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.

Tax Litigation: The Week of October 4 – October 8, 2021

 

Crim v. Comm’r, T.C. Memo. 2021-117 | October 4, 2021 | Lauber, J. | Dkt. No. 16574-17L

Short Summary: During tax years 1999 through 2003, Mr. John Crim promoted a tax shelter scheme involving domestic and offshore trusts. In 2008, Mr. Crim was convicted of certain crimes (conspiracy to defraud the United States and a corrupt endeavor to interfere with the administration of the internal revenue laws) and imprisoned until 2014.

The Internal Revenue Service notified Mr. Crim that it proposed to assess penalties under Section 6700(a) by letter dated June 16, 2010. On July 26, 2010, the Internal Revenue Service assessed the proposed penalties. On November 18, 2011, the Internal Revenue Service filed a notice of federal tax lien. On March 8, 2017, the Internal Revenue Service sent Mr. Crim a Letter 1058, Notice of Intent to Levy.

Mr. Crim’s representative timely filed a request for CDP hearing. At the hearing, Mr. Crim’s representative made various legal arguments, including that the penalties had been assessed and/or collected after the relevant period of limitations had expired. The Internal Revenue Service sustained the collection action. On August 4, 2017, Mr. Crim timely filed his petition with the Tax Court. On November 14, 2019, the Internal Revenue Service filed a motion for summary judgment.

Key Issues:

  • (1) Whether the Internal Revenue Services’ determination to sustain the collection action (notice of intent to levy) was proper as a matter of law.

Primary Holdings:

  • (1) The Internal Revenue Services’ determination to sustain the collection alternative (notice of intent to levy) was proper as a matter of law.

Key Points of Law:

  • The Tax Court may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
  • A taxpayer’s underlying liability is properly at issue in a CDP case only “if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. I.R.C. § 6330(c)(2)(B); Sego v. Comm’r, 114 T.C. 604, 609 (2000).
  • “The Commissioner has generally prevailed in foreclosing challenges to the underlying liability under section 6330(c)(2)(B) where he establishes that a notice . . . was mailed to the taxpayer’s last known address.” Kamps v. Comm’r, T.C. Memo. 2011-287, 102 T.C.M. (CCH) 580, 582.
  • Section 6502(a)(1) provides that a tax that has been properly assessed may be collected if the levy or other collection action is begun “within 10 years after the assessment.”
  • Section 6501(a) imposes no period of limitations on the assessment of penalties under Section 6700.

Insight: Crim highlights the fact that the Tax Court reviews a settlement officer’s determination for abuse of discretion. Taxpayers should be prudent in contesting tax and penalty assessments at the appropriate time. Further, taxpayers should be cognizant of the applicability of periods of limitation to certain types of penalties, including Section 6700 penalties. Finally, taxpayers should be wary of bombarding the Tax Court with multiple filings/”mountains of paper” that lacks certain critical support, such as personal affidavits from the taxpayer.

Leyh v. Comm’r, 157 T.C. No. 7| October 4, 2021 | Greaves, J. | Dkt. No. 20533-18

Short Summary:  Pursuant to a separation agreement, Mr. Leyh agreed to pay his then spouse’s health insurance premiums through a “cafeteria plan” provided by his employer.  Mr. Leyh excluded from his gross income an amount equal to the health insurance premiums pursuant to section 106 and section 125 of the Code and also claimed an alimony deduction pursuant to section 62 and section 215 for the portion of the premiums covering his then spouse.

Key Issues:

  • Whether Mr. Leyh may deduct, as alimony, the amount equal to the premiums paid to provide heatlh insurance coverage for his then spouse.

Primary Holdings:

  • Neither the double deduction common law principle nor section 265 applies to prevent the deduction of alimony where a separated couple pending a final decree of divorce creates an alimony agreement that includes continued health care coverage as provided by the payor spouse’s employer, premiums for which are properly excluded from the payor’s gross income and included in the recipient spouse’s gross income.

Key Points of Law:

  • The IRS’ determinations set forth in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving that the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • The fact that a case has been submitted under Rule 122 “does not alter the burden of proof, or the requirements otherwise applicable with respect to adducing proof, or the effect of failure of proof.” Rule 122(b).
  • Gross income includes all income from whatever source derived, unless otherwise specifically excluded. 61.
  • When an employee receives health insurance coverage for himself or his spouse and dependents as a benefit through an employer-sponsored health care plan, the premiums paid for such coverage may generally be excluded from that employee’s gross income. 106(a), 125; Prop. Reg. § 1.125-1(h)(2).
  • If a taxpayer pays alimony as defined in section 71(b), then the taxpayer may deduct such payments from gross income if the amounts are includible in the gross income of the recipient under section 71. 62(a)(10), 215(a) and (b).
  • Deductions are a “matter of legislative grace,” and the taxpayer bears the burden of clearly showing the right to a claimed deduction. Interstate Transit Lines v. Comm’r, 319 U.S. 590 (1953).  Moreover, “double deductions (or their practical equivalent) for the same economic loss are impermissible absent a clear declaration of congressional intent.”  Thrifty Oil Co. & Subs. v. Comm’r, 139 T.C. 198, 205 (2012).
  • Section 265(a) generally provides that an amount may not be deducted if it is allocable to wholly tax-exempt income (other htan interest). Tax-exempt income includes any class of income wholly excluded from gross income under subtitle A of the Code or under any other provision of law.  Reg. § 1.265-1(b)(1).  The principal purpose of section 265 is to restrict deductions of expenses incurred in connection with an ongoing trade or business or investment activity, the conduct of which generates exempt income.  See Manocchio v. Comm’r, 78 T.C. 989, 994 (1982).

Insight:  The practical effect of the Leyh decision may be limited due to the Tax Cuts and Jobs Act’s permanent disallowance of alimony deductions.  However, although the alimony deduction does not currently sunset, Congress may revisit the deductibility of alimony at a later date.  If this occurs, taxpayers who have health care cafeteria plans and who pay alimony may want to remember the Leyh decision, which is taxpayer favorable.

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