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Treece Financial Services Group v. Commissioner – The Broad Sweep of Tax Court Jurisdiction By: STEVEN TOSCHER, MICHEL STEIN and PHILIPP BEHRENDT

The Tax Court’s jurisdiction has been expanding over the years, both by legislation and rulings designed to make sure that taxpayers have adequate remedies.. This is the message in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6, as well as the related opinion Treece Investment Advisory Corp. v. Comm’r, T.C. Memo 2022-38 (both April 19, 2022).

The background of the Treece cases is quickly explained. For the years in question, the petitioner(s)’ sole corporate officer classified himself as an independent contractor. Mr. Treece does not dispute that this classification was incorrect, but he claims that he is eligible for federal employment tax relief under the Voluntary  Classification Settlement Program (“VCSP”). Because the misclassification was  purportedly discovered during an employment tax examination, the government denied the petitioner’s participation in the program.

The following is a summary of the requirements for VSCP eligibility as discussed by the court: “(1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the Internal Revenue Service (IRS).”

Not surprisingly, the court denied the petitioner’s motion for summary judgment because whether he was audited is a material fact in dispute. But that’s not all.

. Importantly, the opinion also addressed the government’s motion to dismiss due to lack of jurisdiction. The IRS has repeatedly argued that the tax court’s jurisdiction does not extend to the agency’s determination of whether  a taxpayer is eligible for the VCSP.

The Tax Court rejected the IRS position and denied its motion to dismiss.. While the Tax Court has jurisdiction only when Congress expressly grants it. See § 7442; Breman v. Commissioner, 66 T.C. 61, 66 T.C. (1976), the Tax Court, however, determines whether jurisdiction can be exercised. Kluger v. Commissioner, 83 T.C. 309, 314 (1984).

According to IRC § 7436(a), the Tax Court has jurisdiction to determine whether the  determination is correct and to determine the proper amount of employment taxes. Trimmer v. Commissioner,148 T.C. 334, 345-48 (2017) and similar cases established that the court’s jurisdiction extends to determinations going to the merits of a deficiency determination. The amount of employment tax owed is directly affected by the agency’s determination of whether an employer is eligible under the VCSP. An eligible employer is not subject to interest or penalties and pays a lower tax amount. According to the Tax Court, reviewing the eligibility denial was logically part of reviewing the tax deficiency.

As a result, the IRS’s determination is subject to Tax Court review. A few weeks later, on May 19, 2022, the IRS filed a 23-page motion for reconsideration (compared to the agency’s 10-page motion for summary judgment), a motion described in the Chief Counsel’s Directive Manual at 35.9.1.2.4 as necessary “[i]n rare instances.”

This is apparently one of these “rare” instances–; not only because the agency expects taxpayers to litigate their VCSP eligibility denials if the decision stands, but also because of the  ongoing expansion of Tax Court’s jurisdiction  over agency administrative acts that are improper and result in a notice of deficiency. What is the IRS afraid of—isn’t judicial review a good thing for improper agency action?

Steven Toscher is a Principal and Managing Partner at Hochman Salkin Toscher Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.

Michel Stein is a Principal at Hochman Salkin Toscher Perez, specializing in controversies, as well as tax planning for individuals, businesses and corporations.  For more than 20 years, he has represented individuals with sensitive issue civil tax examinations where substantial penalty issues may arise, and extensively advised individuals on foreign

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures.  He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.

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