Federal Income Tax Update
By I. Thanksgiving Holiday Extends the Due Date for Filing Tax Court Petition; Sall vs. Commissioner, 161 T.C. No. 13 (2023).
Mr. Sall received a notice of deficiency dated August 25, 2022, which was sent to Mr. Sall by certified mail on August 26. The 90th day after August 26 was Thursday, November 24, Thanksgiving Day. The face of the notice of deficiency stated that “the last day to file a petition with the US Tax Court” was Friday, November 25, 2022. Although the Tax Court’s electronic filing system through Dawson was operational and accessible throughout the entire Thanksgiving week, the Tax Court was closed from Thanksgiving Day until the following Monday. Mr. Sall mailed his petition to the court on Monday, November 28, 2022. The court received Mr. Sall’s petition on Thursday, December 1, 2022.
The IRS filed a motion to dismiss on the basis that the petition was filed late, since according to the IRS, the filing deadline was November 25, 2022. The court, however, concluded the petitioner’s due date was no earlier than Monday, December 12, 2022, which was long after the court received Mr. Sall’s petition. The court navigated the rules of Section 7451 to conclude the filing deadline was extended from Friday, November 25 through Monday December 12, 2022. Even though the electronic Dawson filing system was operational throughout Thanksgiving week, the court was officially closed on Thursday, November 24 and Friday, November 25. Under Section 7451(b), the statute of limitations for filing a Tax Court petition is tolled by “the number of days within the period of inaccessibility, plus an additional fourteen days.” Section 7451(b)(1).
Other rules may operate to extend the deadline to file a Tax Court petition. If the filing deadline falls on a Saturday, Sunday or legal holiday, the deadline is extended to the next day that is not a Saturday, Sunday or legal holiday. Section 7503. Also, if the face of the notice of deficiency provides for a “last day to file a petition” date that is later than the 90th day, the due date is extended to that later date. Section 6213(a). Adding fourteen days to Friday, November 25 meant the initial due date was extended fifteen days from the original due date, which shifted the petition due date to no earlier than December 10. Since December 10 was a Saturday, the petition deadline shifted further to Monday December 12, 2022.
II. Third Circuit Holds Time Limit for Filing Tax Court Petition is Procedural so Equitable Tolling Can Save a Late-Filed Petition; Culp vs. Commissioner, 2023 U.S. App. LEXIS 18287.
Mr. and Mrs. Culp were late in filing a Tax Court petition. The court dismissed the petition on the basis that the court lacked jurisdiction to review it due to the time deadlines in Section 6213(a). The Third Circuit Court of Appeals determined the Section 6213(a) deadline is not jurisdictional but instead is a statutory deadline that is claims processing in nature. That means that the principles of equity can toll the deadline for filing a petition. The court remanded the case to the Tax Court to determine whether the Culps qualify for equitable tolling relief.
III. Tax Court Rules Deadline to File a Tax Court Petition to Dispute a Notice of Deficiency is Jurisdictional; Sanders v. Comm’r, 161 T.C. No. 8 (2023).
After the Culp decision was issued by the Third Circuit Court of Appeals, the Tax Court located in the Fourth Circuit declined to follow Culp and ruled the Section 6213(a) 90-day deadline for filing a petition is jurisdictional. In Sanders, Tuesday, June 21, 2022, was Ms. Sanders’ deadline for filing a Tax Court petition. Her USPS Priority Mail envelope was dated June 23, 2023. Relying on Hallmark Research Collective v. Comm’r, 159 T.C. 126 (2022), the Sanders court held the 90-day deadline in Section 6213(e) is jurisdictional and upheld the IRS’ motion to dismiss.
IV. In Another Case, Tax Court found Deadline to File a Petition to Redetermine Employment Status is Not Jurisdictional; Belagio Fine Jewelry, Inc. v. Commissioner, U.S. Tax Ct. LEXIS 1634 (2024).
In Belagio, the Tax Court decided the deadline for filing a petition to determine employment tax status is not jurisdictional. The court stated: “To create a jurisdictional requirement, Congress ‘need not use magic words.’ Henderson v. Shinseki, 562 U.S. 428, 436 (2011) . . . [T]he focus of the analysis is whether the statute expressly refers to the Court’s authority to hear a case rather than merely the consequences to the petitioner.” Further, the Belagio court noted “jurisdictional statutes speak to the ‘power of the court’ whereas claim-processing rules speak ‘to the rights or obligations of the parties.’”
Belagio concluded Section 7436(b)(2)’s use of “initiated” focuses on consequences to the taxpayer, not the court’s ability to “hear the case, to consider the pleadings, or to act upon motions.” In concluding Section 7436(b)(2) did not clearly indicate the deadline was jurisdictional, the court added “[Section 7436(b)(2)]’s use of prescriptive text—‘no proceeding may be initiated’—likewise does not make the deadline jurisdictional. The Supreme Court has rejected the notion that mandatory or emphatic text is sufficient to signal that a deadline is jurisdictional.”
V. District Court Allows Assessment of Successor in Interest Liability; ACI Construction, LLC vs. US, 13 AFTR 2d 2024-1418.
Sid Crookston, LLC operated a construction business for many years. After Sid Construction failed to pay Federal 941 taxes of over $2 million, the principals of Sid Construction formed ACI Construction to take over the construction activities of Sid Construction. Various members of the Crookston family formed ACI Construction. Although Mr. Crookston, the patriarch of the family and primary stockholder of Sid Construction, owned no stock of ACI, the new owners of ACI (Sid’s children) assured everyone Mr. Crookston would be in charge of ACI’s operations. Likewise, Mr. Crookston told Sid Construction’s customers he would be helping his sons and stepson with ACI and would play a major role and be heavily involved in its operations. Soon after ACI was formed, Sid Construction went out of business. ACI picked up all of Sid Construction’s employees and equipment and continued to perform its construction contracts and general business operations. ACI paid off some of Sid Construction’s creditors even though ACI never entered into a formal arrangement to do so.
The District Court in Utah ruled in favor of the IRS and allowed the IRS to pursue federal tax liens against ACI as a successor in interest of Sid Construction. The court based its decision on four doctrines under Utah law: (1) the successor liability doctrine; (2) the theory of a “de facto merger” between Sid Construction and ACI; (3) the theory that ACI had implicitly agreed to assume all debts and obligations of its predecessor; and (4) the fraudulent transfer doctrine. The court also held a separate tax assessment against ACI was not required because Section 6901 conveys transferee liability on ACI, not as a new tax liability, but as an enforcement mechanism to allow the IRS to enforce an existing liability against ACI, as the successor in interest of Sid Construction. The court further concluded the IRS was not required to issue a notice or demand for payment to ACI. The IRS was required only to send a payment demand to Sid Construction. ACI inherited the demand for payment made to Sid Construction years earlier. Finally, the court determined ACI Construction was not entitled to a CDP notice or hearing under Section 6320.
VI. Prior IRS Audits did not Save NOL Carryforwards; Amos vs. Commissioner, AFTR 2d 2024 – 1267.
Betty Amos was a certified public accountant and restaurateur. The IRS assessed additional tax against Ms. Amos for 2014 and 2015 by disallowing NOL carryforwards that were generated beginning in 1999 and 2000. The IRS asserted Ms. Amos had not established she had sustained losses in 1999 and 2000 and those losses were still available to be carried over to 2014 and 2015.
For 1999, Ms. Amos’ return claimed NOL loss carryforwards of almost $1.5 million. She reported an additional NOL for 2000 of about $370,000. With the 1999 and 2000 NOL carryforwards combined, Ms. Amos’ 2000 return showed an NOL carryforward of $1,870,175.
The IRS audited Ms. Amos’ 2000 return and agreed there was no deficiency. The IRS later audited Ms. Amos’ 2009 tax return. The parties settled with a small tax deficiency of $11,545. However, the parties stipulated the 2009 deficiency did not take into account NOLs from prior years. The parties agreed Mr. and Mrs. Amos reserved the right to claim NOLs in future years, and the IRS reserved the right to challenge any future claimed NOLs.
For 2014 and 2015, the Tax Court determined Ms. Amos did not establish her NOLs carryforwards from 1999 and 2000. The court also determined Ms. Amos did not prove any NOLs from 1999 and 2000 had not been absorbed in tax years before 2014.
The Amoses appealed to the 11th Circuit Court of Appeals. The court affirmed a taxpayer is required to maintain permanent books of records to establish deductions allowable in the current year, including NOLs from prior years, which include a detailed schedule showing the computation of any net operating loss deduction for the current year. Reg. § 1.172-1(c). It was not sufficient for Ms. Amos to provide a schedule of her past NOLs. Instead, Ms. Amos was required to establish how the NOLs arose in 1999 and 2000, and her taxable income for years between 2000 and 2014 were insufficient to absorb the NOL carryforwards.
In the prior Tax Court proceeding, Ms. Amos failed to introduce a complete set of her tax returns from 2001 to 2013 and instead introduced portions of those returns. Those portions were insufficient to determine how much of the 1999/2000 NOL carryforwards had been absorbed before 2014. The court also confirmed that previous audits do not bind the IRS. A deduction condoned or agreed to in a former year does not bind the IRS as to other years. The IRS is free to challenge those same deductions in future tax years. Finally, the court confirmed the Tax Court’s decision upholding the 20% accuracy related penalty against Mrs. Amos. Since Ms. Amos was a certified public accountant, she was surely aware “each tax year stands alone and that it was her responsibility to demonstrate her entitlement to the deductions she claimed.”
VII. Ecotourism Determined to be a Hobby Following Fifteen Years of Losses; Schwarz vs. Commissioner, TC Memo 2024-55.
Mr. Schwarz was an avid hunter who attempted to engage in an ecotourism business on his property in Texas. He offered hunting, fishing and other recreational events as part of his ecotourism business. In addition to that business, Mr. Schwarz had significant farming operations on the property.
The IRS audited Mr. Schwarz’s 2015, 2016 and 2017 returns. He claimed losses for each year. Mr. Schwarz also had losses in each of the prior 12 years. After analyzing the 13-factor test in the Section 183 regulations, the Tax Court concluded the personal recreation Mr. Schwarz derived from his activities, 15 straight years of losses, and Mr. Schwarz’s not carrying on the activity in a businesslike manner, demonstrated Mr. Schwarz’s farming\ecotourism activities were a hobby. The court, however, struck down the 20% Section 6662 penalty due to the testimony of Mr. Schwarz’s CPA. He credibly testified he believed Mr. Schwartz’s activities met the honest and objective profit intent standard.
Keith Wood is an attorney with Carruthers & Roth, P.A. in Greensboro, North Carolina.