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Tax litigation: The week of January 9, 2022 to January 15, 2022
Elbasha v. Comm’r, TC Memo. 2022-1
January 12, 2022 | Wells, J. | Dekt. No. 25192-13
Short summary: Taxpayer Elbasha, an emergency physician in rural Georgia, challenged the denial of most of his Schedule C deductions for two years. At trial, the IRS decided to increase the deficiency due to a change in the status of his case.
- Has the IRS discharged its burden of proof by raising new questions regarding Elbasha’s filing status for 2008 and 2009?
- Did Elbasha justify his Schedule C expenses for 2008 and 2009?
- Is Elbasha responsible for the accuracy penalties for 2008 and 2009?
- Because the IRS raised a different filing status after issuing the Notice of Deficiency, the IRS bears the burden of proof on these matters. As for 2008, the IRS has discharged its burden of proof as the evidence showed that Elbasha was married at the end of 2008 and he is not entitled to single applicant status simply because his wife lives abroad. As of 2009, the IRS failed to meet its burden of proof as evidence showed that although Elbasha was bungled at the end of 2009, his wife was living overseas, allowing for the status of head of family.
- Because Elbasha failed to demonstrate that he met the specific requirements to claim the Schedule C expenses for 2008 and 2009, the IRS’s dismissal of the expenses as deductions stood in its entirety.
- As Elbasha did not raise the issue of sanctions in her motion, the sanctions are deemed granted. In any event, even if Elbasha had correctly raised the issue of sanctions in his motion, Elbasha failed to show reasonable cause.
Main points of law:
- The Commissioner’s determination of a deficiency gives rise to a presumption of accuracy. Income tax deductions are a matter of legislative grace, and the onus is on the taxpayer to clearly show entitlement to any deduction claimed. In certain circumstances, if the taxpayer presents credible evidence regarding any factual issue relevant to determining the tax liability, section 7491(a)(1) shifts the burden of proof to the Commissioner. Rule 142(a)(2). On the other hand, if the commissioner raises a new question, he has the burden of proof in this regard. Rule 142(a). The Commissioner raises a “new issue” when he goes beyond the scope of the original determination of insufficiency. ID. to *3 (quotes omitted).
- The criterion for determining the marital status of a taxpayer is provided for in article 7703. Art. 1(a)(1). The decision as to whether a person is married must be made at the end of the tax year, unless that person’s spouse dies during that year. Second. 7703(a)(1). A person is not considered married at the end of the tax year if they (a) are separated from their spouse under a divorce decree or separate maintenance agreement, or (b ) provides more than half of the maintenance costs of a household that does not include the spouse but does include a certain child or children. ID. at 3.
- A person can declare as head of household only if they are not married at the end of the tax year. Second. 2(b)(1). For purposes of head of household status, a taxpayer is not considered married at the end of the tax year if that person’s spouse is a nonresident alien. Second. 2(b)(2)(B).
- Section 162(a) allows a deduction for “all ordinary and necessary expenses paid or incurred during the taxable year in the exercise of a trade or business”. Whether an expense is deductible is a question of fact that must be determined on the basis of all relevant facts and circumstances. No deductions are allowed for personal, living or family expenses.
- Taxpayers must keep sufficient records to show how they determined their tax liability. Second. 6001. A simple table of expenses is not sufficient to justify a claimed deduction.
- If a taxpayer has proven that he paid an expense but is unable to prove the exact amount, the court can apply the Cohan doctrine and estimate the deductible expense. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). “By applying the Cohan doctrine, the Court bears heavily against the taxpayer whose difficulty in justifying his deductions is his fault. However, the Tax Court will generally not estimate a deductible expense unless the taxpayer presents sufficient evidence to provide a basis on which an estimate can be made. ID. to *4 (quotes and edits omitted).
- Cohan’s estimate is not an option for Section 274 expenses. Section 274(d) provides stricter guidelines for certain types of deductions. “Under section 274, a deduction is generally disallowed for travel, meal and entertainment expenses, gifts, and listed goods unless the taxpayer can prove by adequate records or sufficient corroborating evidence: ( A) the amount of such expenses or other item, (B) the time and place of travel, entertainment, amusement, recreation or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship with the taxpayer of the persons entertained, using the facility or property, or receiving the gift. Second. 274(d)”. ID. to *4-5 (quotes and edits omitted). These deductions will be disallowed in their entirety unless the taxpayer satisfies all four elements. “While a contemporaneous record is not required to meet these items, the taxpayer must present corroborating evidence used to support a taxpayer’s reconstruction of the expense which must have a high degree of probative value to elevate that statement to the level credibility of a contemporaneous record. In the absence of adequate documentation, a taxpayer may provide detailed testimony (oral or written) on each item. Even an otherwise deductible expense may be disallowed without sufficient justification. ID. to *5 (quotes and edits omitted).
- Taxpayers may deduct home office expenses relating to a portion of the home that is used exclusively and regularly: (a) as the principal place of business for any trade or business of the taxpayer; (b) as a place of business used by patients, clients or clients to meet or deal with the Taxpayer in the ordinary course of trade or business; or (c) in the case of a separate construction which is not attached to the dwelling unit, in connection with the trade or business of the taxpayer. Second. 280A(a), (c)(1).
- Simply having a tax preparer does not protect the taxpayer from an applicable penalty. However, the use of a tax adviser may constitute reasonable cause if (a) the adviser is competent, (b) the taxpayer provided the required information to the adviser and (c) the taxpayer relied in good faith on the adviser. ID. at 11-12 (quotations omitted).
Overview: This review provides a useful application of the different burdens of proof in different contexts and highlights the importance of good record keeping (and, failing that, the need to be prepared to provide corroborating evidence to support inferences requested). At every stage of the court’s analysis (from filing status, to disallowed deductions, to penalties), the taxpayer could have improved their results with better records and corroborating evidence.
Long Branch Land, LLC v Comm’r, Memo TC. 2022-2
January 13, 2022 | Lauber, J. | Dekt. No. 7288-19
Short summary: The IRS disallowed a charitable contribution deduction claimed by Long Branch Land, LLC, related to a conservation easement. The IRS also determined that the accuracy penalties were appropriate. After the taxpayer filed a motion challenging the IRS’ decisions in Tax Court, the taxpayer requested partial summary judgment on whether the IRS complied with section 6751( b).
Key issues: Has the IRS complied with the written management approval requirement of section 6751(b)?
Main holdings: The IRS complied with section 6751(b) because: (1) there is no evidence that the immediate supervisor did not have the authority to determine the penalty at all relevant times; and (2) the presumption of regularity supports the actions of the IRS agent in this case.
Main points of law:
- The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FLP Grp., Inc. & Subs. v. Comm’r, 116 TC 73, 74 (2001). The Tax Court can grant summary judgment on a matter if there is no real dispute about a material fact and a decision can be made at law. Rule 121(b).
- Section 6751(b) provides that no sanction under this title shall be imposed unless the initial determination of such an assessment is personally approved (in writing) by the immediate supervisor of the person making that determination. . In a TEFRA case such as this, supervisor approval must generally be obtained before the FPAA is issued to the partnership. See Palmolive Building. Inv’rs, LLC v. Comm’r, 152 CT 75, 83 (2019). If the supervisor’s approval was obtained on that date, the partnership must establish that the approval was late, e.“that there was a formal communication of the sanction before the proposed approval” was obtained. See Frost v. Comm’r154 CT 23, 35 (2020).
- “The presumption of regularity supports the official acts of officials and, in the absence of clear evidence to the contrary, the courts presume that they have properly discharged their official duties.” Pietanza vs. Comm’r92 TC 729, 739 (1989), aff’d, 935 F.2d 1282 (3d Cir. 1991). Indeed, “it is the well-established general rule that all the preconditions necessary for the validity of an official act are presumed to be fulfilled”. Lewis vs USA279 U.S. 63, 73 (1929).
- Although the Internal Revenue Code does not define the term “immediate supervisor”, the Tax Court has ruled that this term means “the person who supervises the substantive work of the agent during an examination”. Sand Inv. Co., LLC v Comm’r157 TC ___ (23 Nov. 2021).
Knowledge: The decision in Land of the Long Branch demonstrates that in many cases the taxpayer must rebut the IRS’ “presumption of regularity”. that is to say, that public bodies and employees are presumed to perform their official duties, in the absence of clear evidence to the contrary. In some cases, as here, this presumption may prevail.