FTB can penalize you even if you fully pay your taxes

One of the wive’s tales about taxes is that you are due a refund you can file anytime you want.

Be careful, that advice might cost you thousands of dollars.

California has a law on its books that says if the Franchise Tax Board sends you a request for a return, and you don’t answer that request, you can be liable for a penalty of up to 25% of the amount the Franchise Tax Board thinks you owe.

Here’s language from a recent case on the subject:

R&TC section 19133 provides, in part, that if any taxpayer fails to furnish any information requested in writing by respondent or fails to file a return upon notice and demand by respondent, a penalty of 25 percent of the amount assessed by respondent concerning the assessment of which the information or return was required shall be imposed unless the failure is due to reasonable cause and not willful neglect. It is well established that, in the case of a delinquent return, the assessed deficiency is the total correct tax liability as of the due date of the return, rather than the tax shown on the delinquent return.

Some of you still might be thinking this is no big deal as the FTB owes you.  Your employer withheld all the taxes and so you aren’t liable for the penalty.

Wrong again.  Here’s more language from the same case:

Moreover, the tax deficiency exists regardless of whether the taxpayer is entitled to a credit for tax withheld from wages. The credit merely operates to reduce or offset the tax liability established by the delinquent return. 

So lets put it all together.  Your employer withheld $15,000 in California taxes.  You did an estimate of how much you owe and it comes out to $10,000 to the state.  No big deal, for some reason you decide to wait to file your return.  A little bit later the FTB sends a request for a return.  You’re too busy to respond immediately and you’re still not in a rush for your check.  A year later you finally get around to requesting your refund.

Bad news.  The FTB is going to hit you with a penalty equal to 25% of the amount they think your tax liability was going to be.

Moral to the story.  File your tax return on time.  There are all sorts of gotchyas out there that could get ya if you don’t.

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Want to tell the FTB you are a resident of Nevada? Its probably not going to work.

Getting enticed by those radio ads promoting Nevada corporations and becoming a Nevada resident so as to save on California taxes?  Its not going to be easy.

Below I posted a recent Board of Equalization case where a guy:

1.  Had a Nevada drivers license.
2.  Registered his truck in Nevada.
3.  Had Nevada car insurance.
4.  Had leased a Las Vegas apartment
5.  Had registered as a voter in Nevada

You would think that would make him a Nevada resident and thus not subject to California taxes wouldn’t you?  Oh by the way.  There was a little incentive for this guy to claim he was a Nevada resident. He sold a Nevada property for close to $30,000,000 during the time he claimed he was a resident.

Lets see, would you rather be a resident of a state that was going to hit you with taxes or a state with no taxes.  Its a no brainer.  However California felt like they had the right to tax the guy.  Here’s why:

1.  He had access to a home in California.
2.  He filed a divorce in California.
3.  His kids lived in California.
4.  He filed a California tax return a year earlier.
5.  He gave a California address on his non resident return he filed with California.
6.  He used a California tax preparer.
7.  He used a California address on his Nevada driver’s license.
8.  He had a couple new cars registered in California
9.  He had ownership in a couple California businesses.

Translation, California wanted him to pay taxes.

Normally I would wrap this column up by saying if you lived in La Quinta, Palm Desert, Palm Springs, Indian Wells, Rancho Mirage, Indio, or the Coachella valley and had questions about being a resident of Nevada, to give us a call.  However, there is a good chance you are going to lose that argument.

BOARD OF EQUALIZATION

STATE OF CALIFORNIA

In the Matter of the Appeal of:

MORDECHAI DAYAN

SUMMARY DECISION

PERSONAL INCOME TAX APPEAL

Adopted: November 19, 2013

Representing the Parties:

For Appellant:
Robert J. Herrera, Enrolled Agent

For Franchise Tax Board:
Ronald E. Hofsdal, Tax Counsel III

Counsel for the Board of Equalization:
Mai C. Tran, Tax Counsel

This appeal is made pursuant to section 19045 of the Revenue and Taxation Code (R&TC) from the action of the Franchise Tax Board (FTB or respondent) on appellant’s protest against a proposed assessment in the amount of $ 411,400 in tax and a late filing penalty of $ 102,850, 1 plus interest, for the 2007 tax year. The issues presented in this appeal are (1) whether appellant has shown that respondent’s determination of appellant’s residency is erroneous; and (2) whether appellant has demonstrated reasonable cause for the abatement of the late filing penalty.

FINDINGS AND DISCUSSION

Background

Prior to 2007, respondent indicates that appellant was domiciled in, and a long-time resident of, California. 2 Appellant filed California resident returns for 2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2008. Starting in 2008, it is undisputed that appellant was and is domiciled in, and a resident of, California. In 2007, appellant recognized a capital gain of $ 4,718,167 from the sale of land, through his interest in Riverside Developments, LLC. 3 Appellant filed a 2007 California nonresident return on or about December 15, 2008. Upon review, respondent issued a Notice of Proposed Assessment (NPA) on November 16, 2010, which treated appellant as a California resident for 2007 and assessed tax of $ 411,400, a late filing penalty of $ 102,850, and a penalty for failure to furnish documents of $ 102,850. Respondent issued a Notice of Action (NOA) on May 10, 2011, affirming the NPA. This timely appeal then followed.

Contentions

Appellant

Appellant contends that he was a domiciliary and a resident of Nevada during the 2007 tax year. In support, appellant provides the following documents:

1) A copy of appellant’s Nevada driver’s license
covering the period of December 31, 2005 through
January 5, 2010, which lists both a Las Vegas, Nevada
address and a Sherman Oaks, California address;

2) A copy of appellant’s driver’s license covering
the period of January 8, 2010 through January 5,
2014, which lists a Las Vegas, Nevada address;

3) A copy of appellant’s Nevada vehicle registration
for a 2005 Dodge Ram issued on December 12, 2005,
and expired on December 12, 2006;

4) A copy of appellant’s Nevada vehicle insurance
card for the 2005 Dodge Ram with an effective date
of September 29, 2006, and an expiration date of
May 13, 2007;

5) A copy of appellant’s Nevada vehicle insurance
card for the 2005 Dodge Ram with an effective date
of January 3, 2007, and an expiration date of July
3, 2007;

6) A copy of appellant’s insurance coverage summary
covering the period from November 13, 2006 through
May 13, 2007;

7) A copy of a leasing agreement for a Las Vegas
apartment for the period December 6, 2005 through
November 30, 2008;

8) A copy of a letter from appellant’s mother dated
January 3, 2011, stating that appellant travelled
to Israel at least twice in 2007 to spend time with
appellant’s ailing father. Appellant’s mother states
that each visit was between three weeks to two months;

9) Copies of appellant’s passports issued by the
United States and Israel;

10) Appellant’s voter registration card for Clark
County, Nevada, issued on February 17, 2006; and

11) A copy of a seller’s closing agreement between
buyer Emerald Shores T, LLC and seller Riverside
Developments, LLC dated April 12, 2007, for the sale
of a piece of land in Nevada for $ 29,071,791.40.

Appellant also disagrees with respondent’s contention that appellant was domiciled in, and a long-time resident of, California prior to 2007. Appellant contends that he has established domicile in Nevada, separate from his former spouse, in 2006 based on the evidence listed above. Appellant further contends he followed the erroneous advice of his income tax preparer in filing a California resident return for 2006. Appellant contends that this act did not preclude appellant from correctly filing a non-resident return for 2007.

With regard to appellant’s divorce, appellant contends that he merely went along with his former spouse’s request for divorce, using the same divorce attorney as his former spouse to expedite the divorce process and keep his sanity. Appellant contends that, as a result of erroneous professional advice, he held himself out as a California resident on the Marriage Separation Agreement (MSA). Appellant claims that he returned to California in 2007 for a temporary purpose due to the unforeseen divorce request and the subsequent divorce proceedings. Appellant points out that the divorce proceeding was unexpected because his former spouse initiated the divorce. In response to this Board’s Appeals Division staff’s request for additional information, appellant states that he does not have any additional supporting documents, as the divorce caused him to be impaired.

Appellant also contests the imposition of the late filing penalty on the basis that appellant was going through a divorce, and, as a consequence, he suffered from mental illness. Appellant claims that his state of mind was impaired for many months due to the divorce and separation from his former spouse and children. Accordingly, appellant claims that he has demonstrated a reasonable cause for the abatement the late filing penalty.

Respondent

Respondent contends that appellant is a longtime domiciliary and resident of California. Respondent contends that a domicile is the place with which a person has the most settled and permanent connection. Respondent further contends that a change in domicile requires actual residence in a new place and an intention to remain there permanently or indefinitely without any intention to return to the former place of abode, citing Estate of Philips (1969) 269 Cal.App.2d 656. Respondent asserts that appellant’s closest connections in the 2007 tax year are to California, and not to Nevada. Respondent further asserts that, as appellant has not shown that his domicile clearly changed to Nevada, his domicile remains in California.

With respect to appellant’s residency, respondent contends that appellant has not established that he was outside of California for something other than a transitory or temporary purpose in the 2007 tax year. Respondent asserts that an analysis of the evidence based on the factors discussed in this Board’s decision in the Appeal of Stephen Bragg, 2003-SBE-002, decided on May 28, 2003, supports a determination that appellant’s closest connections remained with California. Therefore, respondent contends that appellant was a domiciliary and resident of California during the 2007 tax year.

With respect to the residential information, respondent contends the evidence strongly suggests that appellant did not possess a living place in Nevada during 2007. Respondent notes that the lease entered into between appellant and the Las Vegas landlord was voided on September 4, 2006, by agreement of the parties. With regard to the second lease which was entered into between appellant, his former spouse, and the Las Vegas landlord, respondent notes that this lease was not identified as a liability in the MSA. As such, respondent surmises that the second lease never went into effect or was no longer in effect at the time the MSA was signed in 2007. Respondent asserts that a September 2006 departure from Las Vegas is supported by the apparent lack of records, including bills for lawn care, telephone service, and other services after October 2006, despite being plentiful prior to October 2006. Respondent provided a telephone service notice dated October 31, 2006, indicating that telephone service for the apartment was disconnected. In contrast, respondent notes that, until their separation, appellant had access to a home in West Hills, California, which appellant owned but quit claimed to his former spouse 4 on September 6, 2005. Respondent further notes that appellant used numerous California addresses throughout 2007 and the years before and after the 2007 tax year.

Respondent also contends that appellant’s tax return information supports its position that appellant was a domiciliary and resident of California in the 2007 tax year. Respondent notes that appellant filed his 2006 California resident tax return in 2007 using a California address. In addition, while the 2007 return was filed in 2008, appellant used a California address on his California nonresident return. Respondent further notes that appellant used California tax preparers to file his 2006 and 2007 returns. Respondent further notes that the 2007 Internal Revenue Service Wage and Income Transcripts report indicates that appellant received a Schedule K-1 from Riverside Developments, LLC in which appellant received a capital gain of $ 4,718,167 and listed appellant’s Las Vegas, Nevada address. However, respondent notes that appellant also received Schedule K-1s from Mordy’s Construction, Inc. and Absolute Stone & Marble, Inc. and numerous Form 1099-Bs in which appellant’s address was listed in Encino, California. Appellant also received a Form 1098 for mortgage interest addressed to appellant in Agoura Hills, California. Respondent contends that appellant’s tax returns and supporting forms clearly reflect significant connections to California.

With regard to appellant’s Department of Motor Vehicle (DMV) records, respondent contends that it is significant that appellant purchased a 2007 Mercedes in California in June of 2007 and registered it in California in May of 2008. Appellant also registered a 2005 Lexus in California during October 2007. Respondent notes that, as part of the MSA, appellant retained ownership of both vehicles. In contrast, respondent notes that the 2005 Dodge Ram appellant registered in Nevada starting in December 2005 was not listed in the MSA. Respondent contends that the Dodge Ram was no longer in appellant’s possession at the time the MSA was signed in late 2007. Respondent further notes that the insurance cards for the Dodge Ram appear to be issued in 2006, although one card had a start date of January 3, 2007, and all the insurance cards expired in early to mid-2007. Respondent asserts that the registration of the Dodge Ram occurred at the time when it was undisputed that appellant was a California resident (2005). Respondent contends that appellant’s vehicles supports its contention that appellant was a California resident in the 2007 tax year.

Respondent also contends that, while appellant obtained a Nevada driver’s license on December 28, 2005, and renewed the license on January 8, 2010, appellant was a California resident in 2005, 2006, and 2008, when he held the Nevada license. Respondent contends that there is no evidence furnished from the Nevada Department of Motor Vehicles which reflects that appellant changed his mailing address in 2007, despite vacating his Las Vegas apartment in 2006. Accordingly, respondent contends that appellant’s Nevada driver’s license bears little weight to determining whether appellant was in Nevada for other than a temporary or transitory purpose in 2007. With regard to appellant’s Nevada voter registration, respondent contends that this factor does not favor either appellant or respondent as appellant never voted, despite registering to vote in late December 2005.

With regard to appellant’s submission of a letter from his mother, Miriam Dayan, stating that appellant travelled to Israel several times during the 2007 tax year due to his father’s serious medical problems, respondent contends that this is not relevant because appellant’s trips to Israel were clearly a temporary or transitory purpose regardless of whether appellant was a resident of California or Nevada. Respondent notes that, if appellant provided evidence of the origination point of his travels, appellant’s travel would then be relevant.

Respondent contends that the MSA supports its determination that appellant was a domiciliary and resident of California in the 2007 tax year. Respondent contends the MSA demonstrates that appellant took advantage of the laws and protections of California throughout 2007, despite appellant’s argument that he was a Nevada resident. In addition, respondent contends that the MSA acts as an admission because appellant agreed that he was a California resident for at least the six months prior to the signing of the MSA in December of 2007. 5 Next, respondent contends that the assets and liabilities establishing Nevada connections are not mentioned in the MSA, as one would expect if they were still assets and liabilities at the time the MSA was signed. Lastly, the absence of any evidence reflecting that appellant had access to, or possessed living quarters in, Nevada in 2007, combined with evidence which reflects that appellant abandoned his Nevada quarters in late 2006, supports respondent’s contention that appellant’s closest connections throughout 2007 were with California instead of Nevada.

With regard to the late filing penalty, respondent contends that it properly imposed the late filing penalty as appellant filed his return on December 15, 2008, well after the original due date of April 15, 2008, and the extended due date of October 15, 2008. Respondent further contends that appellant has not demonstrated reasonable cause to abate the penalty.

Law

Residency

California residents are taxed upon their entire taxable income regardless of source, while non-residents are only taxed on income from California sources. (Rev. & Tax. Code, section 17041, subds. (a), (b), and (i); 17951.) Part-year residents are taxed on their income earned while residents of this state, as well as all income derived from California sources while nonresidents. (Rev. & Tax. Code, section 17041, subds. (b) & (i).) A California resident includes: (i) every individual who is in this state for other than a temporary or transitory purpose; and (ii) every individual domiciled in this state who is outside this state for a temporary or transitory purpose. (Rev. & Tax. Code, section 17014.)

Accordingly, the key question under either facet of the “resident” definition is whether the individual is present in California, or absent from California, for a temporary or transitory purpose. (Appeal of Stephen D. Bragg, supra.) This determination cannot be based solely on the individual’s subjective intent, but must instead be based on objective facts. (Appeal of Anthony V. and Beverly Zupanovich, 76-SBE-002, Jan. 6, 1976.) In situations where an individual has significant contacts with more than one state, the state with which the individual maintains the closest connections during the taxable year is the state of residence. (Cal. Code Regs., tit. 18, section 17014, subd. (b); Appeal of Raymond H. and Margaret R. Berner, 2001-SBE-006-A, Aug. 1, 2002.) In the Appeal of Stephen D. Bragg, supra, this Board reiterated the purpose of the residency rules, to ensure that all individuals who are in California for other than a temporary or transitory purpose, enjoying the benefits and protection of the state, should in return contribute to its support. (Cal. Code Regs., tit. 18, section 17014, subd. (a); Whittell v. Franchise Tax Board (1964) 231 Cal.App.2d 278). In the Appeal of Bragg, supra, the Board compiled a non-exhaustive list of objective factors helpful in the determination with which state an individual maintains his closest connections. Those factors include:

º The location of all of the taxpayer’s residential
real property, and the approximate sizes and values
of each of the residences;

º The state wherein the taxpayer’s spouse and children
reside;

º The state wherein the taxpayer’s children attend
school;

º The state wherein the taxpayer claims the homeowner’s
property tax exemption on a residence;

º The number of days the taxpayer spends in California
versus the number of days the taxpayer spends in
other states, and the general purpose of such days
(i.e., vacation, business, etc.);

º The location where the taxpayer files his tax returns,
both federal and state, and the state of residence
claimed by the taxpayer on such returns;

º The location of the taxpayer’s bank and savings accounts;

º The state wherein the taxpayer maintains memberships
in social, religious, and professional organizations;

º The state wherein the taxpayer registers his automobiles;

º The state wherein the taxpayer maintains a driver’s
license;

º The state wherein the taxpayer maintains voter registration,
and the taxpayer’s voting participation history;

º The state wherein the taxpayer obtains professional
services, such as doctors, dentists, accountants,
and attorneys;

º The state wherein the taxpayer is employed;

º The state wherein the taxpayer maintains or owns
business interests;

º The indications in affidavits from various individuals
discussing the taxpayer’s residency;

º The taxpayer’s telephone records (i.e., the origination
point of taxpayer’s telephone calls);

º The origination point of checking account transactions
and credit card transactions;

º The state wherein the taxpayer holds a professional
license or licenses; and

º The state wherein the taxpayer owns investment real
property.

Domicile

The California Court of Appeal and the FTB’s regulations define “domicile” as the location where a person has the most settled and permanent connection, and the place to which a person intends to return when absent. (Whittell v. Franchise Tax Board, supra, at 284; Cal. Code Regs., tit. 18, section 17014, subd. (c).) An individual may claim only one domicile at a time. (Cal. Code Regs., tit. 18, section 17014, subd. (c).) An individual who is domiciled in California and leaves California retains his or her California domicile as long as there is a definite intention of returning to California, regardless of the length of time or the reasons why he or she is absent from California. (Cal. Code Regs., tit. 18, section 17014, subd. (c); See also Appeal of Robert J. Addington Jr, 82-SBE-001, Jan. 5, 1982.) To change domicile, a taxpayer must actually move to a new residence and intend to remain there permanently or indefinitely. (In re Marriage of Leff (1972) 25 Cal.App.3d 630, 642; Estate of Phillips, supra, at 659.) While an individual’s intent will be considered when determining domicile, intent will not be determined merely from unsubstantiated statements; the individual’s acts and declarations will also be considered. (Appeal of Joe and Gloria Morgan, 85-SBE-078, July 30, 1985.)

Burden of Proof

An FTB’s assessment is presumed correct, and a taxpayer has the burden of proving it to be wrong. (Todd v. McColgan (1949) 89 Cal.App.2d 509; Appeal of Ismael R. Manriquez, 79-SBE-077, Apr. 10, 1979.) In particular, the FTB’s determination of residency is also presumptively correct. (Appeals of John R. Young, 86-SBE-199, Nov. 19, 1986.) The party asserting a change in domicile bears the burden of proving such change. (Sheehan v. Scott (1905) 145 Cal. 684; Appeal of Terance and Brenda Harrison, 85-SBE-059, June 25, 1985.) If there is doubt on the question of domicile after the facts and circumstances have been presented, domicile is presumed not to have changed. (Whitmore v. Commissioner (1955) 25 T.C. 293; Appeal of Anthony J. and Ann S. D’Eustachio, 85-SBE-040, May 8, 1985.) California Code of Regulations, title 18, section 17014, subdivision (d)(1), states that the type and the amount of proof required to show domicile cannot be specified by general regulation, but will depend largely on the circumstances of each particular case. In the case of individuals who claim to be nonresidents by virtue of being outside of the state for other than temporary or transitory purposes, affidavits of friends and business associates as to the reasons for being outside of the state should be submitted. (Id.) An appellant’s failure to produce evidence that is within his control gives rise to a presumption that such evidence is unfavorable to his case. (Appeal of Don A. Cookston, 83-SBE-048, Jan. 3, 1983.)

Late Filing Penalty

R&TC section 19131 provides that a late filing penalty shall be imposed when a taxpayer fails to file a tax return on or before its due date, unless the taxpayer establishes that the late filing was due to reasonable cause and was not due to willful neglect. The penalty is computed at five percent of the tax due, after allowing for timely payments, for every month that the return is late, up to a maximum of 25 percent. (Rev. & Tax. Code, section 19131.) To establish reasonable cause, the taxpayer “must show that the failure to file timely returns occurred despite the exercise of ordinary business care and prudence, or that cause existed as would prompt an ordinary intelligent and prudent businessman to have so acted under similar circumstances.” (Appeal of Howard G. and Mary Tons, 79-SBE-027, Jan. 9, 1979.) The burden is on the taxpayer to prove that the difficulties experienced prevented him or her from filing a timely return. (Appeal of Michael E. Myers, 2001-SBE-001, May 31, 2001.) Unsupported assertions are not sufficient to satisfy a taxpayer’s burden of proof. (Appeal of Aaron and Eloise Magidow, 82-SBE-274, Nov. 17, 1982.)

Discussion

Appellant claims that he changed his domicile from California to Nevada sometime prior to the 2007 tax year and that he was in California in 2007 for the temporary or transitory purpose of getting a divorce. Respondent contends that appellant has been a longtime California domiciliary and resident prior to the 2007 tax year and that appellant’s Nevada activities were temporary or transitory so that appellant remained a California resident in the 2007 tax year.

Domicile

Although appellant claims that he was domiciled in Nevada prior to and during the 2007 tax year, the evidence establishes that appellant’s most settled and permanent connections were with California and not Nevada. In addition, appellant returned to California after a brief period in Nevada.

Appellant had the following connections to California in 2006 and 2007: (1) appellant had access to a home in West Hills, California, which he owned, but quitclaimed to his spouse in 2005; 6 (2) the divorce was filed in California; (3) according to the MSA, appellant’s minor children considered California their home state and the children resided in California for at least six months prior to September 19, 2007; (4) appellant filed a 2005 California resident return; 7 appellant listed a Sherman Oaks, California address on his 2006 California resident tax return; (5) appellant listed a Los Angeles, California address on his 2007 California nonresident tax return; (6) appellant employed California tax preparers to file his 2006 and 2007 tax returns; (7) appellant listed a Sherman Oaks, California address on his Nevada driver’s license covering the 2006 and 2007 tax years; (8) appellant used multiple California addresses for the 2007 tax year; (9) appellant registered a vehicle in California in 2007; (10) appellant purchased a new vehicle in California in 2007 and registered the new vehicle in California in 2008; (11) appellant held interests in two corporations, Absolute Stone & Marble, Inc., and Mordy’s Construction, Inc., that appear to be located in Encino, California; and (12) appellant used multiple California mailing addresses.

In addition, the evidence presented shows that appellant had the following connections to Nevada in 2006 and 2007: (1) two leases for the same apartment in Las Vegas for the period December 6, 2005 to November 30, 2008, one of which appears to have been voided on September 4, 2006; 8 (2) appellant paid for utilities for the Las Vegas apartment up to October 2006; 9 (3) appellant had Nevada driver’s licenses covering the period of December 31, 2005 through January 5, 2014; (4) appellant registered a leased vehicle with the Nevada DMV and had Nevada car insurance for that vehicle with an expiration of July 3, 2007, at the latest; (5) appellant was registered to vote in Nevada; and (6) appellant held interests in Riverside Vista Del Rio, LLC and Riverside Developments, LLC, two limited liability companies that appear to be located in Las Vegas, Nevada.

Although appellant claims that he followed the erroneous advice of his tax preparer in filing a 2006 resident income tax return and that he was a Nevada domiciliary in 2006, appellant has not explained why he was precluded from filing an amended 2006 income tax return to correct this alleged error. Furthermore, appellant’s eventual return to California and use of the California court system, rather than Nevada’s court system, to process his divorce supports finding that appellant remained a domiciliary of California in 2006 and 2007. Although it appears that appellant was briefly in Las Vegas, Nevada, in 2006, the records relating to utilities for the Las Vegas apartment reflect that appellant left Las Vegas, Nevada, prior to the end of 2006. In addition, appellant’s Las Vegas apartment lease was voided as of September 4, 2006, and appellant has not provided any evidence of residing in another residence in Nevada for the remaining part of 2006 and all of 2007. According to the MSA, appellant and his former spouse were California residents at least six months prior to the filing of the petition for dissolution of marriage on September 19, 2007, appellant’s minor children resided in California for six months prior to the filing of the petition for dissolution of marriage, and the home state for appellant’s minor children was California. In contrast, appellant and his family had access to a single family home in West Hills, California. Moreover, it appears that appellant remained in California after the divorce as he used a California address in filing his 2007 nonresident return and he filed a 2008 California resident tax return. Therefore, it appears that appellant returned to California sometime after September 4, 2006, and at the latest by March 2007 (i.e., six months prior to the filing of the petition for dissolution of marriage on September 19, 2007). Accordingly, appellant failed to show that he intended to remain in Nevada permanently or indefinitely. Therefore, appellant remained a domiciliary of California in 2006 and 2007.

Residency

As appellant was domiciled in California, the next question is whether appellant was outside of California for a temporary or transitory purpose in 2007. The key question is which state did appellant maintain the closest connections during the taxable year. (Appeal of Stephen D. Bragg, supra.) Here, the evidence clearly supports that appellant maintained the closest connections with California rather than Nevada during the 2007 tax year.

Residence: Appellant had access to a residence in California, but not in Nevada in 2007. Specifically, appellant had access to a single family home in West Hills, California, which appellant had owned but quitclaimed to his former spouse after they were married. In contrast, appellant merely provided two leases for the same Las Vegas, Nevada apartment, one of which appears to have been voided prior to 2007, on September 4, 2006. With regard to the second lease, which was entered into between appellant, his former spouse, and the Las Vegas landlord, this lease was not identified as a liability in the MSA. In addition, appellant provided no evidence of paying rent based on either of the two leases. Appellant’s lack of a Nevada residence after September 2006 is supported by appellant’s lack of records, such as bills for lawn care, telephone service, and other services after October 2006. While there are bank statements and billing invoices which show the payment of utilities for the Las Vegas apartment up to October 2006, appellant has not provided any evidence of utilities paid for this apartment during the 2007 tax year. Appellant has not alleged that he lived in another Nevada residence for the 2007 tax year other than the Las Vegas apartment appellant apparently vacated in late 2006. This factor supports a finding that appellant was a resident of California.

Location of where appellant’s spouse and children reside: The MSA indicates that appellant’s minor children and former spouse resided in California for at least six months prior to appellant and his former spouse’s filing of the petition on September 19, 2007. As such, the minor children considered California their home state. 10 This factor also supports a finding that appellant was a resident of California.

Tax return information: Appellant filed his 2006 California resident tax return in 2007 using a California address and a California tax preparer. In addition, while the 2007 return was filed in 2008, appellant used a California address and a California tax preparer. While appellant’s Schedule K-1 from Riverside Developments, LLC listed appellant’s Las Vegas, Nevada address as appellant’s mailing address, appellant also received Schedule K-1’s from Mordy’s Construction, Inc. and Absolute Stone & Marble, Inc. at an address in Encino, California. In addition, appellant engaged in day trading from January 3, 2007 through August 29, 2007, and his Form 1099-Bs were sent to the same Encino, California address. Appellant also received a Form 1098 for mortgage interest addressed to him in Agoura Hills, California. This factor supports a finding that appellant was a resident of California.

Vehicle Registration: Appellant purchased a 2007 Mercedes in California in June of 2007 and registered it in California in May of 2008. Appellant also registered a 2005 Lexus in California in October 2007. Appellant retained the ownership of both vehicles after his separation. In contrast, appellant, while a California resident, registered the 2005 Dodge Ram in Nevada in December 2005 with an expiration date of December 12, 2006. All of the insurance cards for the 2005 Dodge Ram expired in early to mid-2007. It is not clear whether appellant still possessed the Dodge Ram in 2007 as it was not listed as an asset or a liability in the MSA. In contrast, appellant possessed two vehicles in California during 2007. This factor supports a finding that appellant was a resident of California.

Driver’s License: Although appellant obtained a Nevada driver’s license on December 28, 2005, and renewed the license on January 8, 2010, appellant was a California resident in 2005, 2006, and 2008, when he held the Nevada license. Moreover, we note that the Nevada driver’s license covering the 2007 tax year listed a Sherman Oaks, California address as well as the Las Vegas, Nevada apartment address, which appellant apparently vacated in late 2006. This factor supports a finding that appellant was a resident of California.

Voter Registration: Although appellant registered to vote in Nevada in 2005, there is no evidence demonstrating whether appellant ever voted. This factor does not favor residency in either California or Nevada.

Professional Services: Appellant used California tax preparers to prepare his 2007 tax return. In addition, appellant stated that he and his former spouse used the same California attorney to process their divorce. Absent any other evidence of professionals that appellant may have used during the 2007 tax year, this factor supports a finding that appellant was a California resident.

Business interests: In the 2007 tax year, based on appellant’s wage and income transcript, appellant held interests in the following entities: Riverside Vista Del Rio, LLC, Riverside Developments LLC, Absolute Stone & Marble, Inc, and Mordy’s Construction, Inc. While the Riverside Vista Del Rio LLC and Riverside Developments, LLC appear to be located in Las Vegas, Nevada, Absolute Stone & Marble, Inc., and Mordy’s Construction, Inc. appear to be located in Encino, California. This factor shows connections to both California and Nevada and, as a result, does not favor either state.

Trips to Israel: While appellant provided a letter from his mother which discusses appellant’s travel to Israel several times during the 2007 tax year, this information is not helpful in determining whether appellant was a resident of California or Nevada in 2007. Although appellant provided a copy of his passport substantiating his travels, he did not provide any evidence of the origination point of his travels which would have been relevant in determining whether appellant used California or Nevada as his origination or return points of this travel. Therefore, these facts and circumstances do not favor residency in either California or Nevada.

Based on the above analysis of the Bragg factors 11 and the additional facts and circumstances presented, we find that appellant’s closest connections throughout 2007 were with California. The MSA supports a finding that appellant took advantage of the laws and protections of California in 2007. His minor children considered California their home state. In addition, appellant has not shown that he resided in Nevada during 2007, as he did not provide any evidence of living quarters in Nevada, such as payments for rent and utilities. Furthermore, in 2007, appellant registered a vehicle in California and subsequently purchased a new vehicle in California, which he retained pursuant to the MSA. Accordingly, appellant was a resident of California and his absences from California were for a temporary or transitory purpose in the 2007 tax year.

Late Filing Penalty

Appellant contends that his divorce and subsequent mental problems prevented him from filing a timely return. Appellant and his former spouse filed for dissolution of their marriage in September of 2007 and the MSA was completed in January of 2008. Appellant has not demonstrated that his divorce and alleged mental illness prevented him from timely filing his return by the original due date of April 15, 2008, or by the extended due date of October 15, 2008. Accordingly, appellant has not demonstrated that reasonable cause existed for the late filing of his tax return.

CONCLUSION

Based upon the foregoing, the FTB’s action is modified to reflect the concession by the FTB that it will abate the failure to furnish information penalty. The FTB’s action is otherwise sustained.

FOOTNOTES:
n1
Respondent originally imposed a failure to furnish penalty of $ 102,850, in addition to the late filing penalty of $ 102,850. Upon further consideration, respondent will abate the failure to furnish information penalty. Only the late filing penalty remains at issue.
n2
Appellant asserts that he was a Nevada domiciliary and resident in 2006.
n3
According to the Marital Settlement Agreement, appellant owns a twenty percent stake in Riverside Developments, LLC. According to the Seller’s Closing Statement relating to the sale, Riverside Developments, LLC is a Nevada limited liability company.

n4
According to the MSA, appellant and his former spouse were married on February 15, 2005.

n5
We note that the MSA indicates that appellant’s former wife filed the petition for dissolution of marriage on September 19, 2007, and appellant was personally served on October 5, 2007. The MSA further indicates that the minor children considered California their home state as they resided in California for six months prior to the filing of the petition of dissolution.

n6
We note that appellant has not alleged or shown that he had no access to this West Hills, California residence.

n7
We note that respondent did not submit a copy of appellant’s 2005 California resident tax return. However, appellant has not alleged that he did not file a California resident return for 2005.

n8
Appellant did not provide any evidence of rent payments for either one of the leases.

n9
According to an October 3, 2006 statement for telephone service, local telephone service related to the Las Vegas apartment was removed sometime in the period of September 7, 2006 to October 3, 2006.

n10
We note there is nothing in the record discussing where the children attended school.
n11
Appellant did not provide any evidence or discussion of the remaining Bragg factors for the 2007 tax year.

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Want to stop an IRS Levy?

If you can’t afford to pay your IRS tax bill, the IRS has a multitude of programs to help you out.

One of the most interesting of the IRS programs is something called currently not collectible status.  If the IRS decides you are currently not collectible, under the tax code, the IRS has to cease all collection activities against you.  Just got hit with a notice of levy?  If you are deemed currently not collectible the IRS has to stop the levy.

By the way, this won’t affect any liens filed against you.  The aren’t removed with the currently not collectible status.

So how do you get declared currently not collectible?  You, your tax attorney, or tax advisor are going to have to fill out a financial statement and give it to the IRS.  If your allowable living expenses are greater than your income you win!

Below is a case where the IRS was going to levy on someone, but since the IRS determined they were in a currently not collectible category the IRS ceased its levy action.

Want to talk with one of our lawyers about your tax options?  We are in La Quinta California and are just down the street from Palm Desert, Indio, Cathedral City, Palm Springs, Bermuda Dunes, and the entire Coachella Valley.

ROGER A. BUCHANAN,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
 
Release Date: APRIL 16, 2014
 

 
                                                UNITED STATES TAX COURT
 
                                                  Filed April 16, 2014
 
Roger A. Buchanan, pro se.
 
Diana N. Wells, for respondent.
 
                                       MEMORANDUM FINDINGS OF FACT AND OPINION
 
GOEKE, Judge: This is a collection due process (CDP) appeal pursuant to section 6330(d),  1 in which petitioner Roger Buchanan asks this Court to review the determinations of the Internal Revenue Service (IRS) Appeals Office. The [*2] issue for decision is whether respondent’s settlement officer abused her discretion in rejecting petitioner’s proposed offer-in-compromise. We hold that she did not.
 
                                                   FINDINGS OF FACT
 
Petitioner resided in Indiana when he filed his petition.
 
Respondent sent petitioner a Letter 1058 (LT-11NC), Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice), advising him that respondent intended to impose a levy against him for his unpaid trust fund recovery penalty liabilities (TFRP liabilities) for the tax periods ended March 31, June 30, September 30, and December 31, 2006, and March 31 and June 30, 2007, and that petitioner could request a hearing with the IRS Appeals Office. When respondent issued the levy notice, petitioner’s total TFRP liabilities were $ 27,871.46.
 
Petitioner timely mailed respondent a Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing). In his Form 12153, petitioner requested an installment agreement, an offer-in-compromise, or currently-not-collectible status. Petitioner’s request was forwarded to the IRS Appeals Office.
 
An IRS settlement officer sent a letter to petitioner that scheduled a CDP hearing and requested petitioner to provide certain information. John Brengle, [*3] who held a power of attorney for petitioner, faxed various documents for the settlement officer’s review in anticipation of the hearing. Those documents included a Form 636, Offer in Compromise (OIC); Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals; two Form 433-A attachments; bank account information; and wage and income information. The Form 433-A attachments detailed petitioner’s 25% interest in several parcels of land (collectively Buchanan Farms) and petitioner’s business expenses. The attachments did not however include a value for Buchanan Farms or any information showing the value of petitioner’s 25% interest. In his OIC, petitioner offered to pay a total of $ 1,357 to satisfy his TFRP liabilities on the basis of doubt as to collectibility.
 
The settlement officer postponed petitioner’s hearing while the IRS Centralized Offer in Compromise Unit considered petitioner’s OIC. The settlement officer rescheduled the hearing and requested additional information from petitioner. Mr. Brengle responded with the information and participated in the hearing on petitioner’s behalf. During the CDP hearing, the settlement officer stated that she would make a determination based upon the information petitioner had previously provided, issues raised and discussed during the hearing, and any additional, posthearing information requested and provided.
 
[*4] Among the items provided to the settlement officer was a tax assessment for Buchanan Farms that showed a total assessed value of $ 73,400. Mr. Brengle also provided a letter asserting the value of petitioner’s 25% interest in Buchanan Farms would be $ 18,350 if petitioner could liquidate it.
 
Using all the information provided, the settlement officer issued a Corrected Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 for petitioner’s TFRP liabilities. This notice displayed an income and expense table and an asset-equity table. The asset-equity table showed that petitioner had $ 20,666 in total equity. The income and expense table showed that petitioner’s monthly expenses exceeded his monthly income by $ 147.
 
The settlement officer informed petitioner she had determined that his accounts are currently not collectible, that the proposed levy action would not be allowed, and that petitioner’s proposed OIC had been rejected because the information petitioner provided did not support it. Petitioner timely petitioned this Court for a redetermination. The petition disputes respondent’s rejection of the proposed OIC but does not dispute the underlying liabilities.
 
                                                    [*5] OPINION
 
                                                   I. Jurisdiction
 
Petitioner comes before us pursuant to section 6330(d) to appeal the settlement officer’s determination in his CDP hearing. “[J]urisdiction under section 6330(d)(1)(A) is established when there is a written notice that embodies a determination to proceed with the collection of the taxes in issue, and a timely filed petition.”Lunsford v. Commissioner, 117 T.C. 159, 164 (2001).
 
Petitioner received a notice of determination stating that his liabilities are currently not collectible, that the proposed levy action would not be allowed, and that his proposed OIC was rejected. Petitioner timely petitioned this Court in response to the IRS notice of determination. However, because the IRS decided not to proceed with the collection of taxes in issue, the question arises whether the OIC determination is moot.
 
Although the settlement officer determined that the proposed levy was not appropriate and that petitioner’s TFRP liabilities are not currently collectible, collection by levy is still possible in the future if petitioner’s financial condition improves.  2 A determination to accept the proposed OIC would have permitted [*6] respondent to treat petitioner as having met his payment obligations and would have eliminated the possibility of a future collection action. Accordingly, we do not believe the OIC determination is moot.
 
                                  II. CDP Hearings in General and Standard of Review
 
If a taxpayer fails to pay any Federal income tax liability after notice and demand, section 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer’s property. Before proceeding with a levy, the Commissioner must issue a final notice of intent to levy and notify the taxpayer of the right to a hearing. Sec. 6330(a)and (b)(1). During the hearing a taxpayer may raise any relevant issue, including challenges to the appropriateness of the collection action and possible collection alternatives. Sec. 6330(c)(2)(A).
 
Following the hearing, the Appeals Office must determine whether the proposed collection action may proceed. For a notice of levy, the Appeals Office is required to consider: (1) whether the Secretary has met the requirements of applicable law and administrative procedure; (2) the relevant issues raised by the taxpayer; and (3) whether the proposed collection action appropriately balances the need for efficient collection of taxes with the taxpayer’s concerns that the collection action be no more intrusive than necessary. Sec. 6330(c)(3). The settlement officer considered each of these prongs and found petitioner’s accounts [*7] were currently not collectible and the proposed levy action would not be allowed.
 
Petitioner does not argue that the Secretary failed to meet the requirements of applicable law and administrative procedure and is not challenging the underlying liabilities. However, petitioner claims that the settlement officer erred in rejecting his proposed OIC.
 
Where a taxpayer’s underlying tax liability is not in dispute, the Court reviews the Commissioner’s determination for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). To establish an abuse of discretion, the taxpayer must prove that the decision of the Commissioner was arbitrary, capricious, or without sound basis in fact or in law. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007) (citing Sego v. Commissioner, 114 T.C. at 610, and Woodral v. Commissioner, 112 T.C. 19, 23 (1999)). In reviewing for abuse of discretion, we generally consider only the arguments, issues, and other matters that were raised at the hearing or otherwise brought to the attention of the Appeals Office. Giamelli v. Commissioner, 129 T.C. at 115.
 
                         [*8] III. Whether the Settlement Officer
Abused Her Discretion
 
Petitioner argues that the settlement officer’s determination merely delays respondent’s inevitable future collection attempts. Petitioner asks this Court to require the IRS to accept his proposed OIC and put an end to the collection action permanently.
 
Petitioner’s proposed OIC offered to pay $ 1,357 in satisfaction of his TFRP liabilities, which had grown to $ 28,119.59 by the time he submitted his OIC. The settlement officer rejected this proposed OIC because the information petitioner provided did not support it. Using the information petitioner provided, the settlement officer determined that petitioner’s reasonable collection potential was about $ 20,666.
 
Petitioner argues that respondent overvalued his equity in Buchanan Farms (i.e., $ 18,350) because he and his three brothers have a binding agreement that requires unanimous consent to sell the property. Petitioner argues it would be impossible for him to sell the land to pay his tax liabilities. He also claims liquidating his interest would be difficult because his brothers were not interested in buying him out and no third party would buy his interest on account of the restrictions under the brothers’ agreement.
 
[*9] Although petitioner alleges the difficulty of liquidating his interest in this property, he has produced no evidence sufficient to prove the settlement officer made an arbitrary determination. He relies solely on his own self-serving testimony and the brothers’ agreement. In Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), we held that the Court is not required to accept a party’s self-serving testimony that is uncorroborated by persuasive evidence. Petitioner failed to produce any testimony from his brothers to support his claim that they were not interested in purchasing his interest. Petitioner also failed to produce any evidence showing that the land could not be partitioned or that a loan could not be obtained against his interest. The only evidence of value petitioner produced for the CDP hearing indicated that his interest in Buchanan Farms had a value of $ 18,350. Given these facts, we hold that petitioner has failed to prove abuse of discretion regarding his proposed OIC.
 
                                                    IV. Conclusion
 
We hold that the settlement officer did not abuse her discretion in rejecting petitioner’s proposed OIC. We therefore sustain the determination of the settlement officer.
 
[*10] In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
 
To reflect the foregoing,
 
An appropriate decision will be entered.

FOOTNOTES:


Click here to return to the footnote reference.n1
 
Unless otherwise indicated, all section references are to the Internal Revenue Code.


Click here to return to the footnote reference.n2
 
The IRS previously issued a notice of Federal tax lien on Buchanan Farms and on petitioner’s home.


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Is a Real Estate Agent a Real Estate Professional in the eyes of the IRS?

If you have rental properties you may not get the full use of your tax losses unless you meet the tax code definition of a real estate professional.

Its kind of common sense for a real estate agent to think they are a real estate professional.  After all, they work 9 to 5 8 to 9 in their job and their commissions pay the bills.  The challenge is once you start mentioning the tax code, common sense goes out the window.  As the case below shows, in order to meet the definition of a real estate professional to use losses generated by rental properties, the IRS regulations treat the rental business as a distinct and separate activity from being a real estate agent.  In short your real estate agent time and activity isn’t credited towards your rental business.

If you aren’t the type to shoot the messenger and want to learn how to fully utilize the losses generated by your rental properties, come visit with one of our tax attorneys.  La Quinta, Palm Desert, Cathedral City, Indio, Rancho Mirage, Palm Springs, and Indian Wells are all just down the street from our offices in La Quinta.

CHARLES GRAGG; DELORES GRAGG,

Plaintiffs,

v.

UNITED STATES OF AMERICA;

COMMISSIONER OF INTERNAL REVENUE,

Defendants.

 

Release Date: MARCH 31, 2014

 

Published by Tax Analysts(R)

 

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

 

ORDER GRANTING DEFENDANTS’ MOTION

FOR SUMMARY JUDGMENT AND DENYING

PLAINTIFFS’ CROSS

                                                        -MOTION

 

I. INTRODUCTION

 

This is a taxpayer refund suit brought pursuant to 26 U.S.C. section 7422. During the tax years 2006 and 2007, husband-and-wife plaintiffs Charles and Delores Gragg owned two real estate rental properties. Their rental properties incurred losses, and the Graggs, in jointly filed returns, sought to deduct those losses from their otherwise taxable income. Normally, losses from real estate rental activities are considered “passive” losses under section 469 of the Internal Revenue Code  n1 and may not be used to offset income (or, for that matter, portfolio gains). However, persons who “materially participate” in their rental real estate activities are not subject to this passive-loss limitation. I.R.C. section 469(c)(7). Mrs. Gragg is a qualified real estate agent. Plaintiffs’ position is that Mrs. Gragg’s full-time occupation as a real estate professional generally relieves her and her husband from having to show material participation in their rental real estate activities before deducting losses from those activities against their income.

 

Presently before the Court is a third  n2 motion for summary judgment filed by defendants the United States of America and the Commissioner of Internal Revenue. (Dkt. No. 35 (“Defs. MSJ”).) Plaintiffs have filed an opposition and cross-motion for summary judgment (Dkt. No. 37 (“Pls. XMSJ”), to which defendants have replied (Dkt. No. 38 (“Defs. Reply”)).  n3 The parties have stipulated to a statement of the facts of the case and agree that no disputed material fact exists. (Dkt. No. 36 (“Stmt.”).) The Court concurs that none does.

 

Having fully considered the papers submitted and the argument of the parties, and for the reasons set forth herein, the Court GRANTS defendants’ motion for summary judgment and DENIES plaintiffs’ cross-motion for summary judgment. Plaintiffs fail to carry their burden of showing that section 469(c)(7) of the Internal Revenue Code and related regulations excuse real estate professionals, and real estate professionals only, from the obligation of showing material participation in each real estate activity before deducting otherwise passive losses from that activity.

 

II. STATEMENT OF STIPULATED FACTS

 

1. During the tax years 2006 and 2007, plaintiffs resided in Pleasanton, California. For the 2006 and 2007 tax years, plaintiffs filed joint federal income tax returns with the Internal Revenue Service (“IRS”). (Stmt., Ex. 1 (2006 joint federal income tax return (“2006 Return”); id., Ex. 2 (2007 joint federal income tax return (“2007 Return”).)

 

2. In tax years 2006 and 2007, Mr. Gragg listed his occupation as “VP of Logistics” and Mrs. Gragg listed her occupation as “real estate sales.” (See 2006 Return and 2007 Return, signature pages.) For the 2006 and 2007 tax years, plaintiffs reported wage and salary income as follows:

 

2006

_____________________________________________________________________________

 

Third Party Payor           Form             Payee              Amount

_____________________________________________________________________________

 

ITRADE NETWORK INC         W-2            Charles D. Gragg    $ 241,636.46

 

Hometown GMAC Real         1099-MISC      Delores Gragg       $ 217,131.98

Estate

 

2006 Total Wage and                                           $ 458,768.44

Salary Income — Per

Return

 

2007

_____________________________________________________________________________

 

Third Party Payor          Form             Payee                Amount

_____________________________________________________________________________

 

ITRADE NETWORK INC         W-2            Charles D. Gragg    $ 126,624.51

 

Hometown GMAC Real         1099-MISC      Delores Gragg       $ 312,320.00

Estate                     (schedule C

of tax return)

2007 Total Wage and                                           $ 438,944.51

Salary Income — Per

Return

 

3. In each of the 2006 and 2007 tax years, plaintiffs reported rental real estate loses in excess of their rental real estate income on Schedule E of the tax returns, as set out more fully in paragraphs 5 and 6 below. (2006 Return; 2007 Return.)

 

4. Plaintiffs did not elect to treat all interests in real estate as one activity pursuant to 26 U.S.C. section 469(c)(7)(A)(ii) and Treas. Reg. section 1.469-9(g), as no statement was filed with plaintiffs’ original 2006 and 2007 joint federal income tax returns. (2006 Return; 2007 Return.)

 

5. On Schedule E of their joint 2006 Form 1040, plaintiffs reported the following income and expenses from their rental properties:

 

2006 — Schedule E          Home A — Arroyo Drive   Home B — Mockingbird Lane

______________________________________________________________________________

 

Total Rental Income

Received                           $ 12,000                      $ 3,600

 

Insurance                               $ 0                        $ 140

 

Mortgage Interest Paid              $ 9,733                     $ 10,818

 

Repairs                             $ 2,273                          $ 0

 

Taxes                               $ 3,330                      $ 1,400

 

Utilities                               $ 0                         $ 80

 

HOA                                 $ 2,340                          $ 0

 

Depreciation Expense

or Depletion                        $ 8,039                          $ 0

 

Total Schedule E

Deductions                         $ 25,715                     $ 12,438

 

6. On Schedule E of their joint 2007 Form 1040, plaintiffs reported the following income and expenses from two rental properties, one of which is located in Atlanta, GA:

 

2007 — Schedule E          Home A — Arroyo Drive   Home B — Mockingbird Lane

______________________________________________________________________________

 

Total Rental Income

Received                           $ 15,000                      $ 5,000

 

Auto and Travel                         $ 0                      $ 3,600

 

Cleaning and Maintenance                $ 0                        $ 150

 

Insurance                               $ 0                        $ 227

 

Mortgage Interest Paid             $ 10,463                      $ 3,773

 

Repairs                               $ 650                          $ 0

 

Taxes                               $ 3,409                      $ 1,520

 

Utilities                               $ 0                      $ 1,520 (sic)

 

HOA                                 $ 2,340                      $ 1,134

 

Warranty                              $ 350                          $ 0

 

Depreciation Expense or

Depletion                           $ 8,005                      $ 3,249

 

Total Schedule E

Deductions                         $ 25,217                     $ 15,173

 

7. In 2009, the IRS conducted an audit of plaintiffs’ 2006 and 2007 tax returns. The audit issues included rental income, property taxes, sale of property, and passive activity loss. The sole issue relevant to this refund suit is the passive activity loss. As an initial part of the audit, the IRS requested documents from plaintiffs relevant to the passive activity loss. (Stmt., Ex. 3.)

 

8. During the audit, the Power of Attorney for Mrs. Gragg was interviewed concerning the Schedule E real estate losses. Based on that discussion and a review of the documents provided (Real Estate Salesperson License, a note “760 Mockingbird Lane, Pleasanton” and a note “The following are the duties that I performed for 8031 Arroyo Dr. Pleasanton in 2006″), the IRS noted that Mrs. Gragg would not be able to pass the material participation test based on the documents provided. (Stmt., Ex. 4.) 10.

 

9. Mrs. Gragg also provided a facsimile transmission from Bologna Accountancy Corporation, a Real Estate Salesperson License, a letter from Hometown/GMAC Real Estate and a letter from Keller Williams, to establish that “[t]hey do meet material participation under Regulation 1.469-5T of the Internal Revenue Code.” (Stmt., Ex. 5.)

 

10. The IRS auditor concluded:

 

Rental activities of any kind, regardless of material

participation, are considered passive activities

unless the requirements of section 469(c)(7) of the

Internal Revenue Code are met in tax years beginning

after December 31, 1993.

 

Passive losses can only be offset against passive

income. A passive activity is one involving the conduct

of a trade or business in which you do not materially

participate, or any rental activity unless the requirements

of section 469(c)(7) of the Internal Revenue Code

are met in tax years beginning after December 31,

1993.

 

(Stmt., Ex. 6.)

 

11. For the 2007 tax year, the IRS arrived at the same conclusion:

 

Passive losses and credits can be offset by passive

income (or in the case of credits, to the tax attributable

to net passive income). Passive losses are also allowed

to the extent they qualify for the special allowance

for rental real estate activities and the transitional

phase-in rule for activities acquired before October

23, 1986. They cannot be used to offset portfolio

income. Since your losses from such activities were

in excess of the [sic] passive income, the special

allowance, and the phase-in -rule, the excess loss

has been denied. You may carry forward the amount

of the loss you were unable to claim.

 

Rental activities of any kind, regardless of material

participation, are considered passive activities

unless the requirements of section 469(c)(7) of the

Internal Revenue Code are met in tax years beginning

after December 31, 1993.

 

(Stmt., Ex. 7.)

 

12. The IRS made adjustments to plaintiffs’ 2006 federal income tax liability, including adjustments for “Real Estate Loss After Passive Limitation,” in the amounts of $ 8,838 and $ 13,715, resulting in a tax deficiency of $ 14,874. (Stmt., Ex. 8.)

 

13. The IRS made an adjustment to plaintiffs’ 2007 federal income tax liability, including an adjustment for “Real Estate Loss After Passive Limitation,” in the amount of $ 20,390, resulting in a tax deficiency of $ 43,499. (Stmt., Ex. 9.) 15.

 

14. The IRS assessed additional federal income tax for 2006 in the amount of $ 14,874, on or about December 28, 2009. (Stmt., Ex. 10.)

 

15. The IRS assessed additional federal income tax for 2007 in the amount of $ 43,499, on or about February 2, 2010. (Stmt., Ex. 11.)

 

16. A notice of deficiency for the 2006 tax year was issued to plaintiffs on September 28, 2009. (Stmt., Ex. 12.) Plaintiffs did not petition the Tax Court in response to the notice. The additional tax assessed, plus interest and penalty, was fully paid, resulting in a zero balance to the 2006 tax account. (Stmt., Ex. 10; see also Dkt. No. 10 (“Answer”) paragraph 3.)

 

17. A notice of deficiency for the 2007 tax year was issued to petitioners on July 30, 2009. (Stmt., Ex. 13.) Plaintiffs did not petition the Tax Court in response to the notice. The additional tax assessed, plus interest and penalty, was fully paid, resulting in a zero balance to the 2007 tax account. (Stmt., Ex. 11; see also Answer paragraph 3.)

 

18. Plaintiffs filed a Claim for Refund, Form 843, dated June 23, 2011, for tax years 2006 and 2007. The basis for the claim was: “Taxpayer is a real estate professional and as such is not subject to the passive loss limitations which the IRS disallowed.” The Form 843 asks that the claim be immediately denied to allow plaintiffs to proceed with this refund suit. (Stmt., Ex. 14.) 19.

 

19. The claim was disallowed by notice dated November 23, 2011, and this suit for refund subsequently was filed. (Stmt., Ex. 15.)

 

20. By this action, plaintiffs seek a refund of $ 10,000 for the 2006 tax year, plus statutory interest as provided by law, and a refund of $ 10,000 for the 2007 tax year, plus statutory interest as provided by law. (Dkt. No. 1 (Complaint), Prayer for Relief.)

 

21. Defendants do not dispute that Mrs. Gragg was a real estate professional under I.R.C. section 469(c)(7) for both the 2006 and 2007 tax years.

 

III. LEGAL STANDARD

 

A court may grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Summary judgment procedures are appropriate where, as here, no dispute of material fact exists and the parties’ dispute hinges on the resolution of a question of law. See Thrifty Oil Co. v. Bank of Am. Nat. Trust & Sav. Ass’n, 322 F.3d 1039, 1046 (9th Cir. 2003); In re Comark, 971 F.2d322, 324-25 (9th Cir. 1992).

 

In a tax deduction case such as the one at bar, the taxpayer bears the burden of establishing her entitlement to a deduction under the Internal Revenue Code. Maciel v. C.I.R., 489 F.3d 1018, 1028 (9th Cir. 2007); Talley Indus. Inc. v. C.I.R., 116 F.3d 382, 387-88 (9th Cir. 1997); Norgaard v. C.I.R., 939 F.2d 874, 877 (9th Cir. 1991). “If evidence to establish a deduction is lacking, the taxpayer, not the government, suffers the consequence.” Talley Indus., 116 F.3d at 387-88.

 

IV. DISCUSSION

 

The key question for decision is whether, pursuant to section 469(c) of the Internal Revenue Code and related regulations, plaintiffs must establish their material participation in their rental real estate activities separate and apart from Mrs. Gragg’s undisputed material participation in her profession as a real estate agent. As set forth below, the Court concludes that they must, but have not.

 

A. RELEVANT HISTORY AND STRUCTURE OF SECTION 469(C)

 

Enacted as part of the Tax Reform Act of 1986, section 469 established a general rule that losses from “passive activities” could not be used to offset income from active sources and portfolio gains. See I.R.C. section 469, entitled “Passive Activity Losses and Credits Limited,” paragraphs (a) and (e). Passive activities are defined in paragraph (c):

 

(1) The term “passive activity” means any activity

(A) which involves the conduct of any trade or business,

and

 

(B) in which the taxpayer does not materially participate.

 

I.R.C. section 469(c)(1). Subparagraph (2) then specifically creates a per se categorization: “The term ‘passive activity’ includes any rental activity,” regardless of whether the taxpayer materially participates in them. See I.R.C. section 469(c)(2).  n4 However, while passive losses could not offset income generally, passive losses which exceeded the related passive income could be carried forward indefinitely for use in subsequent years. See I.R.C. section 469(b); Treas. Reg. section 1.469-1T.

 

By treating all rental activities as passive, the Tax Reform Act, as originally enacted, “created problems among real estate professionals.” Pungot v. C.I.R., 79 T.C.M. (CCH) 1558 (T.C. 2000). “A full-time real estate developer, for example, could not use losses from one aspect of his business; i.e., renting properties, to offset income from another aspect of his business; i.e., developing real estate, except to the extent of” a $ 25,000 allowance provided at I.R.C. section 469(i). Id. “By contrast, a taxpayer who materially participated in any other trade or business could use losses incurred in that business against active income.” Id. “To ‘alleviate this unfairness,’ Congress modified the passive loss rules by adding subparagraph (7) to section 469(c), effective for tax years beginning after December 31, 1993.” Id. (quoting H.R. REP. NO. 103-111, at 614 (1993)).  n5

 

Subparagraph 469(c)(7), titled “Special rules for taxpayers in real property business,” provides a mechanism for removing one’s rental real estate activities from the scope of paragraph (c)(2)’s per se categorization of rental activity as passive activity. Paragraph (c)(7) describes the taxpayers for whom the mechanism is available:

 

(B) This paragraph shall apply to a taxpayer for

a taxable year if —

(i) more than one-half of the personal services performed

in trades or businesses by the taxpayer during such

taxable year are performed in real property trades

or businesses in which the taxpayer materially participates,

and

(ii) such taxpayer performs more than 750 hours of

services during the taxable year in real property trades

or businesses in which the taxpayer materially participates.

 

I.R.C. section 469(c)(7)(B) (title omitted; emphasis supplied).  n6

 

Paragraph (h) of section 469 then defines “material participation”:

 

A taxpayer shall be treated as materially participating

in an activity only if the taxpayer is involved in

the operations of the activity on a basis which is

 

(A) regular,

 

(B) continuous, and

 

(C) substantial.

 

I.R.C. section 469(h)(1). In interpreting section 469(h)(1)‘s requirement of regular, continuous, and substantial involvement, the Treasury Department has established by regulation a set of seven “safe harbors.” See Treas. Reg. section 1.469-5T(a); see also id. section 1.469-9(b)(5) (defining “material participation” by incorporating Treas. Reg. section 1.469-5T); Mordkin v. Comm’r of Internal Revenue, 71 T.C.M. (CCH) 2796 (T.C. 1996) (upholding validity of section 1.469-5T safe harbors). A taxpayer who satisfies the conditions of any one of them can establish material participation in a rental real estate activity. Treas. Reg. section 1.469-5T(a).  n7

 

Thus, a taxpayer who falls within the scope of subparagraph (c)(7)(B) for a particular year can avoid having their rental activities treated as per se passive activities “for such taxable year.” I.R.C. section 469(c)(7)(A). However, the statute does require treatment of “each interest of the taxpayer in rental real estate” as “a separate activity” unless the taxpayer “elect[s] to treat all interests in rental real estate as one activity.” I.R.C. section 469(c)(7)(A)(ii) and concluding paragraph.

 

Under this framework, the Court now turns to the question of whether a taxpayer who materially participates in a real estate trade or business is automatically exempted from having her rental real estate losses categorized as passive losses, or whether the taxpayer must demonstrate material participation in the rental real estate activities separately from her material participation in her primary occupation in a real estate trade or business.

 

B. APPLICATION OF SECTION 469(C) AND REGULATIONS

 

The Graggs’ primary contention is that Mrs. Gragg’s status as a full-time real estate agent establishes her material participation in a qualifying real estate trade or business, such that she need not “requalify” — that is, demonstrate material participation in each of her separate real estate rental activities.  n8 Defendants contend that plaintiffs, notwithstanding Mrs. Gragg’s occupation, must separately establish material participation as to their two rental properties for 2006 and 2007.

 

Defendants are correct. As described above, section (c)(7)(A)(ii) requires that the analysis regarding rental activity for taxpayers in the real property business “shall be applied as if each interest of the taxpayer in rental real estate were a separate activity” unless the taxpayer makes an affirmative election “to treat all interests in rental real estate as one activity.” Here, the parties stipulate that the Graggs did not make such an election. (Stmt. paragraph 4.) Thus, given the lack of an election, section 469‘s rules on passive losses must be applied as if each of the Graggs’ interests in rental real estate were a separate activity.

 

Plaintiffs contend that “Mrs. Gragg’s real estate rental activity is encompassed within her profession as a real estate agent” and that, therefore, “she has already met the material participation requirement by previously qualifying for all activities that fall within the scope of that profession.” (Pls. XMSJ at 3.) Treasury Regulation section 1.469-9 forecloses plaintiffs’ position. Subparagraph (e)(3) of that regulation, titled “Grouping rental real estate activities with other activities,” provides, in pertinent part:

 

For purposes of this section, a qualifying taxpayer

may not group a rental real estate activity with

any other activity of the taxpayer. For example,

if a qualifying taxpayer develops real property,

constructs buildings, and owns an interest in rental

real estate, the taxpayer’s interest in rental real

estate may not be grouped with the taxpayer’s development

activity or construction activity. Thus, only the

  participation of the taxpayer with respect to the

  rental real estate may be used to determine if the

  taxpayer materially participates in the rental real

  estate activity under section 1.469-5T.

 

Treas. Reg. section 1.469-9(e)(3)(i) (emphasis supplied).

 

The regulation’s example is directly applicable here. The regulation contemplates a taxpayer who, like Mrs. Gragg, works in a real estate occupation but also “owns an interest in rental real estate.” Under the regulation, these two activities are separate and distinct, and may not be grouped together. Plaintiffs’ construction of section 469 would contravene the regulation’s guidance by treating Mrs. Gragg’s rental real estate activities as part of her other activities, namely, her activity of performing personal services as a real estate agent.

 

Though Tax Court cases do not bind this Court,  n9 the Court finds persuasive the reasoning of a Tax Court case squarely addressing the question now at bar, Perez v. Commissioner of Internal Revenue, T.C. Memo. 2010-232, 100 T.C.M. (CCH) 351 (2010). In Perez, the taxpayer was self-employed during a certain tax year as a real estate loan agent and broker, and also owned three residential rental properties. The taxpayer there, as here, “reported her income and loss from her real estate business on her . . . Schedule C” and reported income and expenses from her residential properties on Schedule E . . . .” The taxpayer deducted losses from her rental properties in the amount of $ 45,199, which deduction the IRS disallowed. The parties stipulated that in the relevant tax year the taxpayer “was a real estate professional pursuant to section 469(c)(7)(B).” The parties further agreed that the taxpayer “did not meet the ‘material participation’ tests described in [Treasury Regulation] 1.469-5T . . . with respect to her rental real estate activities.”

 

The Tax Court, after surveying the statutory and regulatory framework, concluded that the IRS was correct to disallow the deduction. The taxpayer argued that she need not satisfy the material participation requirement of section 469 with respect to her real estate rental activities because, as “a qualifying real estate professional pursuant to section 469(c)(7)(B), all her real estate activities, including rental activities, [were] not passive . . . .” The Tax Court rejected that position, holding that, even if it were to accept the taxpayer’s view that “section 469(c)(7)(B) exempts real estate professionals who own real estate and manage it as part of their profession from the material participation requirement of section 469(c)(1),” such a rule would not exempt the taxpayer because her “activity as a real estate loan agent and broker [was] separate from her activity as the owner of three residential real estate properties.” Citing Treasury Regulation section 1.469-9(e)(3)(i), the Tax Court observed that the taxpayer was required to show material participation in her rental real estate activities because she did “not own or manage the three residential real estate properties as part of her profession as a real estate loan agent and broker but rather own[ed] those properties independent of her profession.”

 

Perez is directly on point. Mrs. Gragg, like the petitioner in Perez, owns her interest in the two subject rental real estate properties regardless of her occupation as a real estate agent. If Mrs. Gragg had surrendered her real estate agent’s license in the middle of 2006, she still would have owned her interest in the rental properties. Her personal interests in her rental real estate properties are not coupled with or dependent upon the personal services she renders to clients as a real estate agent. The mere fact that both relate to real estate does not suffice to establish Mrs. Gragg’s material participation in each separate activity in which she participated. Treas. Reg. section 1.469-9(e)(3)(i).

 

Plaintiffs contend that Perez was wrongly decided, but their argument fails to persuade. Plaintiffs contend that it is “illogical” and “based on a faulty premise” because the Tax Court there analogized the taxpayer’s “unique situation to cases with dissimilar facts, yet call[ed] it ‘similar’. . . .” Plaintiffs’ criticism of Perez fails to grasp the unremarkable principle that whenever a court analogizes to a case, it does so precisely because the case is similar but non-identical. Were the cases identical, no analogy would be required.

 

Plaintiffs also criticize the Perez court, contradictorily, for having failed to analogize to Pungot, a case cited by the taxpayer in Perez as well as this one, notwithstanding its factual and legal dissimilarity. However, plaintiffs cite Pungot only for its gloss on the legislative history of section 469(c)(7), which this Court has considered. Nothing in the Pungot opinion persuades the Court that plaintiffs correctly interpret section 469(c)(7) or Treasury Regulation section 1.469-9(e)(3)(i). At most, Pungot lends support to the notion that Congress sought to rectify an unfairness in the tax code’s treatment of real estate professionals vis-a-vis persons in other businesses. From that premise, however, it does not follow, as a matter of law or of logic, that every real estate professional is entitled to deduct losses from rental real estate properties. Rather,statute and regulation determine when losses from rental real estate activities may be deemed non-passive and, thus, deductible against income not specifically tied to the passive asset. As set forth above, those rules require a showing of material participation in the rental real estate activity before the deduction may be taken in such a manner.

 

For the reasons set forth above, the Court holds that, in order to deduct losses from a rental real estate activity against the income declared in the tax years 2006 and 2007, plaintiffs were required to establish their material participation in each such rental real estate activity.

 

C. EVIDENCE OF MATERIAL PARTICIPATION

 

The Graggs are less than clear about whether they seek to establish their material participation in their real estate activities pursuant to the seven safe harbors set forth in Treasury Regulation section 1.469-5T. On the one hand, plaintiffs specifically state that Mrs. Gragg “does not contend that she meets the material participation requirements set forth in [Treas. Reg.] section 1.469-5T for each rental real estate activity.” (Pls. XMSJ at 4.) Yet plaintiffs then set out to demonstrate that Mrs. Gragg used “reasonable means to show the time and activities dedicated to each rental real estate property.” (Id.) Defendants contend that, to the extent Mrs. Gragg seeks now to demonstrate her material participation in her rental real estate activities, the means she seeks to use are not reasonable, as required by Treasury Regulation section 1.469-5T(f)(4), because they are post hoc estimates of the amount of time she spent dealing with the rental properties rather than contemporaneous records.

 

The Court agrees with defendants. A taxpayer may demonstrate the extent of her participation in an activity “by any reasonable means.” Treas. Reg. section 1.469-5T(f)(4). The Tax Court has long and consistently held that backwards-looking “post-event ballpark guess-timates,” unsupported by reliable and contemporaneous records, do not suffice as a “reasonable means” of demonstrating the scope of one’s participation in an activity pursuant to section 469. E.g., Almquist v. C.I.R., T.C.M. (RIA) 2014-040 (T.C. 2014) (reciting the “ballpark guestimate” formulation); Moss v. C.I.R., 135 T.C. 365, 369 (2010) (same); Smith v. C.I.R., 14306-12S, 2014 WL 642818(T.C. Feb. 19, 2014) (same). Tax Court cases are merely persuasive authority, but, based on this record, the Court sees no reason to deviate from the Tax Court’s well-established rule, which, particularly in light of concerns over uniform nationwide application of tax rules, is due an appropriate measure of deference. See Esgar Corp., ___ F.3d ___, 2014 WL 889614, at *3. Plaintiffs seek to distinguish the government’s proffered authority. Even if the particular cases cited were distinguishable, the rule cited is well-established and applies here.

 

Applying the rule, then, the Court concludes that the documents provided by Mrs. Gragg that address her rental real estate activities, as opposed to her participation in her profession as a real estate agent, amount to unreliable post hoc reconstructions of time spent. In connection with an initial taxpayer interview conducted April 10, 2009, Mrs. Gragg supplied a signed but undated note stating that, with respect to the Graggs’ Mockingbird Lane property, in 2006 her “estimated hours were approx[imately] 40 hours” for two months that the house was rented and “approx[imately] 100 hours” after the tenants moved out. (Stmt., Ex. 4.) She also supplied another signed but undated note representing that in 2006 her duties with respect to the Arroyo Drive property amounted to “approx[imately] 200 hours” dealing with tenant problems that culminated in an eviction and “[a]pprox[imately] 300 [hours]” restoring the property thereafter. The record does not reflect any estimates of hours covering the tax year 2007. As to the records covering 2006, no basis for their method of calculation has been supplied, nor do they bear internal indicia of being anything other than guesses of the approximate number of hours spent. Consequently, the Court concludes that the post hoc estimates proffered by Mrs. Gragg are, as a matter of law, not “reasonable means” of showing her material participation.

 

The Court finds that the Graggs have not met their burden of demonstrating material participation in each of their rental real estate activities during the tax years 2006 and 2007. Such demonstration being required pursuant to section 469(c)(7) and applicable Treasury Regulations, the Court holds that defendants are entitled to judgment as a matter of law.

 

V. CONCLUSION

 

For the foregoing reasons, the Court GRANTS the motion for summary judgment of Defendants the United States of America and the Commissioner of Internal Revenue and DENIES the cross-motion for summary judgment of Plaintiffs Charles Gragg and Delores Gragg.

 

Defendants shall prepare a proposed form of Judgment and submit it to plaintiffs for approval as to form. It shall be filed within seven days of entry of this Order.

 

This Order terminates Dkt. No. 35.

 

IT IS SO ORDERED.

 

Date: March 31, 2014

Yvonne Gonzalez Roger

United States District Court Judge

 

FOOTNOTES:

 

n1

 

The Internal Revenue Code is codified at Title 26 of the United States Code, and the attendant Treasury Regulations are codified at Title 26 of the Code of Federal Regulations. In keeping with common practice, the Court in this opinion cites to the “I.R.C.” and “Treas. Reg.,” respectively.

 

n2

 

The Court previously entertained two rounds of cross-motions for summary judgment, but, in both rounds, denied all motions without prejudice because the parties had failed to present a record adequate for decision and asked, essentially, for an advisory opinion. (See Dkt. Nos. 22, 31.)

 

n3

 

Pursuant to Federal Rule of Civil Procedure 78(b) and Civil Local Rule 7-1(b), the Court took the instant motions under submission without oral argument. (Dkt. No. 39.)

 

n4

 

“Rental activity” is a defined term meaning “any activity where payments are principally for the use of tangible property.” I.R.C. section 469(j)(8).

 

n5

 

Paragraph (c) of section 469, which defines the contours of “passive activity,” contains subparagraphs (1) through (7).

 

n6

 

Subparagraph (c)(7)(B)’s concluding language then provides, in pertinent part: “In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements.” Id. Here, the record establishes that the Graggs filed joint returns but that they rely solely upon Mrs. Gragg’s activities to satisfy the requirements of subparagraph (B). (See Stmt. paragraphs 1, 8-9; Pl. XMSJ at 3.)

 

n7

 

Treasury Regulations section 1.469-5T(a) provides:

 

 

[A]n individual shall be treated, for purposes

of section 469 and the regulations thereunder, as

materially participating in an activity for the taxable

year if and only if —

 

(1) The individual participates in the activity for

more than 500 hours during such year;

 

(2) The individual’s participation in the activity

for the taxable year constitutes substantially all

of the participation in such activity of all individuals

(including individuals who are not owners of interests

in the activity) for such year;

 

(3) The individual participates in the activity for

more than 100 hours during the taxable year, and such

individual’s participation in the activity for the

taxable year is not less than the participation in

the activity of any other individual (including individuals

who are not owners of interests in the activity) for

such year;

 

(4) The activity is a significant participation activity

(within the meaning of paragraph (c) of this section)

for the taxable year, and the individual’s aggregate

participation in all significant participation activities

during such year exceeds 500 hours;

 

(5) The individual materially participated in the activity

(determined without regard to this paragraph (a)(5))

for any five taxable years (whether or not consecutive)

during the ten taxable years that immediately precede

the taxable year;

 

(6) The activity is a personal service activity (within

the meaning of paragraph (d) of this section), and

the individual materially participated in the activity

for any three taxable years (whether or not consecutive)

preceding the taxable year; or

 

(7) Based on all of the facts and circumstances (taking

into account the rules in paragraph (b) of this section),

the individual participates in the activity on a regular,

continuous, and substantial basis during such year.

n8

The parties have stipulated that Mrs. Gragg was “a real estate professional under [I.R.C.] section 469(c)(7) for both the 2006 and 2007 tax years.” (Stmt. paragraph 21.) The term “real estate professional” is not used in section 469(c)(7), but the Court understands the parties’ stipulation to signal their agreement that Mrs. Gragg satisfied the requirements of section 469(c)(7)(B) as to her professional real estate activities (that is, her occupation as a real estate agent) by spending more than half of her working time and in excess of 750 hours performing personal services in that capacity.

n9

See, e.g., Esgar Corp. v. C.I.R., ___ F.3d ___, 2014 WL 889614, at *3 (10th Cir. Mar. 7, 2014)(“[T]he Supreme Court has counseled that, while the Tax Court’s decisions may not be binding precedents for courts dealing with similar problems, uniform administration would be promoted by conforming to them where possible. Rulings by the Tax Court on matters of tax law are therefore persuasive authority, especially if consistently followed.” (brackets, internal quotation marks, and citations omitted)); see also Hubbard v. United States, 359 F. Supp. 2d 1123, 1127 n.5 (W.D. Wash. 2005) aff’d, 209 F. App’x 660 (9th Cir. 2006) (“Except for res judicata issues, Tax Court precedent does not bind a United States District Court” but “may serve as persuasive authority.”).

 

 

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Can the IRS take away your Social Security check?

Is social security exempt from an IRS levy or garnishment?  The short answer is no, the IRS is allowed to take away your social security if you fall behind on your payments to the IRS. The rules are laid out in the case below.

What should you do if you receive an IRS notice of levy (legal IRS garnishment)? The first thing you should do is consult with a competent tax attorney. Steps you can take to have the IRS stop taking away your social security would be:

1)  Enter into a payment plan with the IRS.  If the amount you owe is less than $25,000 this is as simple as going on the IRS website.

2) Requesting uncollectible status.  If you are only living on social security and there is no prospect of an increase in income, you probably qualify for a special tax code exemption where the IRS can no hit you with a levy, garnishment, or take away your assets if it would cause economic hardship.

3)Negotiate with the IRS on your debt.  You could enter into an offer in compromise program with the IRS.  This is the proverbial settle with the IRS for pennies on the dollar program.  If you can show you have very little income the results can be dramatic.  You could pay a few thousand dollars to wipe out IRS debt in the hundreds of thousands.

4)Bankruptcy.  Taxes are dischargeable in bankruptcy.  If you tax advisor or bankruptcy attorney tells you otherwise ask for a second opinion.  It makes no sense to be saddled with a big tax bill due to someone’s ignorance.

5)Pay the bill.  Yeah for some reason people don’t like this idea as much as the others, but many times just gritting your teeth and paying the bill could be your best solution.

If you are looking to discuss your options with a tax lawyer, we would be more than happy to help you.  We are located in La Quinta and help residents of Cathedral City, Palm Desert, Indio, Palm Springs, Rancho Mirage, and the entire Coachella Valley.

 

DENNIS A. BLANCHETTE,

v.

SOCIAL SECURITY ADMINISTRATION.

Release Date: FEBRUARY 21, 2014

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

MEMORANDUM AND ORDER ON DEFENDANT’S MOTION TO DISMISS

 

February 21, 2014

 

STEARNS, J.

 

Plaintiff Dennis Blanchette complains that the Social Security Administration (SSA) “fraudulently took all of his $ 1,157.00 monthly SSA payments, and gave it to the Internal Revenue Service (IRS)” between the years 2009 to 2012. Blanchette requests that the court find the SSA liable to him in the amount of $ 3,000,000.00.

 

The SSA admits that from May of 2009, until January of 2012, the SSA garnished $ 1,157.00 from Blanchette’s SSA retirement benefits on a monthly basis, stating that it did so in compliance with an IRS levy on Blanchette’s Social Security retirement benefits pursuant to 26 U.S.C. section 6331. (Blanchette has not disputed the fact that the IRS released the levy in January of 2012 and that the SSA ceased garnishing Blanchette’s retirement benefits at that time). The SSA now moves to dismiss Blanchette’s Complaint for lack of subject matter jurisdiction and for failure to state a claim.

 

DISCUSSION

 

1. Blanchette fails to state a claim upon which

  relief can be granted.

 

Internal Revenue Code, 26 U.S.C. section 6332(a) states: “[A]ny person in possession of . . . property or rights to property subject to a levy . . . shall, upon demand of the Secretary, surrender such property . . . to the Secretary.” The definition of the term “person” for purposes of section 6332(a) is expansive and includes individuals, business entities, agencies, and even States. See Commonwealth of Massachusetts v. United States, 296 F.2d 336, 337 (1st Cir. 1961) (holding Massachusetts liable for failing to honor an IRS levy to collect federal income tax owed by state employees); cf. McKean v. United States, 563 F. Supp. 2d 182, 185 (D.D.C. 2008) (upholding the procedural validity of an IRS levy on social security payments); Overton v. United States, 74 F. Supp.2d 1034, 1045 (D.N.M. 1999) (“General retirement benefits such as IRAs, self-employed Keough plans, thrift savings plans and Social Security benefits are not [exempt from levy].”). The SSA was therefore obligated to comply with the levy and to surrender that portion of Blanchette’s retirement benefits that was subject to the levy.

 

Further, anyone who surrenders such property pursuant to an IRS levy “shall be discharged from any obligation or liability to the delinquent taxpayer and any other person . . . arising from such surrender or payment.” 26 U.S.C. section 6332(e). Thus, Blanchette cannot by operation of law state a claim upon which relief can be granted against the SSA for having “given” his property to the IRS during the duration of the levy.

 

Blanchette argues that the Social Security Act (Pub. L. No. 74-271, now codified as 42 U.S.C. ch. 7) forbids the SSA from complying with an IRS levy. See Pl.’s Mot. to Strike (Dkt. #10), paragraph 14. In support, Blanchette cites 42 U.S.C. section 407 (Social Security Act, section 207), which provides that social security payments shall not be “subject to execution, levy, attachment, garnishment, or other legal process” and that “[n]o other provision of law . . . may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.” Id. section 407(a) & (b).

 

Blanchette’s citation to the Social Security Act is not inaccurate, insofar as it goes, but it is irrelevant to this dispute because the statutory authorization of the IRS levy power to collect unpaid taxes does contain an express exclusionary reference to section 207 of the Social Security Act. See 26 U.S.C. section 6334, titled “Property Exempt from Levy,” which states in pertinent part:

 

“[n]otwithstanding any other law of the United

States (including section 207 of the Social Security

  Act), no property or rights to property shall be

exempt from levy other than the property specifically

made exempt by subsection (a).”

 

26 U.S.C. section 6334(c) (emphasis added). Because 26 U.S.C. section 6334(c) supersedes 42 U.S.C. section 407(a), Blanchette’s exemption argument fails as a matter of law.

 

2. The court lacks subject matter jurisdiction over

  Blanchette’s Complaint because it was not brought

  in accordance with 26 U.S.C. section 7433.

 

A taxpayer’s claim for damages resulting from tax collection is limited by 26 U.S.C. section 7433. Section 7433 operates as a waiver of sovereign immunity and allows a taxpayer to bring a lawsuit for damages against the United States to recover for “certain unauthorized collection actions” by the IRS. Id. section 7433(a). It is “the exclusive remedy for recovering damages resulting from such actions.” Id. section 7433(b). Blanchette’s Complaint, on its face, seeks damages in connection with the collection of a tax (requesting $ 3,000,000 as redress from the SSA for having turned over his retirement benefits to the IRS). Because he has failed to comply with 26 U.S.C. section 7433, the court lacks subject matter jurisdiction.

 

As an initial matter, Blanchette fails to name the proper party to a section 7433 action (the United States) and fails to allege that he has satisfied any of the other jurisdictional requirements for bringing a section 7433 action (such as exhaustion of his administrative remedies with the IRS). Further, Blanchette himself disavows any connection between his Complaint and section 7433 via a contorted reading of the terms “taxpayer,” “person,” and “individual” in 26 U.S.C. section 7433 and 7701, and 1 U.S.C. section 1, concluding “[n]eedless to say, I am not the statutory taxpayer or personage what-so-whoever of interest at law.” See Pl.’s Mot. to Dismiss (Dkt. # 12), paragraphs 9-13.

 

Blanchette’s argument regarding the inapplicability of section 7433 is one of the many “well-worn tax-protester arguments,” In re Haggert, 1992 WL 379414, *4 (1st Cir. Dec. 22, 1992), that courts have repeatedly rejected as “meritless” and “frivolous.”  n1 Blanchette’s assertion, by reference to 1 U.S.C. section 1 (which defines the meaning of the term “person” for any Act of Congress), that he is not a “person” subject to an internal revenue tax, is particularly ironic (as well as mistaken as a matter of law) in light of the fact that the stated purpose of his Complaint is to recover damages for the deprivation of his alleged “right” as a “person,” under another Act of Congress, to social security payments.

 

ORDER

 

For the foregoing reasons, defendant’s Motion to Dismiss is GRANTED.

 

SO ORDERED.

Richard G. Stearns

United States District Judge

 

FOOTNOTES:

 

n1

 

See, e.g., United States v. Studley, 783 F.2d 934, 937, n. 3 (9th Cir. 1986) (noting that “[a]n individual is a ‘person’ under the Internal Revenue Code” and that arguments to the contrary “ha[ve] been consistently and thoroughly rejected by every branch of the government for decades” and “advancement of such utterly meritless arguments is now the basis for serious sanctions imposed by civil litigants who raise them.”); United States. v. Rice, 659 F. 2d 524, 528 (5th Cir. 1981) (noting the frivolity of the “not a ‘person'” argument); Lovell v. United States, 755 F.2d 517, 519-520 (7th Cir. 1984) (imposing sanctions against pro-se plaintiffs for arguing that as “natural persons” they were “exempt from federal taxation”); United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990) (“contention that defendant was not an ‘individual’ under the Internal Revenue Code also is frivolous”); Jones vs. I.R.S., 2012 WL 5334631, *2 (D. Mont. Oct. 26, 2012) (“An individual, including Jones, is a ‘person’ under the Internal Revenue Code and is subject to Title 26.”).

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Fighting a 6672 penalty for employment taxes?

If you were the officer of a company that went belly up there is a good chance the IRS is going to come after you for the missed employment taxes.  Typically the IRS will hit you with something called the 6672 penalty, which is the amount of your employee’s employment taxes that weren’t made. Only “responsible parties” of the business are liable for the penalty, with the broad definition of responsible party being someone who had control over the business.

The IRS is pretty broad about this penalty and typically hits anyone and everyone they can with the theory being that someone is going to pay it off sooner or later.

A court case came out today that showed the catch 22 in fighting this penalty.  How do you show the IRS you weren’t a responsible party if you didn’t have control over the business and thus didn’t have control over the records.  Think about that one a bit.

That’s exactly what happened in this case.  The taxpayer asserted they never had control over the defunct company, and when the IRS said prove it, the taxpayer said that since they weren’t in control they couldn’t get access to prove they weren’t in control.

Wow, that’s a brain twister.

What did the court say?  The passed the buck and said there should be another court hearing to determine if the taxpayer was right or wrong.  The good news is the IRS didn’t get an outright win.

If the IRS or franchise tax board is saying you were the responsible party to a business there are a number of ways to show otherwise.  Give us a call or visit us in our La Quinta office and one of our attorneys can go over the issues with you. Our lawyers work with people in the entire Riverside County, including Palm Springs, Palm Desert, Indio, Cathedral City, Rancho Mirage, and Indian Wells.

 

JONATHAN L. KAPLAN,

Plaintiff,

v.

THE UNITED STATES,

Defendant.

 

Release Date: JANUARY 27, 2014

 

Published by Tax Analysts(R)

 

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

 

(Filed: January 27, 2014)

 

Rule 59 Motion for Reconsideration; Subject Matter Jurisdiction

over Trust Fund Recovery Penalty (TFRP) Suits; “Responsible

Person” under 26 U.S.C. section 6672; Divisible Tax Exception to

Full Payment Rule.

 

Rachael E. Rubenstein, Center for Legal and Social Justice, Saint Mary’s University School of Law, San Antonio, Texas, for Plaintiff.

 

Carl D. Wasserman, with whom were Kathryn Keneally, Assistant Attorney General, David I. Pincus, Chief, and G. Robson Stewart, Assistant Chief, Court of Federal Claims Section, Tax Division, U.S. Department of Justice, Washington, D.C., for Defendant.

 

OPINION AND ORDER

ON PLAINTIFF’S MOTION FOR RECONSIDERATION

 

WHEELER, Judge.

 

On October 9, 2013, the Court granted Defendant’s motion to dismiss Plaintiff Jonathan L. Kaplan’s complaint for lack of subject matter jurisdiction. On November 7, 2013, Mr. Kaplan filed a motion for reconsideration pursuant to Rule 59 of the Rules of the U.S. Court of Federal Claims. The Government filed a response in opposition to the motion, and Mr. Kaplan filed a reply in support. This motion has been fully briefed, and the matter is now ready for decision. For the reasons explained below, Plaintiff’s motion for reconsideration is GRANTED.

 

BACKGROUND

 

On December 20, 2010, the Internal Revenue Service (“IRS”) assessed $ 86,902.76 in trust fund recovery penalties against Mr. Kaplan after determining that for the first three quarters of 2008, he had failed to pay employment taxes for the employees of Merchants Restaurant SA, LLC (“Merchants Restaurant”) as required by I.R.C. section 6672. Kaplan v. United States, 113 Fed. Cl. 84, 85 (2013). Mr. Kaplan subsequently made three $ 100 payments toward the penalties associated with the three respective tax quarters and claimed a refund for each payment. Id. When the IRS denied his claims and demanded payment of the full penalty, Mr. Kaplan filed his complaint in this Court, seeking a refund of his $ 300 in tax payments and a determination that he is not liable for the trust fund recovery penalties. Id.

 

Prior to arguing the merits of the case, the Government filed a motion to dismiss Mr. Kaplan’s complaint because his $ 100 payments did not satisfy the jurisdictional requirement that he “pay the entire assessment for at least one employee per quarter.” Def.’s Mot. to Dismiss 1. The Government demonstrated that Plaintiff had “produced no evidence” showing the assessed tax for any employee in any of the relevant quarters. Id. at 1-2, 6-7. Mr. Kaplan responded by providing one week’s worth of payroll records and, by extrapolation, arguing that this evidence was sufficient to meet his burden of establishing subject matter jurisdiction by a preponderance of the evidence. Pl.’s Resp. to Def.’s Mot. to Dismiss 4-6. The Court disagreed, concluding that one week’s worth of records was an insufficient basis from which to extrapolate the data for a thirteen-week quarter, and therefore dismissed the complaint. Kaplan, 113 Fed. Cl. at 86-87. On November 7, 2013, Mr. Kaplan filed his motion for reconsideration.

 

DISCUSSION

 

A. Standard of Review

 

To succeed, a motion for reconsideration must show “exceptional circumstances justifying relief based on a manifest error of law or mistake of fact.” Stueve Bros. Farms, LLC v. United States, 107 Fed. Cl. 469, 474 (2012) (citations and internal quotation marks omitted), aff’d, 737 F.3d 750 (Fed. Cir. 2013). This showing can be made on one of three grounds: (1) an intervening change in the controlling law; (2) the availability of previously unavailable evidence; or (3) the necessity of preventing manifest injustice. Bishop v. United States, 26 Cl. Ct. 281, 286 (1992).

 

B. Analysis

 

In this case, Plaintiff’s motion is based on the third ground. Mr. Kaplan asserts that the Court “effectively conclude[d] that Plaintiff is a ‘responsible party’ before he ha[d] the opportunity to present the merits of his case” and thereby denied his access to a proper forum. Pl.’s Reply 2. This assertion represents a shift in Plaintiff’s legal theory. Earlier Mr. Kaplan argued that he could establish subject matter jurisdiction by extrapolating from limited records, see Pl.’s Resp. to Def.’s Mot. to Dismiss 4-6, but now he argues that he can establish jurisdiction without any records at all, see Pl.’s Mot. for Recons. 13. Although the Government is correct that ordinarily “an argument made for the first time in a motion for reconsideration comes too late,” this is only a general principle that is subject to exceptions. Bluebonnet Sav. Bank, F.S.B. v. United States, 466 F.3d 1349, 1361 (Fed. Cir. 2006); Gen. Elec. Co. v. United States, 416 F.2d 1320, 1322 (Ct. Cl. 1969). Ultimately, whether to grant a motion for reconsideration is left to the sound discretion of the trial court. Martin v. United States, 101 Fed. Cl. 664, 671 (2011), aff’d sub nom. Fournier v. United States, No. 2012-5056, 2012 WL 6839784 (Fed. Cir. Nov. 27, 2012). As explained below, in this case the Court agrees with Mr. Kaplan’s argument that reconsideration is necessary to prevent manifest injustice.

 

The crux of this argument lies in the competing evidentiary burdens imposed by the jurisdictional and liability standards in this type of divisible tax refund suit. Under section 6672, liability is imposed on a “responsible person” (defined as “[a]ny person required to collect, truthfully account for, and pay over” employment taxes) who willfully fails to fulfill his statutory responsibilities. Jenkins v. United States, 484 F. App’x 511, 515 (Fed. Cir. 2012) (citing Godfrey v. United States, 748 F.2d 1568, 1574 (Fed. Cir. 1984)). The foundation of Mr. Kaplan’s claims is that he was never “required to collect, truthfully account for, and pay over employment taxes” for Merchants Restaurant, and therefore never had control of the documents related to these requirements. Compl paragraphs 6, 8, 13-14. In fact, even though he is listed as one of the company’s three managing members in its certificate of formation, he claims that he “was unaware of this status and never agreed to assume such responsibility.” Id. paragraph 7.

 

However, in order to establish the Court’s subject matter jurisdiction, Mr. Kaplan must prove by a preponderance of the evidence that he has paid the assessed tax for at least one employee. Cencast Servs., L.P. v. United States, 94 Fed. Cl. 425, 435 n.7, 439 (2010), aff’d, 729 F.3d 1352 (Fed. Cir. 2013). More precisely, he must show that his payments of $ 100 were sufficient to cover the full assessment attributable to at least one employee in each quarter. This, of course, cannot be done without some record of the amount of payroll taxes assessed per employee per quarter. In his motion for reconsideration, Mr. Kaplan relates in detail his diligent but futile efforts at obtaining these records. Pl.’s Mot. for Recons. 6-11. He then explains that he is unable to provide this evidence for exactly the same reason he is not liable for the assessed taxes, that is, he is not a responsible person under section 6672. Id. at 12.

 

Thus, assuming these representations are true, Mr. Kaplan is caught in an “evidentiary Catch-22.” In order to prove the merits of his argument that he is not a “responsible person,” he must first produce the evidence for which he is not responsible. This inequity is magnified by the fact that the Government is itself unable to state what minimum payment would be sufficient. See id. at 9-10; Def.’s Resp. to Pl.’s Mot. for Recons. 7.

 

In the end, the merits of this case will turn on whether Mr. Kaplan is liable for the full $ 86,902.76 penalty, and the divisible amount at issue is merely representative of that full amount. Indeed, “[w]hen a taxpayer sues for a refund based on a divisible refund claim, it is meant to ‘test the validity of the entire assessment.‘” Cencast, 729 F.3d at 1366 (quoting Lucia v. United States, 474 F.2d 565, 576 (5th Cir. 1973)). Under the circumstances of this case, the Court is not inclined to prevent Mr. Kaplan from challenging that full assessment in this forum simply because the representative amount he paid might not be representative enough. Accordingly, the Court accepts the three $ 100 payments as sufficient to establish subject matter jurisdiction. See, e.g., Schultz v. United States, 918 F.2d 164, 165 (Fed. Cir. 1990) (accepting plaintiff’s payment of $ 100 toward the $ 20,691.38 penalty assessed against him); Cook v. United States, 52 Fed. Cl. 62, 66 (2002) ($ 97,760.00 penalty).

 

CONCLUSION

 

For the reasons set forth above, Plaintiff’s motion for reconsideration is GRANTED, and the Government’s motion to dismiss the complaint for lack of subject matter jurisdiction is DENIED. The Government’s motion to dismiss its counterclaim is DENIED without prejudice. The Court’s earlier decision in Kaplan v. United States, 113 Fed. Cl. 84 (2013), is VACATED.

 

The Court will contact counsel for the parties shortly to set a new trial date.

 

IT IS SO ORDERED.

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Taxpayer’s Rights

When it comes to dealing with the IRS, you are in the driver’s seat.

Due the to various bouts of Congressional grand standing and political theater, the tax code is riddled with provisions that help out individuals.

Hit with an audit, no problem, you can appeal it.  Don’t like the results of the appeal, you can have the audit reconsidered.  Want to still challenge results, file a tax court petition.  By the way, you’ll also be offered an additional chance to appeal.

Lose the tax court case and the IRS hits you with an assessment for a few million dollars? Once again, no problem, the IRS still has to collect on that debt.  Don’t like the fact they want to levy (garnish) your wages? No problem you can appeal that decision, and they can’t do anything during the appeal.  Don’t like the results of the appeal? Back to tax court.  Don’t like the tax court decision?  You can appeal that as well.

Below is a snippet from a recent appellate court case that summarizes the various options for taxpayers.

In short, it isn’t that taxpayers have a ton of rights, its that people aren’t aware of all their options when dealing with the IRS. If you want to find out your options when dealing with the IRS, give us a call.  We are attorneys and lawyers who have dealt with IRS and tax problems  for over 30 years.  We serve the La Quinta, Palm Springs, Palm Desert, Indio, Rancho Mirage, Indian Wells and all of Riverside County.

 

A. Tax Redeterminations and Collection Due Process Hearings

1. Redetermination of Tax Assessments

When the IRS finds a discrepancy between an individual’s income tax filing and records from other sources, it may use a “notice of deficiency” to inform the taxpayer that it intends to collect the difference in owed taxes. 26 C.F.R. section 301.6212-1. If a taxpayer fails to file a return, the IRS may create a substitute tax form under 26 U.S.C. section 6020(b) and file a notice of deficiency for the total amount it calculates as due.

A taxpayer who disagrees with the statement of the amount of taxes owed in a notice of deficiency has two options: pay the amount assessed and then sue for a refund in federal district court or the Court of Federal Claims under 28 U.S.C. section 1346(a), or refuse to pay the tax and file a petition in Tax Court under 26 U.S.C. section 6213 for a “redetermination of the deficiency.” Either of the two court proceedings may result in a redeterminationof the amount of taxes owed by the taxpayer.

2. Collection Due Process Hearings

In addition to seeking redeterminations, taxpayers may also contest the IRS’s means of collecting overdue taxes. The IRS can initiate a lien on a taxpayer’s property, 26 U.S.C. section 6321, and impose a levy on the taxpayer’s property, id. section 6331. In 1998, Congress established the CDP hearing process to temper “any harshness caused by allowing the IRS to levy on property without any provision for advance hearing.” Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005); Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, section 3401, 112 Stat. 685, 746 (codified at 26 U.S.C. section 6320, 6330). The statute requires notice to the taxpayer of a right to a hearing before a levy or lien is made and guarantees the right to a fair hearing before an impartial officer from the IRS Office of Appeals. 26 U.S.C. section 6320, 6330.

In a CDP hearing challenging a levy, a taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy,” including “challenges to the appropriateness of collection actions,” and “offers of collection alternatives.” Id. section 6330(c)(2)(A). The appeals officer then considers whether any proposed collection action “balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” Id. section 6330(c)(3)(C). The law also affords a taxpayer the right to appeal a CDP determination to the Tax Court. Id. section 6330(d)(1).

CDP proceedings are informal and may be conducted via correspondence, over the phone, or face to face. See 26 C.F.R. section 601.106(c), 301.6330-1(d). A taxpayer may challenge his underlying tax liability at a CDP hearing, but only if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” 26 U.S.C. section 6330(c)(2)(B).

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Franchise Tax Board Mission Creep

Been hiding out from the Franchise Tax Board or IRS?

A few months back I posted about the FTB’s FIRM (Financial Institutions Records Match) program to track where you had your checking account.  Well, the program just expanded.

Assembly Bill 1411 amended the California Tax Code 19266 to authorize the FTB to use FIRM addresses for general tax administration effective January 1, 2014.  That means that if you’ve been trying to live under the radar, and yet have your checking account statements go to the right address, you are officially busted.  The FTB will now have your correct address.

How fast is this going to take place? FTB is expecting to have all their addresses updated by February 2014.

Instead of living a life in fear of the FTB or IRS knocking on your door, you really should clean up the problem.  We are a law firm with attorneys who deal with tax and bankruptcy issues and are located in La Quinta, CA.

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FTB Notices about missed installment payments

Do you have an installment plan with the franchise tax board?  If so you and 15,999 other people with installment agreements experienced a slight glitch with your December payment.

Ironically the exact same thing happened last December as well.

The good news is the FTB won’t treat your installment agreement as breached, also the FTB would be pleased if you decided to go ahead on make the payment on your own.

If you want more information, the notice is below.

Remember, if you live in La Quinta, Palm Desert, Palm Springs, Rancho Mirage, Indio, or Cathedral City and you would like to talk with a tax attorney, we are here to help.

 

Electronic Funds Transfer (EFT) Payment Failure for Installment Agreements

December 13, 2013

Purpose of Bulletin

To advise staff of a failure to process EFT installment agreement payments and provide corrective procedures.

Background

On December 1, 2013, and December 2, 2013, an error occurred and we were unable to complete approximately 16,000 EFT installment agreement transactions.

Because this is our error, we will not consider the affected taxpayers defaulted on their installment agreements for lack of payment. Taxpayers can expect their January payments to be processed as normal.

FTB is taking the following steps to correct the error:

  • We are issuing a letter to affected taxpayers explaining the issue and requesting they voluntarily remit their December payment using one of our payment options.
  • Post this PSB on the FTB website to inform affected taxpayers of the issue.
  • Apply missed payments received within 10 days of the date of our letter, with the effective date of December 1 or 2, 2013.

Taxpayer Inquiries

What to do if you are contacted by an affected taxpayer:

Request they voluntarily remit the missed payment using one of the following payment options:

  • Pay online at ftb.ca.gov using Web Pay.
  • Pay with a credit card. Go to ftb.ca.gov and search for payment options.
  • Pay by check or money order in person at one of our field offices.

Mail check or money order with the account number written on the front of the payment to:

FRANCHISE TAX BOARD
PO BOX 942867
SACRAMENTO CA 94267-0041

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Can you make the IRS pay your legal fees?

What if you the IRS audits you and you, with the help of your lawyer or attorney, are able to show the IRS you did nothing wrong.

Are you now able to go after the IRS for your lawyer fees? Maybe, maybe not.

In order to receive legal fees from the IRS, you have to show that the IRS was not substantially justified in going after you.  If on the other hand the IRS can show a justification for their actions you probably aren’t going to receive any attorney fees.

Below is relevant language from a recent court case on the subject, yeah there is a bit of legalese involved, but it is a good summary.

Need to discuss your situation face to face with a real tax attorney?  If you live in La Quinta, Rancho Mirage, Palm Desert, Indio, Cathedral City, Palm Springs, Indian Wells, or the Coachella Valley we are just a few minutes drive away.

 

We may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). We conclude that there is no genuine dispute as to any material fact regarding the issue raised in respondent’s motion.

Section 7430(a)(1) authorizes an award to the “prevailing party” of reasonable administrative costs incurred in connection with an administrative proceeding within the Service involving the determination, collection, or refund of any tax, [*13] interest, or penalty under the Code, provided that certain requirements are satisfied.  5

Section 7430(c)(4)(B)(i) provides the following exception to the definition of the term “prevailing party” in section 7430(c)(4)(A): “A party shall not be treated as the prevailing party in a proceeding * * * if the United States establishes that the position of the United States in the proceeding was substantially justified.”

The position of the United States is substantially justified if it “is one that is ‘justified to a degree that could satisfy a reasonable person’ or that has a ‘reasonable basis both in law and fact.'” Swanson v. Commissioner, 106 T.C. 76, 86 (1996) (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)). “A position has a reasonable basis in fact if there is relevant evidence that a reasonable mind might accept as adequate to support a conclusion.” Corkrey v. Commissioner, 115 T.C. 366, 373 (2000) (citing Underwood, 487 U.S. at 564-565). In determining whether the position of the Commissioner of Internal Revenue (Commissioner) was substantially justified, we must “consider the basis for * * * [the Commissioner’s][*14] legal position and the manner in which the position was maintained.” Wasie v. Commissioner, 86 T.C. 962, 969 (1986). Whether the Commissioner acted reasonably will be resolved “upon those available facts which formed the basis for the position taken in the * * * [administrative proceeding], as well as upon any legal precedents related to the case.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997). The Commissioner’s position “may be incorrect but substantially justified ‘if a reasonable person could think it correct’.” Id. (quoting Underwood, 487 U.S. at 566 n.2).

A significant factor in determining whether the Commissioner’s position is substantially justified as of a given date is whether on or before that date the taxpayer has presented all relevant information under the taxpayer’s control and relevant legal arguments supporting the taxpayer’s position. Corson v. Commissioner, 123 T.C. 202, 206-207 (2004); sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

The Commissioner’s concession of an issue is not conclusive as to whether the Commissioner’s position with respect to that issue was substantially justified. See Corkrey v. Commissioner, 115 T.C. at 373; Sokol v. Commissioner, 92 T.C. 760, 767 (1989); Wasie v. Commissioner, 86 T.C. at 968-969. In other words, the Commissioner’s concession of an issue, standing alone, does not establish that the [*15] Commissioner took an unreasonable position with respect to that issue. See Lavallee v. Commissioner, T.C. Memo. 1997-183, 1997 WL 189928, at *5.

For purposes of an administrative proceeding, the “position of the United States” means “the position taken in an administrative proceeding to which subsection (a) [of section 7430] applies as of the earlier of — (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.” Sec. 7430(c)(7)(B).

On the record before us, we conclude that respondent’s position in the administrative proceeding is respondent’s position as of April 19, 2011, the earliest date on which petitioner received a “notice of the decision” of the Appeals Office with respect to petitioner’s protest, as reflected in the Tampa Appeals April 19, 2011 letter. See id.

It is respondent’s position in the instant proceeding that on or before April 19, 2011, the date on which the Tampa Appeals Office sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had failed to provide that office with records and other documentation and information that established petitioner’s entitlement under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question. As a result, according to respondent, [*16] the Tampa Appeals Office’s position to include in petitioner’s income that COI income in question, as reflected in the Tampa Appeals Office’s April 19, 2011 letter, was reasonable in fact and in law and thus was substantially justified undersection 7430(c)(4)(B)(i).

Petitioner’s only argument with respect to whether respondent’s position in the administrative proceeding was substantially justified is set forth in petitioner’s petition.  6 In the petition, petitioner alleged in pertinent part:

The Petitioner had to appeal an over assessment of
tax liability for Form 1040 Tax Year 2008. The Petitioner
received a One Hundred Percent (100%) favorable determination
by the Internal Revenue Service Appeals [Office].
The original finding of tax liability was reversed.
Pursuant to 26 U.S.C. section 7430 the prevailing
party may file a request for an award of reasonable
administrative costs incurred in connection with
such administrative proceeding within the Internal
Revenue Service.

While respondent acknowledges that petitioner received a “One Hundred Percent (100%) favorable determination” by the Philadelphia Appeals Office and that the “original finding of tax liability was reversed”, respondent maintains that those facts, standing alone, do not entitle petitioner to administrative costs where respondent establishes, as respondent claims respondent has, that respondent’s position in the administrative proceeding was substantially justified. We agree.

[*17] Before turning to an examination of respondent’s position as of April 19, 2011, to include in petitioner’s income under section 61(a) petitioner’s COI income in question, we will summarize the applicable provisions of sections 61(a) and 108 with which petitioner was obligated to comply in order to be entitled to exclude that income under section 108.

Section 61(a) defines the term “gross income” broadly to mean all income from whatever source derived, including income from discharge of indebtedness (i.e., COI income). Seesec. 61(a)(12). Section 108(a) provides certain exceptions to section 61(a)(12). As pertinent here, section 108(a)(1)(B) excludes from gross income any amount that otherwise would be includible in gross income by reason of the discharge in whole or in part of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent; i.e., the taxpayer is insolvent immediately before the discharge. See sec. 108(d)(3). The amount of COI income excluded under section 108(a)(1)(B) is not to exceed the amount by which the taxpayer is insolvent. See sec. 108(a)(3). “The burden of proving insolvency under section 108(a)(1)(B) is on * * * [the taxpayer].” Bressi v. Commissioner, T.C. Memo. 1991-651, 1991 Tax Ct. Memo LEXIS 693, at *18, aff’d without published opinion, 989 F.2d 486 (3d Cir. 1993).

[*18] We turn now to an examination of respondent’s position as of April 19, 2011. As we do so, we bear in mind that we concluded in Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443, that our resolution of whether respondent acted reasonably in taking the position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, as reflected in the Tampa Appeals April 19, 2011 letter, is to be based “upon those available facts which formed the basis for the position taken in the * * * [administrative proceeding], as well as upon any legal precedents related to the case.” We also bear in mind that we concluded in Corson v. Commissioner, 123 T.C. at 206-207, that a significant factor in our determination of whether the position of respondent as of April 19, 2011, was substantially justified is whether on or before April 19, 2011, the date on which respondent sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had presented to respondent all relevant information under her control and relevant legal arguments supporting her position. See also sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

In support of respondent’s position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, the Tampa Appeals Office stated in pertinent part in the Tampa Appeals April 19, 2011 letter: “Since you failed to respond to our inquiries we are sorry, but we [*19] cannot allow the above claim for an adjustment to your tax”. In other words, the Tampa Appeals Office made the determination in the Tampa Appeals April 19, 2011 letter that petitioner is not entitled to exclude from her income for her taxable year 2008 petitioner’s COI income in question because petitioner had failed to meet her burden of establishing as of April 19, 2011, that she was insolvent immediately before the forced sale of petitioner’s rental property.

We have found that petitioner did not provide any information to the Tampa Appeals Office in response to the Tampa Appeals officer’s requests for information, including his request for the so-called insolvency worksheet. We have further found that petitioner did not provide to respondent any records, documents, or other information that tended to show that she was insolvent immediately before the forced sale of petitioner’s rental property until petitioner’s representative sent to the Philadelphia Appeals officer on May 20 and June 2, 2011, certain documents and other information. It was only after reviewing those documents and that other information that petitioner sent to him on those two dates that the Philadelphia Appeals officer was able to, and did, conclude that petitioner was insolvent immediately before the forced sale of petitioner’s rental property and [*20] that consequently petitioner’s COI income in question was excludible from her income for her taxable year 2008.  7

On the record before us, we find that as of April 19, 2011, the date on which the Tampa Appeals Office sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had not provided to the Tampa Appeals officer any records, documentation, or other information in support of her position that she is entitled under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question. On the record before us, we find that as of that date, April 19, 2011, petitioner had failed to satisfy her burden of establishing by providing records and other pertinent documentation and information to a representative of the Tampa Appeals Office  8 (1) that she was insolvent immediately before the forced sale of petitioner’s rental property and (2) that she is entitled under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question.

[*21] Based upon our examination of the entire record before us, we find that respondent’s position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, as determined in the Tampa Appeals April 19, 2011 letter, had a reasonable basis in both fact and law. On that record, we further find that respondent has satisfied respondent’s burden under section 7430(c)(4)(B)(i) of establishing that respondent’s position in the administrative proceeding was substantially justified. On the record before us, we hold that petitioner is not entitled to an award of administrative costs under section 7430(a)(1).

We have considered all of the parties’ respective contentions and arguments that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

To reflect the foregoing,

An order granting respondent’s motion and decision for respondent will be entered.

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