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Tax Court In Brief: Additions To Tax For Underpayments And Income From Trusts

Additions To Tax For Underpayments And Income From Trusts

Hall v Commissioner, T.C. Memo. 2022-82 | July 28, 2022 | Marshall, J.| Dkt. No. 8541-20 

Short Summary: This case involves the disputed liability for (1) the deficiency in taxpayer’s income tax, (2) additions to tax for untimely filing of income tax returns, and (3) additions to tax for underpayments of estimated tax. In 2016 and 2017, Jamie B. Hall (Hall) was a beneficiary of two trusts. She received dividends and capital gains from each of the Trusts. Hall received Schedules K–1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., from each trust. Hall failed to file a federal income tax return for tax years 2015, 2016, or 2017. Hall did not pay any estimated income tax for the 2016 or 2017 tax year.

IRS issued notices of deficiency for the 2016 and 2017 tax years assessing deficiencies and addition to tax. In trial IRS requested to increase the section 6651(a)(1) additions to tax to 25% of the amounts required for 2016 and 2017. Hall argued that the Social Security Administration created the Jamie Bennett Hall trust (one of the trusts) by assigning her a Social Security number and a Social Security card. Additionally, she argued the trust is an agency of the U.S. Government and not subject to tax. The Tax Court found this argument frivolous and sustain IRS determinations for 2016 and 2017.

Key Issues:

  • Whether, pursuant to 26 U.S.C. § 6651(a)(1) and 6654, Hall is liable to additions to tax for untimely filing income tax returns, and to additions to tax for underpayments of estimated tax for 2016 and 2017 tax years?

Primary Holdings:

  • Hall failed to provide enough evidence to support a trust was actually formed providing only frivolous arguments. Consequently, the Tax Court did not recognize the trust for income tax purposes. The Tax Court sustained the additions to tax for income tax and estimated tax payments determined by the IRS for tax years 2016 and 2017.

Key Points of Law:

  • The IRS’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving by a preponderance of the evidence that the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • Section 7491(a) allows the burden of proof to the IRS if a taxpayer introduces credible evidence concerning to any factual issue relevant to ascertaining the liability of the taxpayer. If a taxpayer fails to provide such evidence, the burden remains with the taxpayer.
  • The issuance of a Social Security card is not a transfer of property creating a trust. To support it the taxpayer shall provide legitimate documents forming a trust. If this is not provided the purported trust does not reflect economic reality and should not be recognized for income tax purposes. See United States v. Welch.
  • Section 26 U.S.C. § 6651(a)(1) imposes an addition to tax for the failure to timely file a required return to the taxpayer unless the failure was due to “reasonable cause and not due to willful neglect”. The addition to tax is 5% of the tax not reported on the tax return for each month or fraction thereof for which there is a failure to file the return, not to exceed 25% in total. See Section 26 U.S.C. 6751(a)(1).
  • IRS bears the initial burden of production to provide evidence supporting the tax return was untimely filed. See Section 26 U.S.C. § 7491(c). If the IRS satisfies it, the burden to prove the addition to tax the addition to tax should not apply is for the taxpayer. See 6651(a)(1) and 6654(a).
  • Under Section 26 U.S.C. §6654(a) addition to tax is assessed to the taxpayer if the latter underpays the estimated tax. Generally, a taxpayer shall pay estimated tax if the taxpayer has a mandatory annual payment for the tax year in question. § 6654(d)(1)(A); Wheeler v. Commissioner

Insights:  This case is another example of a taxpayer failing to properly document and substantiate that the taxpayer is not liable for the determinations made by the IRS. We duly recommend getting proper advice before making any arguments against IRS to avoid a higher tax contingency. For additional information on frivolous arguments and 26 U.S.C. §6651and §6654, see Freeman Law:

Hatfield v. Comm’r, T.C. Memo. 2022-59 | June 13, 2022 | Lauber, J. | Dkt. Nos. 7327-20, 1500-21

Gianninis v Commissioner, T.C. Memo. 2022-65 | June 23, 2022 | Urda, J.| Dkt. No. 20132-19.

Kelly v. Comm’r, No. 13353-21L, T.C. Memo 2022-73 | July 13, 2022 | Lauber |

Have a question? Contact Jason Freeman, Freeman Law.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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