the property in detail reasonably sufficient under the circumstances. Id. A taxpayer who lacks a donee receipt is required to keep reliable written records including, among other things: (1) the name and address of the done organization to which the contribution was made, (2) the date and location of the contribution, (3) a description of the property in detail reasonable under the circumstances (including the value of the property), and (4) the fair market value of the property at the time the contribution was made, the method used to determine the fair market value, and if the fair market value was determined by appraisal, a copy of the signed report of the appraiser.
• no deduction is allowed for “any contribution of clothing or a household item” unless such property is “in good used condition or better.” Sec. 170(f)(16)(A).
• noncash charitable contributions of items valued at $250 or more must be substantiated by a “contemporaneous written acknowledgment” (CWA) from the donee. Sec. 170(f)(8)(A).
• Items of property are considered as a group for purposes of determining whether a contribution exceeds the $500 threshold. Sec. 170(f)(11)(F). The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, electronics, or household appliances. Sec. 1.170A-13 (c)(7)(iii), Income Tax Regs. Similar items of property are considered as a group for purposes of determining whether a contribution exceeds the $5,000 threshold. Sec. 170(f)(11)(F); sec. 1.170A-13 (c)(7)(iii), Income Tax Regs.
• For contributions of property in excess of $5,000, in addition to complying with the substantiation requirements for property in excess of $250 and $500, petitioner was required to obtain a “qualified appraisal” of each donated item and attach to each tax return a fully completed appraisal summary on Form 8283. See sec. 170(f)(11)(C); sec. 1.170A-13 (c)(2), Income Tax Regs.
• In appropriate circumstances, some of the reporting requirements set forth in section 1.170A-13, Income Tax Regs., can be satisfied by substantial, rather than literal, compliance.

Insight:  The Chiarelli case serves as a reminder that the charitable deduction regulations are rather specific and detailed.  Taxpayers must take steps to ensure that they comply with the requirements to utilize a charitable deduction.

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Mainstay Bus. Sols. v. Comm’r, 156 T.C. No. 7 | March 4, 2021 | Kerrigan, J. | Dkt. No. 6510-18

• Opinion

Short Summary: On August 2, 2017, Mainstay Business Solutions filed a separate Form 843, Claim for Refund and Request for Abatement, for multiple tax periods. The Internal Revenue Service did not abate interest related to the tax periods. On April 4, 2018, Mainstay Business Solutions filed its petition pursuant to Section 6404(h) to review the Internal Revenue Service’s failure to abate interest. Later, on November 6, 2020, Mainstay Business Solutions filed an unopposed motion to withrdraw its petition.

Key Issue: Whether the Court has discretion to allow the petitioner to withdraw its petition.

Primary Holding:

• The Court has discretion to allow the petitioner to withdraw its petition because the petition did not invoke the Court’s jurisdiction to redetermine a deficiency.

Key Points of Law:

• The Court has jurisdiction of abatement of interest actions. I.R.C. § 6404(h).
• In deficiency cases, a taxpayer may not withdraw a petition in order to avoid a decision. Estate of Ming v. Comm’r, 62 T.C. 519 (1974).
• The Court has concluded that a petitioner may withdraw a petition related to the following types of cases: for the review of collection actions, determination of innocent spouse relief, and whistleblower award determinations. See Wagner v. Comm’r, 118 T.C. 330 (2002); Davidson v. Comm’r, 144 T.C. 273 (2015); Jacobson v. Comm’r, 148 T.C. 68 (2017).
• In making the determination whether a petition should be dismissed, the Court considers whether the other party would lose any substantial right by the dismissal. Durham v. Fla. E. Coast Ry. Co., 385 F.2d 366, 368 (5th Cir. 1967).
• The granting of a motion to dismiss without prejudice is treated as if the underlying lawsuit had never been filed.Wagner v. Comm’r, 118 T.C. 330, 333-334 (2002).

Insight: Mainstay demonstrates that the Tax Court may allow a petitioner to withdraw its petition regarding interest abatement. This decision follows the Tax Court’s previous rulings involving collection due process petitions, innocent spouse relief petitions, and whistleblower petitions. However, deficiency cases are different. In those cases, a petitioner may not withdraw its petition before the Tax Court renders its decision in the matter.

Have a question? Contact Jason Freeman, Freeman Law, Texas.