CORRECTION: Tax Court Make Decisions For and Against Taxpayers

The prospect of delaying tax collections by using frivolous court cases is not a good tactic. The U.S. Tax Court levied penalties totaling $117,500 from 2004 up to now. The Seattle Times reports that taxpayer penalties since 2001 now total $378,900.

Tax court cases are sometimes appealed to higher courts but even federal appeals courts have upheld earlier Tax Court decisions and imposed steep penalties. Tax Court can impose penalties up to $25,000 on those taxpayers going to court to delay payment.

“Taxpayers have rights they should use when appropriate but anyone who abuses those rights should understand they can incur significant penalties,” said Kevin Brown, commissioner of the IRS Small Business/Self-Employed Division, according to the Seattle Times.

Tax Court also hands down decisions that go in the favor of taxpayers. Tax Court recently clarified rules concerning the deduction of points taken off income tax returns. Your mortgage is already deductible up to $1 million. Some lenders charge a point or more in addition to the mortgage amount. A point is equivalent to 1 percent of the mortgage loan amount. Lenders can charge as many points as possible under the law. At some point with so many points being charged, the loan becomes usurious or can be called “predatory lending”.

Although fully deductible in the year paid by the borrower to the lender for home purchase or property improvement, the IRS used to require that a separate check be written for points. The IRS has not enforced this in recent years but writing a separate check at closing for points paid makes sense as well as ensuring the settlement statement (form HUD-1) reflects the number of points and money you have paid.

In a refinance loan, the points may not be deductible fully in the year paid. In many situations, the IRS requires you allocate the points by the term of the loan. Should you pay off the loan early, the remaining unallocated points can be deducted for that tax year.

If a portion of a refinance loan is used to make improvements to your home, then the points pertaining to the improvement itself can be deducted in the tax year the improvements are made. The remaining points have to be allocated over the life of the loan.

The Washington Post reports that the Tax Court found that if the entire refinance loan is used for improvements, taxpayers should be able to deduct the entire amount of points off their return for that tax year even if the improvements were completed over several years after the initial tax year.

In a recent case before the U.S. Tax Court, the Washington Post reports that a judge heard a case where the IRS had denied such a deduction by a California couple. The apparent sticking point for the IRS was that the improvements were made over several years and required instead that the couple allocate the $4400 they paid in points over the life of the 15-year loan.

The couple presented evidence in court for all their home improvements. Work started in 1999 and was completed in 2003 for a total of four years or work. The judge reversed the IRS position allowing the deduction under Section 461(g) of the Tax Code. The judge rebuked the IRS stating that they “presented no authority that would require the improvements to be performed in the year of the refinancing.”

According to the Washington Post, the Tax Court judge also stated, “The Court has never specifically addressed under what facts and circumstances section 461(g)(2) allows a taxpayer to deduct points during refinancing.” The judge also cautioned that the words “in connection with” as it pertained to Tax Code Section 461(g) required a broad interpretation. This case is not a legal precedent for other cases.

In other Tax Court news, the Chicago Tribune reports that U.S. Tax Court judges secretly changed at least five of the findings of lower level trial judges. In making the 117 cases public following inquiries by the Tribune, Chief Tax Court Judge Joel Gerber ordered that the parties involved in the cases to receive copies of each lower level judge’s finding. Gerber also stated that “the decisions in these cases are final … and remain in full force and effect,” potentially leaving no room to challenge the decisions.

The Tribune's inquiry found that official Tax Court opinions were made on more than 900 cases in which lower level trial judges initially handled the cases. There was no explanation of why only 117 of the lower level trial judge findings could be located. This lack of information may change when new rules go into effect on September 30 making the lower court decisions a matter of public record as they have not been since 1984.

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