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Tax Court In Brief | Remisovsky v. Comm’r | Reasonable Cause Exception To Additions To Tax – Tax Authorities



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The Tax Court in Brief – August 29th – September
2nd, 2022

Freeman Law‘s
The Tax Court in
Brief
” covers every substantive Tax Court opinion,
providing a weekly brief of its decisions in clear, concise
prose.

For a link to our podcast covering the Tax Court in Brief,
download here or
check out other episodes of The Freeman Law
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Tax Litigation:  The Week of August 29th, 2022,
through September 2nd, 2022

George Anton Remisovsky and Ellen Jones-Remisovsky v.
Comm’r, T.C. Memo. 2022-89| August 30,
2022 
| Lauber, A. | Dkt. No.
11945-20L

Short Summary: Petitioners sought a hearing in
response to CDP notices issued with respect to tax reported on
their late-filed 2013 tax return and additions to tax under I.R.C.
§§ 6651(a)(1) and (a)(2). At the time the 2013 return was
due, the husband was a practicing physician and the wife a retail
manager. During the hearing, Petitioners expressed interest in a
collection alternative and challenged their liability for the
additions to tax based on reasonable cause. They pointed to the
husband’s history of functional alcoholism and depression
(corroborated by a psychiatrist’s letter), which they argued
diminished his ability to comply with his financial and tax
obligations. The settlement officer (SO) considered
petitioners’ reasonable cause claims and applicability of the
government’s “first time” penalty abatement
policy but determined that petitioners did not meet the
requirements for relief. She offered them an installment plan (IA)
but it was rejected. Because petitioners were not eligible for
penalty abatement, declined the IA and sought no other collection
alternative, the SO closed the case, sustaining the collection
actions. Petitioners timely petitioned. At trial, petitioners
contended that alcoholism and depression are recognized as
“diseases” but they offered no evidence concerning the
severity of the husband’s conditions or his inability to
timely file or pay at relevant times. They also failed to show that
the wife was unable to do so.

Key Issues and Primary Holdings:

Should the disputed additions to tax under sections 6651(a)(1)
and (2) be abated on the basis of reasonable cause?

No. Petitioners did not meet their burden of
proof. The record contained no evidence that the husband’s
illness, if any, incapacitated him during 2013 or 2014, during
which time he continued to practice medicine. Nor did it contain
evidence the wife, employed as a retail manager, was unable to
discharge her tax obligations.

Did the SO abuse her discretion by failing to grant petitioners
an installment agreement for 2013.

No. Petitioners failed to make a
counterproposal to the SO’s rejected installment plan. As the
Court observed, a settlement officer is not obligated to pursue a
collection alternative where no such proposal is made. McLaine
v. Commissioner
, 138 T.C. 228, 243 (2012).

Key Points of Law:

Standard of Review Unless the liability of
a taxpayer’s underlying liability is properly at issue, the
Court reviews IRS determinations in a CDP hearing for abuse of
discretion. Jones v. Commissioner, 338 F.3d 463, 466
(5th Cir. 2003); Goza v.
Commissioner
, 114 T.C. 176, 182 (2000). Abuse of discretion
exists when a determination is arbitrary, capricious, or without
sound basis in fact or law. See Murphy v.
Commissioner
, 125 T.C. 301, 320
(2005), aff’d, 469 F.3d 27
(1st Cir. 2006). If underlying liability is at
issue, the standard of judicial review is de
novo. Goza, 114 T.C. at 181-82.

A taxpayer’s underlying liability includes penalties and
additions to tax that are part of the unpaid tax that the
Commissioner seeks to collect. Dykstra v.
Commissioner
, T.C. Memo. 2017-156.

Additions to Tax — Reasonable Cause
Exception
 A taxpayer can challenge his or her
underlying liability, including additions to tax under sections
6651(a)(1) and (2), if the taxpayer has had no prior opportunity to
dispute the underlying liability. I.R.C. §
6330(c)(2)(B); Montgomery v. Commissioner, 122 T.C.
1, 9 (2004).

A delay in filing a tax return is due to reasonable cause if the
taxpayer “exercised ordinary business care and prudence and
was nevertheless unable to file the return within the prescribed
time.” Treas. Reg. § 301.6651-1(c)(1). Financial
hardship generally does not affect a person’s ability to
file. IRM 20.1.1.3.3.3(1)(a) (Aug. 5, 2014).

To prove reasonable cause for failure to timely pay a tax due,
the taxpayer must show that he “exercised ordinary business
care and prudence in providing for payment of his tax liability and
nevertheless was either unable to pay the tax or would suffer
economic hardship if he paid the tax on the due
date.” Hardin v. Commissioner, T.C. Memo.
2012-162 (citing Treas. Reg. § 301.6651-1(c)(1).

Petitioners bear the burden of proving “reasonable
cause.” See Higbee v.
Commissioner
, 116 T.C. 438, 446 (2001).

Where a taxpayer’s disability is raised as part of a
reasonable cause defense, the Court looks to “the severity of
the disability and the impact it had on the taxpayer’s
life.” Jones v. Commissioner, T.C. Memo.
2006-176. For illness or incapacity to constitute reasonable cause,
the taxpayer must show that he or she is “incapacitated to
such a degree” that he or she could not file his or her
return(s). Thomas v. Commissioner, T.C. Memo.
2005-258.

Illness or incapacity “generally does not prevent a
taxpayer from filing returns where the taxpayer is able to continue
his business affairs despite the illness or
incapacity.” Hazel v. Commissioner, T.C. Memo.
2008-134; Watts v. Commissioner, T.C. Memo. 1999-416
(taxpayer’s “selective inability to perform his or her
tax obligations, while performing his or her regular business, does
not excuse failure to file.”).

Insights:  This case is a useful roadmap
for how to prove up “reasonable cause” based on illness
or incapacity. Also, it clearly illustrates that evidence
‘rules’ — particularly in a tax case. Here, other
than the husband’s self serving testimony and a letter from
his psychiatrist, petitioners offered no evidence to support their
reasonable cause defense. For example, Petitioners did not call the
psychiatrist to opine on why the husband was able to practice law
but not able to satisfy his tax obligations when the return and
payment were due and the wife did not testify or produce
documentation to explain why she was unable to file the return and
pay the tax or engage a tax preparer to do so.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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