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February 2023 Digest

Posted on Mar. 6, 2023

The filing season is in full swing, and we finally have some guidance from the IRS about the treatment of state relief payments. The Tax Section Midyear Meeting happened earlier this month in beautiful San Diego and PT posted about some of the information and updates shared there. There has been some traction in favor of taxpayers in cases involving listing notices. Other recent Tax Court decisions have reiterated the Court’s view that missing the filing deadline in 6213 cases is grounds for dismissal.  

Tax Treatment of State Payments

An Open Letter to the Last IRS Commissioner: Formatted as a letter to former Commissioner Rettig, this post addresses the issues caused by the lack of clarity around how state relief payments made in 2022 should be treated. The post specifically addresses the Middle Class Tax Relief payment in California but notes that these state relief payments occurred in many states and with different reasoning. California issued forms 1099 when the amounts paid were $600 or more. At the time of the post, California wasn’t sure what federal tax treatment would be and IRS wasn’t providing guidance either.

IRS Statement Regarding Payment of Special Tax Refunds by States: Following PT’s post, the IRS issued a statement about the treatment of state payments recommending that taxpayers wait until additional guidance is available or consult with a reputable tax professional.

IRS Acquiesces in Action on TurboTax Decision: The additional guidance arrived, in part, when the IRS announced it “will not challenge the taxability of payments related to general welfare and disaster relief” in Information Release 2023-23. The Information Release doesn’t address all types of payments though. More upfront guidance from the IRS could help resolve these types of issues in the future

Tax Section Midyear Meeting

Unscrupulous Return Preparers Draw Attention At The ABA Tax Section Midyear Meeting: The highlights from the Midyear Meeting panel on unscrupulous return prepares are shared in this post, including how state law causes of action can be used to go after such preparers and the results of a special research report included in the NTA’s Annual Report to Congress which explored dividing or separating the EITC into different components.

Tax Court Practice & Procedure Updates from the 2023 ABA Tax Midyear Meeting: Tax Court updates from the Court and Counsel’s Office from the Midyear Meeting are shared in this post. Notably, practitioners can now enter a limited appearance any time after a case is set for trial and before the trial session is adjourned; the Notice Setting Case for Trial invites interested parties to file a motion for a remote trial session; and the next quarterly Tax Court webinar will be about expert witnesses and held on March 16.  This post also contains lots of data on numbers of cases filed, types of cases, etc.

Taxpayer and Practitioner Rights

Property Tax Strict Foreclosure – A Follow Up: Anna Gooch follows up from an earlier post on states using strict foreclosure to collect property taxes. Since her initial post, additional cases with similar facts have been identified, including one that will be heard by the Supreme Court. Arguments in favor of petitioners, along with the Court’s opinion on them, are discussed, including arguments involving the Takings Clause or the Excessive Fines Clause.

A Pair of FOIA Cases on Similar Trajectories (or not): This is a tale of two FOIA cases. The first involves a request for information related to an OPR referral. The second involves an inquiry into what the IRS does with a practitioner’s information (SSN and birthday) when they call on behalf of a client. In both cases, the IRS used FOIA exceptions to argue that they didn’t have to disclose some of the information. In both cases, the district court agreed with the IRS. In both cases the party seeking the information appealed and the appellate court reversed and remanded the case for furth action.  In both cases the district courts essentially stood by their initial rulings denying the FOIA request.  In the first case, the petitioner was mostly successful on his second appeal to the D.C. Circuit. In the second case, an appeal back to the Eighth Circuit has not yet been filed.

Tax Court Updates

Tax Court’s 2024 Budget Justification : The Tax Court seeks more money for the coming year to cover increased salaries for existing judges and other Court needs, but also to hire at least one more special trial judge. The Court seeks to raise its filing fee from $60 to $100. Additional information and data about the Court’s operations from the Budget Report are shared in the post.

One Computer in Tax Court Record Room: Post-pandemic there is only computer in the Court’s record room instead of two. Keith has observed that other users of the computers are typically reporters in the tax press. The Court aspires to expand public access to information and downsizing the public access computers seems inconsistent with that. After this post, at the mid-year meeting, the Court explained it removed one of the computers was because it was rarely used. The Court’s data showed that, so far, two persons had not showed up at the same time to use the computer in the records room.

Tax Court Trial Procedures: Guidelines from Judge Jones: Judge Jones provided trial guidelines and a worksheet that can be used by taxpayers with business expense issues at a recent D.C. calendar call. Both documents are worth checking out. A link to the guidelines and the worksheet are shared in the post.

Tax Court Decisions

East Coast Bias: Tax Court petitions are required to be electronically filed by 11:59 EST on the day of the petition filing deadline. This can create a disadvantage for any taxpayer outside of the Eastern time zone. The issue was demonstrated in Park when the Court dismissed petitioners’ case because they filed it two minutes after the EST deadline even though it was filed on the last date for filing the petition when viewed from the perspective of California.

Alleged Monthlong Trip to Mexico To Celebrate Día De Los Muertos Not Enough To Get Extra Sixty Days To File A Petition: Shead was dismissed as untimely when the taxpayer failed to prove he was out of the country at the time the IRS mailed the notice of deficiency. The only evidence the taxpayer presented was his testimony and unstamped passport, but it’s very probable that he had other evidence of the trip which may form a basis for the Court to reconsider its dismissal. Testimony is evidence, but in the absence of confirming documentation, a judge may not find it sufficient.  

Tax Court Denies Reconsideration in Green Valley and More District Courts Invalidate Listing Notices: The IRS’s motion to reconsider the Green Valley decision has been denied. The Court stated it is under no obligation to address every argument raised. The existence of other listed-transaction notices did not influence the Court and they stated that they were not offering any opinion related to the other notices. A district court in Alabama was persuaded by the Tax Court’s reasoning in Green Valley and both it and another district court in Ohio invalidated the same notice while limiting the remedy to particular taxpayers.

Your Advice is Sought – A Threshold Inquiry for Penalty Abatement: Taxpayers may only be eligible for penalty relief when they rely on actual advice, rather than clerical work, from a tax advisor. In Patacsil, the court determined reporting business expenses on a Schedule C may not constitute tax advice because it involves transcribing figures rather than exercising judgment or performing analysis. Conversely, the Court granted accuracy related penalty relief for incorrectly carried forward NOL’s because rules around NOLs are “tax-law arcana.” Other cases have shown that failure to report income and inputting data into software is also not tax advice.

Failure to File Information Returns For Foreign Trust Keeps Statute Of Limitations Open For Individual’s Income Tax: The assessment statute does not begin to run until a taxpayer with a foreign trust and distributions furnishes information to the IRS about the trust investments according to 6501(c)(8). In Fairbank the petitioner first argued that her entity was a corporation rather than a trust and she had filed the necessary forms for a corporation after a JDS was issued. Then she argued that the information provided on the corporate forms effectively provided the IRS with the trust information. The Court disagreed citing the need for certainty in this area.

Court of Federal Claims and District Court Decisions

Circuit Precedent and Supreme Court Decisions: Vensure involved the question of whether a three-judge circuit panel has authority to overturn circuit precedent in light of undercutting (but not overturning) Supreme Court precedent. The DOJ argues the panel’s authority is very narrow, but the CFC disagrees. The case involves the jurisdiction of a refund claim, and the argument is one that the DOJ has raised in other jurisdiction cases. The post provides important information about the current litigation in this area.

District Court Rejects Claim That Government Must Choose Either Administrative or Judicial Collection Path To Collect An Assessed Tax: In U.S. v. Varner the taxpayer argued that the IRS can only collect administratively or judicially but not in both ways. More specifically, he argued that a prior levy precluded the IRS from now reducing the assessment to judgment. The Court explained that a taxpayer’s right to appeal collection actions administratively is separate from the government’s power to use judicial collection tools and the options are not mutually exclusive.

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