About Jim Malone

Jim Malone is a tax attorney in Philadelphia. A Principal at Post & Schell, he focuses his practice on federal, state and local tax controversies. Learn more about Post & Schell's Tax Controversy Practice >>

An Entirely Different Kind of Tax Shelter Case

tax shelter 1In the typical tax shelter case, the government is on offense, seeking to blow up a tax shelter and recover taxes and penalties. Last week, a district judge addressed a very different sort of case with a very different sort of posture: The government was playing defense, as the IRS was accused of knowing participation in a breach of fiduciary duty by the plaintiffs’ accountants. Esrey v. United States, No. 16-cv-3019 (JPO), 2017 U.S. Dist. LEXIS 42300 (S.D.N.Y. Mar. 23, 2017).

The plaintiffs, William T. Esrey and Ronald T. LeMay, were the former Chief Executive Officer and Chief Operating Officer of Sprint Corporation.… Read More

The Ongoing Impact of Loving: The IRS May Not Be Able to Regulate Tax Opinions

Loving vs. IRSUnder Circular 230, the IRS regulates tax professionals in a variety of ways. For example, a tax practitioner who learns that a client has made an error in a return must promptly advise the client of the error and its consequences. 31 C.F.R. § 10.21. Among the subjects regulated under Circular 230 is written tax advice, which is subject to a reasonable practitioner standard. 31 C.F.R. § 10.37. Violations of the requirements of Circular 230 expose tax professionals to disciplinary proceedings before the IRS Office of Professional Responsibility (“OPR”). The authority of the IRS to regulate tax professionals rests on a statute that authorizes the Treasury Department to “regulate the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C.… Read More

Employment Taxes: A Look at Changing Enforcement Patterns

IRS BuildingRoughly seventy percent of the federal government’s revenues come from employment taxes, including FICA and income taxes withheld from employees’ wages. Consequently, threats to that source are taken quite seriously. All employers need to be aware of the significant changes in employment tax enforcement that have increased the risks faced by the non-compliant.

Traditional Employment Tax Enforcement

Historically, the failure of an employer to comply with its employment tax obligations was generally treated as a civil tax problem to be handled by the IRS. A typical payroll tax case involved penalties for the delinquent employer. If the taxes were not paid promptly, responsible individuals would be assessed with the trust fund recovery penalty, which applies to “[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof.” I.R.C.… Read More

You Can’t Make Tax Stuff Up: A Look at the Civil Fraud Penalty

Civil Fraud PenaltyThe Internal Revenue Code provides for penalties to deter taxpayers from underreporting their income, claiming bogus deductions, and engaging in other forms of misbehavior. For example, there is a twenty percent accuracy-related penalty that applies when a taxpayer negligently fails to follow regulations, materially understates his tax liability, or files a return with a substantial valuation misstatement. I.R.C. § 6662(a). That twenty percent penalty can be doubled if the return rests upon a gross valuation misstatement. I.R.C. § 6662(h).

For taxpayers who cross the line dividing negligent behavior from willful misconduct, there is a seventy-five percent fraud penalty. I.R.C. § 6663(a).… Read More

Tax Procedure: Claim of Right Relief Is Unavailable if the Taxpayer Obtained the Funds By Fraud

tax court, evasionIf a taxpayer receives money that she believes is properly hers, she has income under the Internal Revenue Code and the funds received will be subject to tax. If she learns in a subsequent year that she was not entitled to the money and repays it, then she would have a deduction in that tax year. But if the taxpayer’s tax bracket is different in the year of repayment, the deduction may not be equal to the excessive tax previously paid.

To address this problem, Congress enacted section 1341 of the Code, which provides the taxpayer with an additional option: She may calculate her tax in the year of repayment by deducting the excessive tax paid in the year the income was received.… Read More

Tax Procedure: Tenth Circuit Upholds Limits on the Scope of Collection Due Process Hearings

IRS, Collection due processAs part of the 1998 IRS Restructuring and Reform Act, Congress provided every taxpayer with an opportunity for an administrative hearing before the IRS files a tax lien or levies against the taxpayer’s property. I.R.C. §§ 6320; 6330. The hearing, which is known as a collection due process hearing, is conducted by an IRS appeals officer who is required to determine whether the IRS has complied with all procedural requirements for the lien filing or levy. I.R.C. § 6330(c)(1). In addition, the appeals officer should consider any innocent spouse issue, any specific challenge that the taxpayer raises to the collection action, and any collection alternative that the taxpayer offers, such as an installment agreement.… Read More

Form Remains Important: The Sixth Circuit Rejects the Application of Substance-Over-Form Doctrine in a Roth IRA Case

Emperor CaligulaTaxpayers often find creative ways to avoid taxes. As a consequence, various common law doctrines have developed that permit the IRS to recharacterize transactions for tax purposes, including the substance-over-form doctrine, the economic substance doctrine, and the step transaction doctrine.

Under the economic substance doctrine, courts examine whether transactions had a business purpose beyond achieving tax benefits and whether they had a realistic prospect of generating profits. Recently, the First Circuit applied the economic substance doctrine to invalidate a foreign tax credit shelter. Santander Holdings USA, Inc. v. United States, 844 F.3d 15, 22-24 (1st Cir. 2016). The economic substance doctrine is quite flexible, and some judges have expressed concern that it amounts to little more than a smell test: “I can’t help but suspect that the majority’s conclusion .… Read More

Half A Loaf Might Suffice: FBARs, Flora and Federal Jurisdiction

FBARJack Townsend’s excellent blog Tax Crimes covered an interesting case that involved an attempt to challenge a penalty under the Bank Secrecy Act (the “Act”), Kentera v. United States, No. 16-cv-1020-JPS, 2017 U.S. Dist. LEXIS 12450 (E.D. Wisc. Jan. 30, 2017). The Kenteras sought to challenge penalty assessments issued because they failed to file a Report of Foreign Bank and Financial Accounts, which is known as an FBAR, for several years. The FBAR reporting obligation is imposed under the Act. See 31 U.S.C. § 5314. The Kenteras were subjected to a series of penalty assessments for a series of violations; the largest penalty assessment for any year was $10,000, which is the ceiling for non-willful violations.… Read More

Tax Shelters: The IRS Issues a Listing Notice for Syndicated Conservation Easements

The Internal Revenue Code provides a deduction for a qualified conservation contribution, such as an easement or an outright donation of property for conservation purposes. See I.R.C. § 170(f)(3)(B)(iii) (providing deduction for a qualified conservation contribution). There are a variety of technical requirements in place that determine whether a particular contribution of property falls within section 170(f)(3)(B)(iii). See I.R.C. § 170(h) (describing requirements for deductible donation). The government has been fairly aggressive in pursuing litigation over the requirements for a deduction. See, e.g., Mitchell v. Comm’r, 775 F.3d 1243 (10th Cir. 2015); Carroll v. Comm’r, 146 T.C. 196 (2016).… Read More

Self-Employment Taxes and Professionals

self employment taxOn January 17th, the Tax Court issued an interesting memorandum decision addressing self-employment tax liability. Hardy v. Comm’r, T.C. Memo 2017-16, 2017 Tax Ct. Memo LEXIS 17 (Jan. 17, 2016). In Hardy, a clever structure limited the self-employment tax exposure of a plastic surgeon.

Dr. Hardy operated his practice through a single-member professional limited liability company managed by his wife. Hardy, 2017 Tax Ct. Memo LEXIS 17 at **3. Some of Dr. Hardy’s surgeries were conducted at a facility known as the Missoula Bone & Joint Surgery Center (“MBJ”). Id. at **1. MBJ was a limited liability company organized by a group of physicians to own and operate a surgery center; it was treated as a partnership for federal income tax purposes.… Read More