Source: https://taxlaw.typepad.com/tax_law/2009/08/index.html
Timestamp: 2019-04-23 22:10:06+00:00

Document:
When does a Federal Tax Lien Attach to Property?
Estate of Brandon v. Commissioner, 133 T.C. No. 4 (T.C. 2009).
On August 9, 2004, [the I.R.S.] issued Mr. Brandon a proposed assessment regarding section 6672 trust penalties. (3). On February 27, 2006, [the I.R.S.] assessed the . . . trust penalties. (3). Mr. Brandon died in a motorcycle accident on April 27, 2006. (3). On November 2, 2006, [after having been informed about Mr. Brandon's death] the revenue officer issued Mr. Brandon a Letter 3172, Notice of Federal Tax Lien . . . relating to the unpaid trust penalties. [On] November 3, 2006, the next day, the revenue office recorded, with the clerk of Denton County, Texas, Form 668(Y)(c), Notice of Federal Tax Lien, relating to Mr. Brandon's property.
[W]hether there was an abuse of discretion in sustaining the notice of Federal tax lien (NFTL) relating to the 2003 trust fund recovery penalties (trust penalties) assessed against Mark Brandon (Mr. Brandon). (2).
Although the court phrases the issue as an abuse of discretion, the court really answers the question of when a lien attaches and whether the lien remains attached when property transfers at death.
The estate contends that as of April 27, 2006, Mr. Brandon's date of death, the title to all Mr. Brandon's property "passed to the devisees or legatees of the estate of Mark Brandon, the estate of Mark Brandon, or the executor of the estate of Mark Brandon [and] therefore, the NFTL is invalid." The estate further contends that Mr. Brandon "had no property interest when the NFTL was issued on November 2, 2006" to which any lien could attach. (5).
The [I.R.S.] contends that the lien attached to Mr. Brandon's property on February 27, 2006, the date of assessment . . . further . . . the attachment occurred before Mr. Brandon's death and . . . the lien remained attached even at his death. (5).
We agree with the [I.R.S.].
[A] lien arises at the time the assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. (5).
After a lien attaches to property, it remains attached and is not invalidated by a transfer of property. See United States v. Bess, 357 U.S. 51, 57 (1958) (holding that the transfer of property after attachment of a lien does not invalidate the lien) . . . . (6). Therefore, Mr. Brandon's death, which occurred 2 months after the lien attached to his property, does not adversely affect the validity of the NFTL. (6).
Pierre v. Commissioner, 133 T.C. No. 2 (T.C. 2009).
Grandma sets up and transfers $4.25 million to a single-member LLC. (4). Through gifts and loans she transfers her entire interest in the single-member LLC to two different trusts created for her grandchildren. (4).
The issue to be decided is whether certain transfers of interests in a single-member limited liability company (LLC) that is treated as a disregarded entity . . . are valued as transfers of proportionate shares of the underlying assets owned by the LLC or are instead valued as transfers of interest in the LLC, and therefore, subject to valuation discounts for lack of marketability and control. (3).
[The taxpayer] argues that, for Federal gift tax valuation purposes, State law, not Federal tax law, determines the nature of a taxpayer's interest in property transferred...Accordingly...we must look to State law to determine what interest was transferred. . . . (7).
[The I.R.S.] argues that, because the LLC . . . is disregarded under the check-the-box regulations, . . . transfers of interests in the LLC should be "treated" as . . . proportionate shares of [the] LLC's [underlying] assets. . . . (6).
A fundamental premise of transfer taxation is that State law creates property rights and interests, and Federal tax law then defines the tax treatment of those property rights. See Morgan v. Commissioner, 309 U.S. 78 (1940). (9).
Pursuant to New York law [the taxpayer] did not have a property interest in the underlying assets of the LLC, which is recognized under New York law as an entity separate and apart from its members. Accordingly, there was no State law "legal interest or right" in those assets for Federal law to designate as taxable, and Federal law could not create a property right in those assets. (11).
[W]hether the check-the-box regulations require us to disregard a single-member LLC, validly formed under State law, in deciding how to value and tax a donor's transfer of an ownership interest in the LLC under the Federal gift tax regime . . . . (15).
[W]e do not agree that the check-the-box regulations apply to disregard the LLC in determining how a donor must be taxed under the Federal gift tax provisions on a transfer of an ownership interest in the LLC. If the check-the-box regulations are interpreted and applied as [the I.R.S.] contends, they go far beyond classifying the LLC for tax purposes. The regulations would require that Federal law, not State law, apply to define the property rights and interests transferred by a donor . . . . [T]o conclude that because an entity elected the classification rules set forth in the check-the-box regulations, the long-established Federal gift tax regime is overturned. . . . (20).
In every case involving questions of statutory or regulatory interpretation, the starting point is the language itself. The regulations we here construe are . . . [the check-the-box regulations]. (31).
Contrary to the majority's suggestion that State law, not Federal law, defines for valuation purposes under the Federal gift tax the property rights and interests a donor transfers (see majority op. p. 19), McNamee v. Dept. of the Treasury, supra, stands for the proposition that Federal law, in the form of the check-the-box regulations, does define the property rights and interests so transferred. (41-42).
The majority fails to apply the plain language of [the check-the-box regulations], which require that a single-member LLC be disregarded for "federal tax purposes." (49).
The regulations provided that the owner of a disregarded entity is treated as the owner of its property. Likewise, the Court of Appeals for the Second Circuit, the court to which this case is appealable, has said " 'if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship . . . of the owner.' " McNamee v. Dept. of Treasury, 488 F.3d 100, 107-108 (2d Cir. 2007).
I agree with the Majority opinion in this case. The regulations' plain language should be respected but not out of context. The majority provides a long history of the regulations starting on p. 11. I am sure this decision will get appealed.
Willock v. Comm'r, T.C. Memo. 2009-178 (T.C. 2009) (parenthetical references are to the page number of the opinion).
The Willocks challenge the IRS's use of a lien to collect $191,724 in unpaid taxes and penalties related to their 2001 tax return. (2). The Tax Court sustains the lien because the Willocks "offered no collection alternatives or other defenses to the lien." (6).
December 7, 2005 - IRS mails a Notice of Deficiency to the taxpayers. (2).
April 11, 2006 - IRS assesses the tax, penalty, and interest because the taxpayer did not respond to the NOD within the requisite 90-day period. (2).
January 23, 2007 - IRS files Notice of Federal Tax Lien. (3).
January 30, 2007 - IRS mails taxpayer the Notice of Federal Tax Lien and Your Right to a Hearing Under IRC 6320 (Letter 3172). (3).
February 26, 2007 - Taxpayer requests a collection due process hearing (CDP). (3).
July 23, 2007 - IRS schedule telephone CDP hearing for August 14, 2007. (3).
August 14, 2007 - at the hearing, "[taxpayers] did not present any reason why the filing of the Federal tax lien should not remain in place, nor did [taxpayers] present any collection alternatives during the hearing." (3).
August 23, 2007 - IRS mails taxpayers a Notice of Determination. (4).
October 1, 2007 - Taxpayers file petition with the Tax Court. (4).
October 7, 2008 - Tax Court holds hearing to discuss taxpayer's motion for summary judgment. (4).
June 18, 2009 - Tax Court denies taxpayer's motion for summary judgment. (4).
At the telephone CDP hearing, the Willocks disputed the amount of tax owed, that is, they disputed the underlying tax liability assessed by the IRS. (3). But, "[b]ecause the petitioners had a prior opportunity to dispute the underlying tax liability for 2001, they would not be permitted to do so during the CDP hearing." (3). In other words, the Willocks had an opportunity to dispute the amount of the liability and they let it pass. Consequently, at the CDP hearing they could only dispute the IRS's collection methods. As the Court points out, in the absence of any relevant arguments from the taxpayers, a lien is a lawful method of enforcing collection of an outstanding tax liability. (6).
Section 6501(a) provides, as a general rule, that taxes must be assessed within three years after a return is filed. This is the basic statute of limitations provision in the Internal Revenue Code. There are exceptions to this general rule, one of which is in section 6501(c)(4)(A). This section states that if "both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon." In other words, the taxpayer can extend the three-year statute of limitations imposed on the Internal Revenue Service.
A review off the above chronology shows that the three-year limitation had expired long before the IRS assessed the tax on April 11, 2006. As is usually the case, there is more here than meets the eye. In footnote no. 2, the Tax Court states that the taxpayers signed Form 872 prior the expiration of the three-year statute of limitations. (4). Form 872 is an agreement between the taxpayer and the IRS that adheres to the requirements under section 6501(c).
I did a search of the IRS website and could not find Form 872. This leads me to believe the IRS has transitioned to a different form. Form 921 appears to be its replacement.
Ortega v. Comm'r, T.C. Summary Opinion 2009-120 (T.C. 2009).
Ms. Ortega deducted $19,885 in education expenses associated with her doctoral degree in psychology on her 2004 tax return. She claimed the expenses were deductible as a trade or business expense because she was already a mental health practitioner. The IRS denied the deduction because the doctoral degree qualified her for a new trade or business, i.e. staff psychologist. The Tax Court agreed with the IRS.
Ms. Ortega earned her masters degree in psychology from the University of Nebraska in 1996. After several years of working as a Mental Health Practitioner for the State of Nebraska, she went back to the University of Nebraska to earn a doctorate in psychology. Upon earning her doctoral degree in psychology, she moved to New York and began work as a staff psychologist for the Federal Bureau of Prisons. New York required a doctoral degree to practice psychology, therefore Ms. Ortega could not practice as a staff psychologist without it.
When are Education Expenses Deductible as Trade or Business Expenses?
Expenditures made by an individual for education are deductible as ordinary and necessary business expenses if the education maintains or improves skills required by the individual in her employment or other trade or business. Sec. 1.162-5(a), Income Tax Regs. However, the general rule under section 1.162-5(a) does not apply [and the expenses are not deductible] if the expenses fall within either of the two specified categories: (1) The expenses are incurred to meet the minimum education requirements for qualification in the taxpayer's trade or business; or (2) they qualify the taxpayer for a new trade or business. Sec. 1.162-5(b).
If the education in question qualifies the taxpayer to perform tasks and activities significantly different from those she could perform before the education, then the education is deemed to qualify the taxpayer for a new trade or business. Browne v. Commissioner, 73 T.C. 723, 726 (1980).
The mere capacity to engage in a new trade or business is sufficient to disqualify the expense for deduction. Weiszman v. Commissioner, 52 T.C. 1106, 1111 (1969).
Did Ms. Ortega's Doctoral Degree Qualify Her for a New Trade or Business?
Ms. Ortega asserts the doctoral degree did not qualify her for a new trade or business because she continued to work in the field of psychology before and after her education.
The Tax Court disagreed. State law controls the outcome here. In both Nebraska and New York, the only requirement for being a mental health practitioner was a masters degree in psychology, which Ms. Ortega already had. In contrast, both states required a doctoral degree in psychology to practice as staff psychologist. When Ms. Ortega left Nebraska and went to work in New York, she started practicing as a staff psychologist. Accordingly, "the doctorate . . . [q]ualified her to perform tasks and activities significantly different from those she could perform before the eduction." Therefore, her education expenses were not deductible as a trade or business expense.
This is not a completely straightforward area of the law, but the decision here is correct. For example, though I already practice tax law as a CPA, my law degree will qualify me to be a lawyer. Therefore, even if I never intend to practice as a lawyer, my law degree expenses are not deductible.
Finally, even if Ms. Ortega was allowed to deduct the education expenses in question, the deduction would be limited by section 67. Section 67 imposes a two-percent floor on miscellaneous itemized deductions. That is, itemized deductions, other than those listed in section 67, are deductible "only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income." Sec. 67(a). Adjusted gross income is defined in section 62. Alternatively, you can look at page 1 of the Form 1040 to see how to calculate AGI.
If you follow me on twitter, or read my twitter updates on the right side of this blog, you know that I just spent five great days with my wife and son in Jackson, Wyoming. I must confess, I did not read the Tax Court opinions published during that time! I will work to catch up by the end of the week.
Trollope v. Comm'r, T.C. Memo 2009-177 (T.C. 2009).
The IRS challenged Mr. Trollope's transactions with Arrow Capital Associates, Inc. After receiving certain documents during discovery, however, the IRS conceded the issue. The Tax Court must decide if Mr. Trollope is entitled to an award of litigation costs pursuant to section 7430.
Mr. Trollope and Mr. Larik each owned 1,500 shares of Arrow. Through a series of transactions, Mr. Trollope purchased Mr. Larik's 1,500 shares, or a 50% interest in Arrow. The initial transaction involved Arrow lending $1.9 million and $.7 million to Mr. Trollope and Mr. Larik respectively ($1.9 + $.7 = $2.6; keep this figure in mind). Through a stock purchase agreement, Mr. Trollope then agreed to purchase Mr. Larik's 50% interest for $2.6 million. To fund the purchase, Mr. Trollope used the $1.9 million he was lent from Arrow, and assumed Mr. Larik's $.7 million note. After becoming the sole shareholder, and owning 3,000 shares, Mr. Trollope sold 1,500 shares to Arrow in exchange for cancellation of his $1.9 million note and cancellation of the $.7 million note he had assumed on behalf of Mr. Larik.
The IRS issued a 30-day letter stating that the last transaction, Arrow's purchase of 1,500 shares from Mr. Trollope, was a constructive dividend. Mr. Trollope argued in response that he "had not received a constructive dividend from Arrow, but rather had stepped in to facilitate a stock redemption as Arrow's agent." Despite Mr. Trollope's argument, the IRS issued a Notice of Deficiency (NOD). Shortly thereafter, Mr. Trollope filed a petition with the Tax Court challenging the NOD.
During the discovery process, Mr. Trollope provided additional documentation that resulted in the IRS conceding the issue. Mr. Trollope filed a motion to recover $122,402 in litigation costs under section 7430.
To qualify under section 7430, taxpayers must establish that they: (1) Were the prevailing party within the meaning of section 7430(c)(4); (2) exhausted the applicable administrative rememdies; (3) did not unreasonably protract the proceedings; and (4) have claimed costs that are reasonable.
Section 7430(c)(4) defines the term prevailing party. As is usually the case, the section provides a general rule and then states exceptions. The first exception to the term prevailing party is section 7430(c)(4)(B). Under this section, if the IRS's position is substantially justified, then the taxpayer will not be considered a prevailing party. Despite the seemingly strong language, the threshold here is quite low.
"Substantially justified" is defined as "justified to a degree that could satisfy a reasonable person" and having a "reasonable basis both in law and fact" . . . Respondent's position may be incorrect and yet be substantially justified "if a reasonable person could think it correct." Whether respondent acted reasonably ultimately turns on the available information which formed the basis for respondent's position as was as on the relevant law.
The IRS's constructive dividend argument was based on the view that the transactions between Arrow and Mr. Trollope were "independent transactions resulting in a dividend . . . under section 301(a) and 302(b)(1)." While Mr. Trollope's view, supported by the facts, showed the transactions were a "single integrated transaction resulting in exchange treatment under section 302(a).
The Tax Court holds for the IRS because Mr. Trollope did not provide "all of the relevant information under his control" prior to the issuance of the NOD. Mr. Trollope provided only the stock purchase agreement to the IRS prior to the formal discovery process. Despite a "multiyear dialogue" between the IRS and Mr. Trollope prior to issuing the NOD, Mr. Trollope never provided the loan documents, corporate minutes, or any other documentation to support the "integrated transaction" argument. All of which were under his control. Thus, relying solely on the stock purchase agreement, it was reasonable for the IRS to take the legal position that the transaction in question was a constructive dividend.
I often wonder what is the "real story" behind these types of facts. Why, for example, wouldn't Mr. Trollope provide any and all necessary documentation to support his position? Particularly since this was supposedly a "multiyear" dialogue. Did Mr. Trollope simply become frustrated during the audit process and refuse to cooperate?
Also, the Court's opinion does not discuss what specific documents were provided to the IRS during discovery that caused the IRS to concede the issue. These facts might help illuminate the real story here.

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