From Sword to Shield – Reliance on RRA98 Section 1203 to Bolster a Taxpayer’s Credibility at Trial

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By Frank Agostino, Jairo G. Cano, and Crystal Loyer

[Today’s post was written by Frank Agostino, Jairo G. Cano, and Crystal Loyer, all of Frank Agostino and Associates of Hackensack, New Jersey.  Frank was the recipient of the 2012 Janet Spragens Pro Bono Award from the ABA Tax Section for his work with the New York City Calendar Call program and his general work for unrepresented taxpayers.  He and his associates write today about a Tax Court case decided last month in which the taxpayer works as a Revenue Officer for the Internal Revenue Service.  We previously posted on the issues raised for IRS employees by Section 1203 of the Revenue Reform Act of 1998.  The Brewer case points out that the harsh punishment that awaits an IRS employee found to have met the criteria of 1203 can cause litigation in a case that might otherwise have settled.  This procedural aspect of the case draws our attention.]

In Brewer v. Commissioner, T.C. Memo. 2013-295, the Tax Court determined that James Brewer, an IRS Revenue Officer, was entitled to claim the First Time Homebuyer Credit in connection with his purchase of a principal residence in 2008.  The Tax Court based its decision on Mr. Brewer’s credible trial testimony.  What makes Mr. Brewer interesting is not that his credible testimony carried the day, but that no one at the IRS was willing to take responsibility for concluding that he was credible.


To qualify for the First Time Homebuyer Credit, a taxpayer must prove that he purchased a home with the intent to use it as his principal residence.  The taxpayer must also prove that he did not have an ownership interest in another principal residence during the preceding three years.  When a taxpayer – such as Mr. Brewer – has an ownership interest in another property, the trier of fact must analyze the circumstances surrounding that ownership to determine if the other property was a principal residence.  Factors to consider include the taxpayer’s place of employment, where his family members reside, the address listed on his tax returns, driver’s license, automobile registration and voter registration card, the mailing address for bills and other correspondence, and the location of religious organizations and other social clubs attended by the taxpayer.

IRS computer systems include software to identify taxpayers who potentially do not qualify for the Credit.  If the taxpayer has claimed a mortgage interest or real estate tax deduction for another property, the IRS system will flag the tax return for further review.  This is what happened in Mr. Brewer’s case.  In such cases, the Internal Revenue Manual asks that the Revenue Agent secure a written “reasonable explanation that any prior year mortgage interest/real estate tax was for something other than a principal resident.1”  Throughout the examination and trial process, Mr. Brewer credibly explained that he purchased a condominium in Staten Island in 2005.  At the time he was engaged to his fiancée, a New Jersey resident.  He ultimately moved into his fiancée’s home and allowed his sister to live in the Staten Island condominium while she attended college.

Mr. Brewer eventually married his fiancée and purchased a home in New Jersey with his wife in 2008.  Because Mr. Brewer did not use the Staten Island property as a principal residence, his ownership interest should not prevent him from claiming the Credit.  Furthermore, the Staten Island property qualified as a second home whereby he could claim a deduction for both mortgage interest and real estate taxes.  Under these circumstances, Mr. Brewer qualified for the Credit and this case should not have extended beyond the cursory examination required by the computer system’s flagging of his return.  In other words, a written explanation of the circumstances surrounding Mr. Brewer’s ownership of the Staten Island property at the time he purchased the new home should have been sufficient for the IRS to close this case.  However, because Mr. Brewer is an IRS employee, those assigned to his case were, in a sense, obligated to hold him to a higher standard of review I.R.M. 1, 2011).

For starters, Section 1203 of RRA98 provides that the IRS must terminate the employment of any employee who engages in certain misconduct.  Specifically, the Internal Revenue Manual provides that as an Internal Revenue Officer, Mr. Brewer is expected to fully comply with all tax laws by accurately reporting and timely filing [his] federal, state, and local tax returns and fully paying their tax when due.  RRA 98 sections 1203(b)(8) and (b)(9) provide for the removal of IRS employees who willfully fail to file any return or who willfully understate federal tax liability respectively.

Given this requirement, an outside observer might view the IRS’s reliance solely on Mr. Brewer’s statements as self-serving and improper.  Therefore, absent anything more to substantiate his testimony, Mr. Brewer was forced to proceed to trial.  At trial, Mr. Brewer acknowledged his understanding the Section 1203 requirements.  He observed that he was subject to termination if he provided untruthful testimony during the trial.  Indeed, Judge Wells acknowledged: “[w]e find petitioner to be reasonable and honest and his testimony to be credible and persuasive.  We note that petitioner testified that he could be dismissed from his position as a revenue officer with the IRS if he gave untruthful testimony.”  Brewer v. Commissioner, T.C. Memo 2013-295 at 10; fn. 6.

At the conclusion of the case, impartiality and common sense prevailed and Mr. Brewer received the tax benefits he deserved.


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