Tax Court

Tax Court

• The US Tax Court generally provides one of three types of opinions, referred to as TC Opinion, TC Memorandum, and TC Summary. Before we discuss how those opinions differ, an overview is helpful. Each opinion is considered the decision of the entire Tax Court, rather than that of the issuing judge alone. In this fashion, the Court acts in a collegiate manner similar to that of an appellate court (though the Tax Court is not truly "en banc" because the judges do not sit together to hear arguments).
• A draft opinion is prepared after the final reply brief is filed. Usually the judge (or trial judge) who heard the case prepares the draft opinion, but that's not required. Draft opinions do not become opinions of the Tax Court until the Chief Judge reviews them.
• The Chief Judge may choose within 30 days to ask the entire court to review the opinion, making it a "reviewed opinion." Review by the full court is likely to happen if the draft opinion invalidates a regular opinion or overrules Tax Court precedent. If a case of first impression, the full court may review the opinion. Reviewed opinions may also occur if the issue is likely to come up in another pending case, if the matter overrules a prior Tax Court decision, or if the Tax Court was previously reviewed by a Court of Appeals. The Chief Judge selects a judge to write the reviewed opinion and other judges offer concurring or dissenting opinions that follow the Court opinion. The Chief Judge determines which description an opinion will have.Cutting to the chase (finally), the three types of opinions follow:
  • TC Opinion: Regular opinions are published in the Reports of the Tax Court; they are considered to be binding precedent and are cited as XXX TC XX. These are the highest level rulings and may be cited and appealed.
  • TC Memorandum: Memorandum opinions are published commercially; these usually apply settled law to the facts and circumstances of the case in question. Importantly, memo decisions do not set precedent, but the Court does not easily ignore them and they can become even more important if they were subject to an appellate review. They are cited TC Memo YEAR-NUMBER. These decisions may be cited and appealed.
  • TC Summary: Summary opinions are those issued but not officially published (and usually rendered in small tax cases). A summary opinion does not set precedent and may NOT be cited (although they may still be useful with IRS examination staff). They are referred to as TC Summary YEAR-NUMBER.
• As an aside, the entry of a decision may be withheld pending a final computation by both parties. Rule 155 computations may be based on valuation issues, or may indicate a split between the taxpayer and IRS on multiple issues. If the parties agree on the amount of deficiency, liability, or overpayment, each submits a computation and a statement of agreement. To be clear, agreement with a calculation does not waive appeals rights. The Court renders a decision when it receives an agreed Rule 155 computation.
• If the parties cannot agree on computation, either may file with the Court a computation of the amount believed to reflect the Court's findings and conclusions. When parties submit differing computations, they may be allowed the opportunity to be heard in argument, after which the Court will determine the correct amount due.
• No new issues may be raised during the hearing, which is held strictly on the question of correct computation. No reconsideration may be requested, though pure issues of law may be reconsidered and mechanical or math adjustments are permitted.
• You'll see below an example of each type of case: a TC Opinion, a TC Memorandum, and a TC Summary.
  • Is compensation for the donation of eggs includable in income? In Perez (144 TC 4 (1/22/15)), http://www.ustaxcourt.gov/InOpHistoric/perezdiv.holmes.TC.WPD.pdf
     the taxpayer received $20,000 in exchange for undergoing painful procedures to donate her unfertilized eggs to infertile couples. Under her contracts the sums she received were designated as compensation for pain and suffering, and she did not report these amounts on her 2009 income tax return. Judge Holmes in this instance concluded Donor Source did not exceed the scope of the taxpayer's contractual consent; as such compensation for pain and suffering from the consensual performance of a service contract is not "damages" under §104(a)(2) and must be included in gross income (take note: NAEA included this case in their top-ranked "Is This Income?" course at IRS' 2015 Nationwide Tax Forum).
    • NOTE: Judge Holmes also looked to the possible interpretations that could occur if the Court ruled differently - that a professional boxer could argue that part of his fee was payment for bruises, nosebleeds and cuts, or that a hockey player could argue that a portion of his salary was allocable to chipped teeth, and football players could allocate part of their earnings for brain injuries. The risk is known and is part of what they agree to before beginning their work, which is what makes it taxable income and not excludable.
  • It's not a joint return when it's signed under duress ... in Hiramanek (TC Memo 2016-92 (5/10/16)), https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10796taxpayer's
    ex-wife previously sought relief from joint liability for the 2006 tax year and reached a settlement with the IRS that since she signed under duress, it wasn't a joint tax return and she had no liability for the deficiency (the Tax Court trial came to the same conclusion). While the first case was pending, the taxpayer filed his own request for relief under §6015, which was denied (it isn't possible to have two innocent spouses). Taxpayer appealed the decision in the first case to the 9th Circuit and lost, and attempted to appeal to the Supreme Court, which denied the writ for certiorari. Taxpayer filed Form 8857, Request for Innocent Spouse Relief, for 2006 (the same tax year).
  • How does equitable ownership allow the taxpayer to deduct mortgage interest? In Phan (TC Summary 2015-1 (1/12/15)) http://www.ustaxcourt.gov/InOpHistoric/phansummary.kerrigan.sum.WPD.pdf
    , the taxpayer moved onto a three acre ranch in California to help his mother. In 2010, the legal title was held by Phan's mother, brother and father - the brother and father did not live at the property, and the mother was divorcing the father. Phan could not buy the property himself, but had an oral agreement with his mother and siblings that he would pay the mortgage loan and the property taxes, and those payments would increase his equity interest. His name was added to the title in 2013. In 2010, Phan claimed a $35,880 mortgage interest deduction, which the IRS denied. The taxpayer may become the equitable owner if he or she assumes the benefits and burdens of ownership. Phan resided at the property and made mortgage payments plus property tax and insurance, paid the cable bill, and made improvements to the property. Taxpayer was entitled to the interest deduction as claimed.
• Please note the cover sheet, which states, "Pursuant to Internal Revenue Code Section 7463(b), this opinion may not be treated as precedent for any other case."
Source: SHERRILL L. (GREGORY) TROVATO, MBA, MST, EA, USTCP