Negotiations on a tax information exchange agreement between the U.S. and the Cayman Islands conclude

The Cayman authorities have announced that the Cayman Islands and the United States have “concluded negotiations” regarding the Foreign Account Tax Compliance Act (FATCA).   The consensus reached a Model 1 Intergovernmental Agreement (IGA) and a new tax information exchange agreement (TIEA).  The United States has been putting pressure on foreign governments in its initiative to gather tax dollars from U.S. citizens and permanent residents who have assets overseas but are not reporting the income.  Under this pressure, Wayne Panton, the Cayman's minister for financial services said: “as an international financial center that contributes to the efficient functioning of global markets, the initialing and subsequent signing of the IGA and new TIEA with the United States will again demonstrate Cayman's commitment to engage in globally accepted tax and transparency initiatives.”

We have all heard of late, the cooperation that has been occurring between the U.S. and the Swiss Government and between the U.S. and the Israeli Government.  Any U.S. citizen or resident with assets overseas – whether in Switzerland, Israel, Cayman or anywhere else, that has not been properly reporting same, should consider speaking to an attorney to discuss the alternatives.

John Hom gets caught “all in” by Tax Court

John Hom gets caught “all in” by Tax Court

Poker player John Hom’s bluff was called in a U.S. Tax Court decision: John C. Hom v. Comm., T.C. Memo 2013-163 (Tax Ct Memo 2013).  Hom had failed to substantiate his gambling losses so his winnings were unreported.  He represented himself at trial.

Background:   Net gambling winnings are taxable while net gambling losses are not deductible.  I.R.C.  §165(d).  This rule also applies to professional poker players where gambling losses exceed gambling income.

Decision:  Hom earned income from various poker tournaments including a $136,695 victory from Grand Sierra Resort & Casino in 2007.  Yet he reported net gambling losses in each year.  The Court held that he could not substantiate his losses or his expenses and charged him with tax on the winnings.  Hom asked the court to let him estimate, but that plan got trumped by the Tax Court because there was no evidence from which to estimate.  The court allowed only a few hundred dollars for entry fees.  Additionally, the court imposed accuracy related penalties pursuant to I.R.C. § 6662 of 20% of the underpayment.

Conclusion:  Representing yourself in the Tax Court can be disastrous.  Gamblers (like all taxpayers) must keep accurate records of their expenses and losses or risk losing the ability to claim the deductions.

 

 

Appellate Court affirms the Tax Court that the period to Petition the Tax Court for denial of a collection due process hearing is 30 days

In Gray v. Comm., 112 AFTR 2d ¶ 2013-5103 (7^th Cir. 7/23/2013), the Seventh Circuit Court of Appeals upheld the determination of the Tax Court and found that the Tax Court lacked jurisdiction to review a collection action because more than 30 days had elapsed.

The Seventh Circuit concluded that the Tax Court properly determined that it lacked jurisdiction where the taxpayer failed to comply with the 30-day time limit pursuant to Code Sec. 6330(d)(1).  Section 6330(d)(1) is the section providing the Tax Court with jurisdiction to appeal a notice of determination after a collection due process (“CDP”) hearing.  In Gray, the taxpayer attempted to use the traditional 90-day time limit for challenging a notice of deficiency under Code Sec. 6213(a).  But the 7^th Circuit found that Sec. 6213 was only applicable to notices of deficiency, not denial of collection due process.

By way of background, taxpayers are entitled to a CDP hearing pursuant to Sec. 6330(b)(1) prior to collection activity taking place.  Prior to levying on property, the IRS is required to provide written notice to the taxpayer of the taxpayer’s right to a hearing to dispute the collection action.  Code Sec. 6330(a).  If the taxpayer requests a hearing within 30 days of the notice, an IRS appeals officer (with no prior involvement in the matter) will review the issues that the taxpayer requests. Code Sec. 6330(b) and (c). After the hearing, the IRS will issue a notice of determination, ruling on whether the proposed collection action is justified after considering the taxpayer's objections. Code Sec. 6330(c)(3).  If the taxpayer is not satisfied with the determination, he may within 30 days of such a determination Petition the Tax Court. Code Sec. 6330(d)(1).

Procedurally, in the Gray case, the taxpayer filed the Petition more than 30 days after receiving the notice of determination.  Thus, the IRS filed a motion to dismiss for lack of jurisdiction based on filing out of time. While the taxpayer objected to the motion the Tax Court sided with the IRS and the 7^th Circuit followed.

 

Conclusion, when petitioning the Tax Court for review of a determination of a collection due process hearing, be certain to file within the 30 day time period or be barred from further appeals.

 

Good news for innocent spouses

The Internal Revenue Service (“Service”) has announced that it will not contest the application of a case that went against it: the case of Wilson v. Comm., 111 AFTR 2d 2013-522 (9^th Cir. 2013) which had affirmed TC Memo 2010-134.  The Service did this in a pronouncement called an Action on Decision - AOD 2013-007, 06/04/2013.  This AOD means that the Service will no longer argue in innocent spouse equitable relief cases either that the Tax Court's review is limited to determining whether the Service abused its discretion, or that the court's review is otherwise limited by the administrative record developed before trial.

By way of background, Sec. 6015 of the Internal Revenue Code affords relief from joint and several liability on a joint return to certain spouses, including equitable relief under Sec. 6015(f) where other relief provided by Sec. 6015 is not available. Sec. 6015(e)(1) provides that the United State Tax Court has jurisdiction to “determine the relief available” to one who files a proper and timely Petition requesting equitable relief.  The Service had previously argued in these cases that the scope of the Tax Court's review was limited to determining whether the Service had abused its discretion in denying equitable relief, and should be confined to matters contained in the administrative record.   Based upon the AOD, it will no longer argue either of those positions in the Tax Court.

The Tax Court had been rejecting the Service’s position in previous cases such as Porter v Comm., 130 TC 115 (2008) and Porter v. Comm., 143 TC 203 (2009), and then Wilson.  The Tax Court in Porter I, Porter II and Wilson and then the 9^th Circuit in Wilson all ruled against the Service and determined that the Tax Court review of the case was de novo and not confined to the administrative record.  So the Courts have stated, and the Service has now conceded, that the Tax Court is not limited to evidence developed in the administrative record and may look to other facts and the Tax Court's ability to grant relief is not dependent on a finding that the IRS abused its discretion in denying relief.

So now if the Service denies innocent spouse relief, instead of having to prove that the Service abused its discretion, a taxpayer must now only show she is entitled to such relief and if facts were not presented to the Service earlier, they may be presented for the first time in the Tax Court.  This is a significant victory for innocent spouses who are stonewalled by the Service and may even make the Service kinder and gentler knowing that the Tax Court will take a fresh look at the case.