Monthly Archives: September 2020

A California District Court in Preimesberger (08/05/2020) 126 AFTR 2d ¶2020-5143 has found that a nursing home officer’s failure to pay withholding taxes was not willful as a matter of law. The officer paid other creditors before the IRS while trying to comply with mandatory federal and state regulations that required him, despite a severe cash flow problem, to keep the nursing homes operating at the existing standard of care. 

James Preimesberger was employed by Meridian Health Services Holdings, Inc. ("Meridian") to operate five skilled nursing home facilities in California ("the Facilities"). 

From 2010 through 2015, the Facilities accrued substantial Medicare and Medi-Cal receivables due from the United States. Eventually the cash flow problem became so acute that the Facilities could not meet all their operational expenses.

Preimesberger arranged for Meridian to bridge the cash flowHim him him gap by drawing on a line of credit from a bank, Capital Finance, Inc. (CFI). However, CFI only authorized and provided funds for the payment of net wages and other expenses necessary to maintain the Facilities’ standard of care, so the Facilities could not use the funds to pay their withholding tax obligations. 

According to Preimesberger, the Facilities could not simply cease operations to resolve its cash flow problems. Under various federal and state regulations, the Facilities had to remain open and maintain the existing standard of care for all residents, despite its cash flow problems, until it complied with regulatory closing procedures and could officially close. Violations of the regulations carried civil and criminal penalties.

In 2019, the IRS assessed trust fund recovery penalties against Preimesberger for the second, third and fourth quarters of 2014 and the first and second quarters of 2015.

The district court found that Preimesberger’s failure to pay the Facilities’ withholding taxes was not willful as a matter of law.

According to the court, the available evidence showed that the Facilities could not just cease operations because federal and state regulations (“nursing home regulations”) prevented nursing homes and skilled nursing facilities from simply closing their doors. Instead, the nursing home regulations required nursing homes and skilled nursing facilities 

1. to follow a specific closing process and 
2. to maintain the existing standard of care until closure.

Failure to comply with the nursing home regulations could have resulted in civil and criminal penalties.

Based on this evidence, the court determined Preimesberger had to keep the Facilities open and maintain the standard of care until he could comply with the regulatory process for closing them.  

Since there was no evidence that Preimesberger had any funding options other than CFI’s line of credit, the court determined that the only way that Preimesberger could meet his obligations under the nursing home regulations was to comply with the restrictions CFI placed on the funds he borrowed.

The IRS did not allege that Preimesberger had access to any funds, other than the CFI loan, that he could use to pay the withholding taxes. 

In addition to the restrictions imposed on the funds by CFI, the court found that the nursing home regulations appeared to have required that CFI’s loan be used to maintain the standard of care, which arguably made the funds “encumbered” under Nakano. The court determined that, under these circumstances, Preimesberger’s nonpayment of the withholding taxes could be considered involuntary and, therefore, not willful.  

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The IRS rejects a lot of e-filed returns for reasons that seemingly have nothing to do with whether the taxpayer filed a valid return. (see these Procedurally Taxing posts) This disparity between the way it treats e-filed returns and the way it treats mailed returns caught up with them in Fowler v. Commissioner, 155 T.C. No. 7 (2020) a fully reviewed opinion with no concurrences or dissents. 

In this deficiency case, the taxpayer's self-reported liabilities, for year for which he e-filed return on extended due date that was rejected for failure to provide valid IP PIN and subsequently refiled return with IP PIN which IRS accepted.

The Tax Court determined on summary judgment that taxpayer's 1st submission triggered running of IRC Sec. 6501(a)'s 3-year Statute of limitations for assessment, so deficiency notice that IRS sent outside that period was untimely. Notwithstanding that the IP PINWas omitted, the taxpayer's 1st submission was “required return” and “properly filed.” 

The court held that the 1st submission met the Beard test insofar as it purported to be return, appeared to be honest and reasonable attempt to comply with tax laws as it included his income, deductions, exemptions and credits along with supporting documentation, and was executed under penalties of perjury. 

 The U.S. Tax Court’s opinion in Beard v. Commissioner enumerated several factors to determine the presumptive validity of a taxpayer submission as a tax return. See 82 T.C. 766, 777 (1984), aff’d per curium, 793 F.2d 139 (6th Cir. 1986) (commonly referred to as the “Beard test”). The  Beard test provides that when a taxpayer mails a paper income tax return to the IRS, the return is treated as valid as long as: 

1. the information on the return is sufficient for the IRS to calculate the tax liability; 
2. the filed document purports to be a tax return; 
3. the return makes an honest and reasonable attempt to comply with the tax laws; and 
4. the taxpayer executes the return under penalties of perjury

The IRS's argument that IP PIN was part of signature requirement was unsupported and otherwise failed where internal IRS guidance stated that element other than e-signature could be needed to authenticate electronic returns; where electronic return originator was instructed to verify taxpayer's identity; and where 1st submission included PPIN, which Form 1040 instructions identified as e-signature. 

Also, taxpayer established delivery of his 1st submission to IRS with accountant's affidavit, accounting firm's transmission log, and IRS's acknowledgement of his submission/that taxpayer's e-filing attempt was unsuccessful due to above omission.

Possibly the Fowler case will persuade the IRS to change its practices of rejecting E-filed returns with issues having nothing to do with whether the taxpayer actually filed a return. While this opinion seems correct, we will see whether given the administrative importance of the issue, the IRS will appeal.

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On August 28, 2020 we posted IRS Approves Temporary Use of E-Signatures For Certain Forms - Great News From The IRS For International Practitioners Form 8832 & 8802, where we discussed that the IRS announced in IR-2020-194 that it will temporarily allow the use of digital signatures on certain forms that cannot be filed electronically.

On September 10, 2020, the agency added several more forms to that list.

The IRS made this decision to help protect the health of taxpayers and tax professionals during the COVID-19 pandemic. The change will help to reduce in-person contact and lessen the risk to taxpayers and tax professionals, allowing both groups to work remotely to timely file forms.

The IRS added the following forms to the list of those being accepted digitally:

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

The forms are available at IRS.gov and through tax professional’s software products. These forms cannot be e-filed and generally are printed and mailed.

The below list was announced Aug. 28, and all of these forms can be submitted with digital signatures if mailed by or on Dec. 31, 2020:

• Form 3115, Application for Change in Accounting Method;
• Form 8832, Entity Classification Election;
• Form 8802, Application for U.S. Residency Certification;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
• Form 1120-L, U.S. Life Insurance Company Income Tax Return;
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.

The IRS will continue to monitor this temporary option for e-signatures and determine if additional steps are needed.

In addition, the IRS understands the importance of digital signatures to the tax community. The agency will continue to review its processes to determine where long-term actions can help reduce burden for the tax community, while at the same appropriately balancing that with critical security and protection against identity theft and fraud.

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ProcedurallyTaxing.com posted that social media posts discredited the Taxpayer in a recently decided Tax Court case of Brzyski v. Commissioner, T.C. Summary Opinion 2020-25 released on August 27.

The facts in Brzyski  involve Mr. Brzyski claiming the children of his significant other as qualifying children for the dependency exemption. The IRS disallowed the dependency exemption because Mr. Brzyski was not formally married to the children’s mother and without a marriage the children cannot be qualifying stepchildren. 

Mr. Brzyski claims that while not formally married in his home state of California, one night while he and his significant other were in Missouri they crossed the border into Kansas for dinner and declared themselves married. Thus, according to Mr. Brzyski, they were legally common-law married in Kansas and the children met the relationship test. To provide support for this Mr. Brzyski testified to this effect and produced affidavits from family members to the same effect.

At trial social media posts were entered into evidence (presumably by Chief Counsel) that showed Mr. Brzyski referring to his significant other as his fiancée after the date of their alleged common law marriage. This plus a host of other inconsistencies, which were probably enough to carry the day for the respondent without mention of the social media post, were enough to satisfy Judge Copeland that the testimony regarding a Kansas common law marriage was unreliable and not enough for the taxpayer to carry their burden of proof. As a result the dependency deduction was denied.

From a quick search it appears that Brzyski may be the first Tax Court decision in which social media posts are cited to as direct evidence of a taxpayer’s lack of credibility. It also appears to be the first decision where the social media posts introduced into evidence could have only come from Chief Counsel’s office.

To get a sense of just how novel this is, it is worth looking at the totality of social media in Tax Court decisions. Tax Court decisions do not cite to social media frequently. Excluding Brzyski, a keyword search using the Tax Court’s website for even a single mention of “social media” returns six cases. A search using the term “Facebook” as a proxy for social media returns eight cases and of those eight cases two of the “Facebook” cases refer to Facebook’s Taxpayer Bill of Rights litigation. This leaves a grand total of twelve cases that cite to social media.

Of the twelve cases that remain for social media, nine of the cases involve the petitioner introducing social media as evidence of a for profit enterprise or as part of a business plan, one case discusses the business expense of a computer that was also used for work and personal social media usage, one opinion from Judge Holmes mentions the company Facebook to set the stage for discussing a petitioner’s career in technology, and one case memorializes a laundry list of the taxpayer’s grievances including the notion that social media websites were conspiring against his vaporizer business.

One common thread that Brzyski shares with the other nine relevant cases is that each of the social media cases is about mindset. Posts on social media are generally inadmissible hearsay if offered by the declarant for the truth of the matter asserted. 

Now that the Tax Court is on the record giving more weight to a spontaneous social media post that hurts the taxpayer than to the taxpayer’s actual testimony at trial, practitioners should beware that these posts cut both ways. 

As a result of Brzyski, due diligence as to a client’s social media should be conducted if the case relies heavily on the petitioner’s credibly on the witness stand. However, this potentially opens up the Pandora’s box of what to do if practitioner learns prior to trial that the petitioner’s version of events does not match the story social media tells. 

This can lead to conflicts between Model Rule 3.3’s Duty of Candor Towards the Tribunal vs Model Rule 1.6’s Duty of Confidentiality. As with many social media issues today, solving one problem invariably leads to another.

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