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Tax Court In Brief: Burdens Applicable To Both Taxpayers And The IRS In Tax Court

Catlett v. Comm’r, No. 13058-14, T.C. Memo 2021-102 | August 16, 2021 | Lauber | Dkt. No. 13058-14

Short Summary: The taxpayer was convicted in 2011 on Federal criminal charges, including tax crimes and conspiracy to defraud the United States. In March 2011 he was sentenced to 210 months in prison. After he was remanded to custody, the IRS completed a civil examination of his 2006-2010 tax years. The IRS subsequently assessed substantial deficiencies, along with additions to tax and penalties. The taxpayer timely petitioned the Tax Court in June 2014. However, because of his incarceration, the case was repeatedly continued. The taxpayer died in January 2020, and the IRS filed a motion to dismiss the case based on lack of prosecution.

Key Issue: The key issue is the standard for dismissal when a taxpayer fails to prosecute their case. Various burdens come into play that the IRS must still meet despite the failure of the taxpayer to prosecute his case.

Primary Holdings:

Written by Jason Freeman | Posted in Burden Of Proof • Tax Court In Brief

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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Written by Jason Freeman | Posted in Section 6751(b) • TaxConnections