Freeman Law’s “Tax Court Brief” covers all of the Tax Court’s substantive opinions, providing a weekly summary of its decisions in clear, concise prose.
For a link to our Tax Court in Brief podcast, download here or watch other episodes of The Freeman Bill.
Tax litigation: The week of April 18, 2022 to April 22, 2022
Treece Financial Services Group c. Comm’r, 158 TC No. 6 | April 19, 2022 | Kerrigan, J. | Dekt. No. 20850-19
and related opinion, Treece Investment Advisory Corp. vs. Comm’r, TC Memo 2022-38 | April 19, 2022 | Kerrigan, J. | Dekt. No. 21015-19
Treece Financial Services Group c. Commissioner
Short summary: This case deals with two procedural issues. First, whether the Tax Court has jurisdiction to rule on an IRS decision regarding the applicability of the Voluntary Classification Settlement Program (VCSP). Second, if a motion for summary judgment (MSJ) filed by the petitioner were to be granted. The relevant part of the opinion turns on the first question.
Dock D. Treece (Mr. Treece) was the sole corporate officer of Treece Financial Services Group (Applicant) during the period 2015-2017 (the years in dispute). The Claimant classified Mr. Treece as an independent contractor during the years at issue. The IRS issued a Notice of Employment Tax Determination under Section 7436 and reclassified Mr. Treece as an employee, determining the additional tax due under Section 6651( a) and penalties under section 6656.
The plaintiff filed a motion with the Tax Court. The parties agreed that Mr. Treece was an employee, but disagreed on whether the claimant could use the VCSP to calculate the amount of employment tax due. The IRS argued that the Tax Court lacked jurisdiction to review the IRS’ decision and moved to dismiss for lack of jurisdiction. The Claimant filed an SSM on the basis that he had met all of the requirements of the VCSP. Both requests were denied. The IRS petition was denied because the Tax Court found that it had jurisdiction over the employment tax determination. The MSJ was denied because there was a factual dispute as to whether all of the requirements of the VCSP were actually met by the applicant.
Key issues: Does the Tax Court have jurisdiction over an employment tax determination under IRC Section 7436?
Main holdings: The Tax Court has jurisdiction to review an employment tax determination issued under IRC Section 7436
Main points of law:
Section 7436(a) establishes that the Tax Court has jurisdiction to determine 1) whether a person providing services to a person is that person’s employee for purposes of Subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act 1978; and (3) the appropriate amounts of employment taxes that relate to the Commissioner’s decision regarding worker classification. IRC § 7436(a).
It should be remembered that the Tax Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent expressly authorized by Congress. Breman v. Comm’r, 66 TC 61, 66 (1976). However, the Court can determine whether it has jurisdiction in a particular case. Kluger v. Commissioner, 83 TC 309, 314 (1984).
While the Court’s jurisdiction is limited, its inadequacy jurisdiction allows it to review administrative decisions that are necessary to determine the propriety of an insufficiency determination.
Section 7436(d) provides that the breach principles contained in Sections 6213(a)-(d) and 6214(a) apply to cases that arise under Section 7436, dealing with determinations of such cases as a notice of default.
The Court explained that an act of administrative discretion is subject to judicial review. Mower, 148 TC to 346; Corbalis v. Commissioner, 142 TC 46, 56 (2014). The decision made as to the applicability of the VCSP is subject to review by the Tax Court, pursuant to the legislative history of section 7436, which was amended in 2000 to give the Court tax the power to determine whether the Secretary’s decision was correct as well as the appropriate amount of employment tax pursuant to such determination. Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 314(f), 114 Stat. 2763, 2763A-643 (2000); Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. no. 105-206, § 3103, 112 Stat. 685, 731.
Based on this legislative history and the case law supporting the review of administrative decisions necessary to determine the propriety of a deficiency determination, the Court concluded that it had jurisdiction to determine whether liability is correct. as part of an employment status determination procedure. Ewens & Miller, Inc. c. Commissioner, 117 TC 263, 267–68 (2001). This applies here because a taxpayer’s denial of VCSP eligibility directly affects the employment tax amounts paid. Mower, 148 TC to 347; Estate of Gardner, 82 TC to 996.
Insight: This case welcomes the review of administrative acts that are necessary for certain determinations issued by the IRS. As mentioned in the single footnote to the Notice, while this decision is not directly contrary to the Court’s policy not to look behind a Notice of Statutory Determination, the Court may consider the merits of the IRS decisions. This can be useful in other cases, where the administrative acts of the IRS are inappropriate and result in an unfounded decision.
Treece Investment Advisory Corp. vs. Commissioner
The facts and opinion in this case are substantially identical to those in the previous case, with the sole exception that the petitioner here is Treece Investment Advisory Corp. Please refer to Treece Financial Services Group, c. Comm’r, 158 TC No. 6 | April 19, 2022 | Kerrigan, J. | Dekt. No. 20850-19 to see a discussion of the facts and applicable law.