Tax Court Action: A Look at Rulings in Second Quarter 2018

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By Carolina Vargas and Courtney Rozen

The U.S. Tax Court released 46 percent fewer memorandum and division opinions in the second quarter of 2018 compared with the same period last year, a Bloomberg Tax analysis found.

The court issued 49 opinions this quarter—seven more than it released in the first quarter.

This is consistent with the trend in the first quarter of 2018, when the number of memorandum and division opinions fell 33 percent, to 42 cases, compared with 63 cases during the same period in 2017.

Because of cuts to the Internal Revenue Service’s budget, it’s no surprise that enforcement efforts are down, thereby reducing caseloads for the Tax Court, practitioners told Bloomberg Tax.

“I suspect the last eight years of cuts to the IRS’s budget have reduced enforcement efforts, which is driving down the court’s caseload,” said Paul DiSangro, a partner at Mayer Brown LLP in Palo Alto, Calif., whose practice focuses on resolving tax disputes with the IRS.

1. Fewer Opinions Issued

The number of memorandum and division opinions released by the Tax Court in the second quarter of 2018 decreased to 49 compared with 91 in the same quarter last year, according to the analysis.

The court has been closing cases at a higher monthly rate than new cases are being filed, Tax Court Judge L. Paige Marvel said June 21 at an annual New York University tax controversies conference. While the court hasn’t studied the causes for the drop, “the sentiment among the judges is that the IRS is just not out there making as many cases as before,” Marvel said.

“The reduced number of opinions correlates, unfortunately, with the reduced resources that the IRS faces from years of budget cuts,” Cabell Chinnis Jr., a partner with Mayer Brown LLP in Palo Alto, Calif., said. “Since 2010, the IRS has lost about a quarter of its full-time employees.”

The four current vacancies on the court could also explain why there were so few cases this quarter, said Adriana Wirtz, a partner at Cooley LLP in New York. With several vacancies awaiting confirmation from the Senate Finance Committee, this could impact the number of opinions issued.

The Finance Committee voted unanimously June 28 to approve the nominations of Elizabeth Ann Copeland and Patrick Urda to the U.S. Tax Court. The next action is a vote by the full Senate.

Two other nominees are waiting in the wings. Courtney Dunbar Jones, a senior attorney in the IRS Office of Chief Counsel, and Emin Toro, a partner in the Washington office of Covington & Burling LLP, also have been nominated, but no hearing has been scheduled so far.

While the number of cases is down, the issues in cases considered during the second quarter of 2018 were as complicated, if not more so, than those tried in previous quarters, said Charles Ruchelman, a tax controversy and litigation attorney at Caplin and Drysdale, Chartered, in Washington.

2. Business Expense Deductions Easier to Catch

The data shows that business expense deductions—expenses that a business can write off because they help it earn income—was the most frequently disputed issue in second-quarter cases.

Parties argued about business expense deductions in 16 cases in the second quarter; in 11 of those cases, less than $1 million was at stake.

Andy Kahn, a tax planning consultant in Bethlehem, Pa., said that IRS technology may be improving, making it easier for the agency to spot taxpayers who mix personal and business expenses.

Expenses categorized as part of a business will vary across industries, DiSangro said. “For example, it may be perfectly reasonable for a graphic designer to deduct the cost of their fashion magazine subscriptions for staying current on the latest trends, but less so for a car mechanic,” he said by email.

Guinevere Moore, a partner and tax litigator at Johnson Moore LLC in Chicago, said business expense deductions are “low-hanging fruit” and can be flagged in an audit with little effort. Budget cuts have hurt the IRS’s ability to pursue more complex cases, she said.

3. Representation Matters

Taxpayers represented by counsel may find it worthwhile to litigate. The IRS won 33 of 49 cases in the second quarter—including 15 of the 17 cases where taxpayers didn’t have legal representation. In the 32 cases where taxpayers had representation, the taxpayers won four cases and split wins with the IRS in 10 others. In the split wins, the IRS and taxpayers won on different issues.

Representation can be pricey and often proves to be more expensive than the amount of money disputed in the case, Kahn said. This may be why taxpayers in cases disputing large sums of money usually have representation.

Having the representation of tax controversy attorneys who know the nuances of Tax Court procedure, such as the importance of the stipulation process, can improve a taxpayer’s prospects at trial.

“Litigation is a game of chess,” Moore said. “You can’t possibly anticipate your opponent’s next move if you don’t know how the game is played.”

To collect the data, Bloomberg Tax recorded every Tax Court case from early April until mid-June, tallying aspects including judge, winner, and issue.

This article is the second in a four-part series analyzing Tax Court data collected by Bloomberg Tax.

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