The Tax Court in Brief – April 18th- April 22nd, 2022

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.

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Tax Litigation:  The Week of April 18th, 2022, through April 22nd, 2022

Treece Financial Services Group v. Comm’r, 158 T.C. No. 6 | April 19, 2022 | Kerrigan, J. | Dkt. No. 20850-19

Opinion

and related opinion, Treece Investment Advisory Corp. v. Comm’r, T.C. Memo 2022-38| April 19, 2022 | Kerrigan, J. | Dkt. No. 21015-19 

Opinion

Treece Financial Services Group v. Commissoner

Short SummaryThis case discusses two procedural issues. First, whether the Tax Court has jurisdiction to determine an IRS’ determination made in regard to the applicability of the Voluntary Classification Settlement Program (VCSP). Second, whether a motion for summary judgement (MSJ) filed by the petitioner was to be granted. The relevant part of the opinion rests on the first issue.

Dock D. Treece (Mr. Treece) was the sole corporate officer of Treece Financial Services Group (petitioner) during the 2015-2017 period (the years at issue). Petitioner classified Mr. Treece as an independent contractor during the years at issue. The IRS issued a notice of employment tax determination under section 7436 and reclassified Mr. Treece as an employee, determining additional tax owed under section 6651(a) and penalties under section 6656.

Petitioner filed a petition with the Tax Court. The parties agreed that Mr. Treece was an employee, but disagreed on whether petitioner could use the VCSP to compute the amount of employment tax owed. The IRS argued that the Tax Court did not had jurisdiction to review the IRS determination and moved for dismissal for lack of jurisdiction. Petitioner filed a MSJ under the argument that it had met all the requirements in the VCSP. Both motions were denied. The IRS’ motion was denied because the Tax Court concluded it had jurisdiction over the employment tax determination. The MSJ was denied because there was a dispute of fact as to whether all the requirements of the VCSP were actually met by the petitioner.

Key Issues: Whether the Tax Court has jurisdiction over an employment tax determination under § 7436 of the I.R.C.

Primary Holdings: The Tax Court has jurisdiction to review an employment tax determination issued under § 7436 of the I.R.C.

Key Points of Law:  

Section 7436(a) establishes that the Tax Court has jurisdiction to determine 1) whether an individual providing services to a person is that person’s employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the Commissioner’s determination concerning worker classification. I.R.C. § 7436(a).

It must be remembered that the Tax Court is a Court with limited jurisdiction and may exercise jurisdiction only to the extent expressly authorized by Congress. Breman v. Comm’r, 66 T.C. 61, 66 (1976). However, the Court can determine whether it has jurisdiction over a particular case. Kluger v. Commissioner, 83 T.C. 309, 314 (1984).

Although the Court’s jurisdiction is limited, it’s deficiency jurisdiction  allows it to review administrative determinations that are necessary to determine the merits of a deficiency determination.

Section 7436(d) provides that the principles relative to deficiencies contained in sections 6213(a)-(d) and 6214(a), apply to cases that arise under § 7436, treating such cases’ determinations as a notice of deficiency.

The Court explained that an act of administrative discretion is subject to judicial review. Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014). The determination made as to the applicability of the VCSP is subject to the Tax Court review, under the legislative history of section 7436, which in 2000 was amended to provide the Tax Court with the power to determine whether the determination of the Secretary was correct as well as the proper amount of employment tax under such determination. Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 314(f), 114 Stat. 2763, 2763A-643 (2000); Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3103, 112 Stat. 685, 731.

Under such legislative history and caselaw supporting the review administrative determinations necessary to determine the merits of a deficiency determination, the Court concluded that it had jurisdiction to determine whether the liability is correct in proceedings for determination of employment status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 267–68 (2001). This applied here because the denial of a taxpayer’s eligibility for VCSP directly affects the amounts of employment tax paid. Trimmer, 148 T.C. at 347; Estate of Gardner, 82 T.C. at 996.

Insight:  This case welcomes review of administrative acts that are necessary for certain determinations issued by the IRS. As mentioned in the single footnote of the opinion, although this decision is not directly contrary to the Court’s policy of not looking behind a statutory notice of determination, the Court can review the merits of the IRS’ determinations. This may be helpful in other cases, where administrative acts of the IRS are improper, and they translate in a meritless determination

Treece Investment Advisory Corp. v. Commissioner

The facts and opinion in this case are substantially identical to the previous case, with the only exception that the petitioner here is Treece Investment Advisory Corp. Please refer to Treece Financial Services Group, v. Comm’r, 158 T.C. No. 6 | April 19, 2022 | Kerrigan, J. | Dkt. No. 20850-19 to see a discussion of the facts and applicable law.

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