Taxing Definitions

Definitions — Order in the court

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If it please the court … A few weeks ago, the national taxpayer advocate released the 2017 Annual Report to Congress, as required by law. ()

Part of the first volume of the report discusses the ten most litigated issues as measured by cases in which the court issued an opinion. Are you ready to test your knowledge? The ball is in your court…



In how many types of courts can taxpayers litigate a tax matter?

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The taxpayer advocate found that the number one most litigated issue was the accuracy-related penalty under internal revenue code sections 6662(b)(1) and (2). These code sections authorize the IRS to impose a penalty if a taxpayer’s negligence or disregard of rules or regulations causes an underpayment of tax required to be shown on a return, or if an underpayment exceeds a computational threshold called a substantial understatement, respectively. Section 6662(b) also authorizes the IRS to impose the accuracy-related penalty on an underpayment of tax in six other circumstances.

The taxpayer advocate identified 138 opinions issued between June 1, 2016, and May 31, 2017, where taxpayers litigated the negligence or disregard of rules or regulations or the substantial understatement components of the accuracy-related penalty.

What percentage of cases do you think the IRS won?

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The taxpayer advocate identified trade or business expenses under internal revenue code section 162 (and related sections) as the second most litigated tax issue in federal courts between June 1, 2016, and May 31, 2017.

The taxpayer advocate reviewed 99 cases involving a trade or business expense issue. The courts affirmed the IRS position in 65 of these cases, or about 66%, while taxpayers fully prevailed in only two cases, or about 2%. The remaining 32 cases, or about 32%, resulted in split decisions.

The courts can use the Cohan rule when a taxpayer cannot substantiate the exact amounts of deductions by documentary evidence such as invoices, bills, or canceled checks, but can establish some business expenditures. In those situations, the Cohan rule grants the taxpayer a reasonable amount of deductions.

The Cohan rule is one of “indulgence” established in 1930 by the Court of Appeals for the Second Circuit in Cohan v. Commissioner. The court held that the taxpayer’s business expense deductions were not adequately substantiated, but stated that “the [Tax Court] should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent.” In Estate of Elkins v. Commissioner, the Fifth Circuit described “the venerable lesson of Judge Learned Hand’s opinion in Cohan: In essence, make as close an approximation as you can, but never use a zero.”

The Cohan rule cannot be used when internal revenue code section 274 (disallowance of certain entertainment, etc., expenses) applies.

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The fifth most litigated issue, per the 2017 National Taxpayer Advocate Annual Report to Congress, was gross income under internal revenue code section 61 (and related sections). One of the more common issues in this group was individual retirement account distributions.

In the report, the taxpayer advocate discussed 148 T.C. No. 14 (Trimmer), where the taxpayer won on the issue of whether distributions had to be rolled over within 60 days of receipt in order to be a nontaxable rollover.

The IRS had assessed a penalty on the taxpayer’s 2011 federal income tax return. The IRS said the taxpayer did not properly request relief due to hardship under Revenue Procedure 2003-16 by not requesting and paying for a private letter ruling to determine whether a hardship exception from the 60-day rollover requirement existed.

The court concluded that the IRS proceeded based on “an incomplete understanding of the pertinent statutory provisions, and failed to address or even acknowledge any of the facts and circumstances Mr. Trimmer set forth in his letter.”

After considering the objections of the IRS to the taxpayer’s claims, the court turned to the merits of the taxpayer’s request for a hardship waiver of the 60-day requirement. The court focused on the phrase “against equity or good conscience” in internal revenue code section 402(c)(3)(B), and found it would be against equity or good conscience to deny the taxpayer’s hardship waiver request.




Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions, IRS guidance, and other tax-related guidance and information. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire source documentation.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.


Section 7803(c)(2)(B)(ii)
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Taxpayers can generally litigate a tax matter in four different types of courts:

The United States Tax Court;

United States District Courts;

The United States Court of Federal Claims; and

United States Bankruptcy Courts.

With limited exceptions, taxpayers have an automatic right of appeal from the decisions of any of these courts.

The Tax Court is a “prepayment” forum. In other words, taxpayers can access the Tax Court without having to pay the disputed tax in advance. The Tax Court has jurisdiction over a variety of issues, including deficiencies, certain declaratory judgment actions, appeals from collection due process hearings, relief from joint and several liability, and determination of employment status.

The United States District Courts and the United States Court of Federal Claims have concurrent jurisdiction over tax matters in which the tax has been assessed and paid in full, and the taxpayer has filed an administrative claim for refund.

The United States District Courts, along with the bankruptcy courts in very limited circumstances, provide the only fora in which a taxpayer can receive a jury trial.

Bankruptcy courts can adjudicate tax matters that were not adjudicated prior to the initiation of a bankruptcy case.

Source: National Taxpayer Advocate Annual Report to Congress, 2017

Editorial Note: Appeals add two more types of courts: United States Courts of Appeals, and the United States Supreme Court.

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The IRS prevailed in full in 111 cases (80%), taxpayers prevailed in full in 22 cases (16%), and five cases (4%) were split decisions.

In last year’s Annual Report to Congress, the taxpayer advocate reported an uptick in the number of split decisions; however, during the period covered by this report, split decisions declined to below recent years’ levels.

Taxpayers appeared pro se (without representation) in 84 of the 138 cases (61%). Pro se taxpayers convinced the court to dismiss or reduce the penalty in 17% of those 84 cases, which is slightly below the overall success rate for taxpayers challenging these penalties.

Source: National Taxpayer Advocate Annual Report to Congress, 2017

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The Cohan rule cannot be used in situations where internal revenue code section 274(d) applies. Internal revenue code section 274(d) provides that unless a taxpayer complies with strict substantiation rules, no deductions are allowable for:

Travel expenses;

Entertainment, amusement, or recreation expenses;

Gifts; and

Certain “listed property.”

Source: National Taxpayer Advocate Annual Report to Congress, 2017

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In light of current IRS guidance, which no longer requires taxpayers who meet certain conditions to pursue a private letter ruling and instead allows taxpayers to self-certify that they meet the requirements for a hardship waiver, the Trimmers would never have ended up in court to pursue a hardship waiver.

A taxpayer is now allowed to self-certify (subject to verification on audit) that he or she is eligible for a waiver of the 60-day requirement instead of seeking a costly private letter ruling.

The current revenue procedure (2016-47) provides 11 reasons for missing the deadline that are eligible for self-certification. It also provides a model letter that may be used for the self-certification.

Source: National Taxpayer Advocate Annual Report to Congress, 2017

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