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No Charitable Exemption for an Organization Formed to Support One Individual

Explaining the most simple tax concepts to Uncle Bill is a task requiring herculean patience.  Explaining why there will be no charitable exemption for an organization formed to support one individual, even if said individual is his current favorite son, Leroy, left you with a deficit of patience that will not be soon refilled. Background Cousin Leroy is not entirely sure what happened. From what he can remember before he blacked out, he turned the corner around the large rock outcropping to see what all the ruckus was about while he was squirrel hunting. All he knows is that the lady moose ran away, and the bull moose charged Leroy and made quick work of exacting his revenge for interrupting their private moment. Needless to say, Leroy was never the same. In fact, the medical bills and physical therapy costs were staggering, and his employer, Rapid Ray's Burgers, did not,…

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February 3, 2021
Income Tax Issues
Income Tax Issues / Penalties Under the Code / Tax Articles

Deductibility of Fines and Penalties under New IRC § 162(f) Regulations

As you sat down one fine Tuesday morning in January 2021, and you cycled through the emails that rolled into your inbox in the 12 minutes since you last checked them, you notice an update announcing that the IRS is issued final regulations on IRC § 162(f) – deductibility of fines and penalties. You have had prior experience with the Code section, due to Uncle Bill’s penchant for minor violations of laws, regulations, and social mores…and his ill-fated pine marten breeding program. As you remember it, IRC § 162(f) was fairly straightforward. Generally, a fine or similar penalty paid to the government for a violation of the law is not deductible unless an exception applies. Somewhere in the deep recesses of your memory, you seem to recall that IRC § 162(f) was amended by the Tax Cuts and Job Act of 2017 (summarized by the Joint Committee on Taxation, here). …

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February 1, 2021
Penalties Under the Code
Tax Opinions / Memorandum Opinions / Penalties Under the Code

Sells v. Commissioner
T.C. Memo. 2021-12

On January 28, 2021, the Tax Court issued a Memorandum Opinion in the case of Sells v. Commissioner (T.C. Memo. 2021-12). The main issue presented in Sells v. Commissioner was whether the conservation easement deduction was appropriately denied, but it is the prior supervisory approval that we’ll focus on below. Background to the Penalty Issue in Sells v. Commissioner The IRS asserted penalties for both the conservation easement and the timber donation. However, the parties stipulated that the IRS had a “penalty-approval form” only for two of the five petitioners. Both these penalty-approval forms were approved by a “Group Manager” and dated before the two petitioners received their notices. The penalty-approval form for one petitioner shows approval of penalties for substantial understatement and gross misvaluation, but it doesn’t approve a penalty for negligence or substantial misvaluation. This form doesn’t specifically mention either the easement or the timber, but states that…

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January 28, 2021
Business Related Issues
Business Related Issues / Memorandum Opinions / Tax Opinions

Whatley v. Commissioner
T.C. Memo. 2021-11

On January 28, 2021, the Tax Court issued a Memorandum Opinion in the case of Whatley v. Commissioner (T.C. Memo. 2021-11). The issue presented in Whatley v. Commissioner was whether the petitioner’s tree or cattle farm (he can’t seem to decide which) was a trade or business during the years at issue. A Note on my Favorite Jurist, Judge Holmes The opinion begins by describing the petitioner as “a proud Auburn alumnus” who made the “tiger’s share of his family’s income from banking.”  Well played sir; well played. When addressing why the cattle farm with no cattle and the tree farm that couldn’t be harvested was audited, Judge Holmes simply notes that “something about this snagged the [IRS’s] attention.” Another classic - “[p]eople don’t go to a mechanic’s banker to fix their cars—they go to a mechanic.” The Cattle Farm with no Cattle in Whatley v. Commissioner The petitioner explained…

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January 28, 2021
Penalties Under the Code
Tax Opinions / Memorandum Opinions / Penalties Under the Code

Reynolds v. Commissioner
T.C. Memo. 2021-10

On January 26, 2021, the Tax Court issued a Memorandum Opinion in the case of Reynolds v. Commissioner (T.C. Memo. 2021-10). The issue presented in Reynolds v. Commissioner was whether the IRS possessed the collection authority under IRC § 6201(a)(4) to undertake administrative collection action to collect restitution-based assessments (RBAs). Note on “Precedent” to Reynolds v. Commissioner It should be noted that the argument the petitioner made in Reynolds was “squarely rejected” in the case of Carpenter v. Commissioner, 152 T.C. 202, 219 (2019), aff’d 788 F.App’x 187 (4th Cir. 2019)…but the petitioner “invited” the Tax Court to “reconsider” the holding in Carpenter.  Tax Court Judge Thorton, not one to mince words, states simply “We decline the invitation.” Background to Reynolds v. Commissioner This is the cautionary tale of Dana Ray Reynolds, who, according to the opinion, “developed strategies to use corporations to conceal assets and evade income tax.” In…

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January 26, 2021
Penalties Under the Code
Full Tax Court Opinions / Penalties Under the Code / Tax Opinions

Grajales v. Commissioner (156 T.C. No. 3)

On January 25, 2021, the Tax Court issued its opinion in Grajales v. Commissioner, 156 T.C. No. 3. The underlying issue presented in Grajales was whether prior written supervisory approval under IRC § 6751(b)(1) was required to assert the 10% IRC § 72(t) “exaction” for early distributions from a qualified retirement plan. Labels are for Cans Abraham Lincoln is credited for saying “How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg.”  Similarly, calling a tax a penalty or a penalty a tax does not make it so.  We have seen the IRS argue in previous cases argue that the IRC § 6751(b)(1) approval requirement does not apply certain penalties, because even though it’s called a “penalty” it is collected like a tax.  Circle back to Laidlaw’s Harley Davidson and Chadwick to name…

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January 25, 2021
International Issues
Full Tax Court Opinions / Income Tax Issues / International Issues / Tax Opinions

Adams Challenge UK Limited v. Commissioner
156 T.C. No. 3

On January 25, 2021, the Tax Court issued its opinion in Adams Challenge UK Limited v. Commissioner (156 T.C. No. 3). The underlying issue presented in Adams Challenge UK Limited v. Commissioner was whether the IRS erred in disallowing the petitioner’s deductions and credits and whether the IRS’s action violated the business profits and the nondiscrimination articles of the bilateral income tax treaty between the United States and the U.K. Background to Adams Challenge UK Limited v. Commissioner The petitioner is a U.K. corporation whose sole income-producing asset for the years at issue was a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf in the Gulf of Mexico. During 2009 and 2010 P derived from the charter gross income of about $32 million, which was effectively connected with the…

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January 25, 2021