Don’t Ignore the Obvious: A Story About A Conservation Easement and A Penalty.

Qualified conservation easements provide a deduction under Section 170(h) of the Internal Revenue Code to a taxpayer who permanently encumbers her property in favor of an appropriate organization for conservation purposes. I.R.C. § 170(h). There are some complex rules at work in this area, and it has generated a fair amount of litigation. A key factor in conservation easements is valuation; the amount of the deduction is driven by the impact on market value that a conservation easement has. Consequently, the Code requires an appraisal to support the deduction. I.R.C. § 170(f)(11).

Last week the First Circuit took up the case of a Boston couple who had an appraisal to support the value of their conservation easement deduction but wound up losing not only the deduction but paying a forty percent penalty for a gross valuation misstatement.… Read More

Collection Due Process Triggers Tax Court Review of Section 6707A Penalties.

Section 6707A imposes significant penalties for the failure to report on the taxpayer’s return any listed or reportable transactions, which are transactions that the IRS has determined are tax shelters. The penalty is significant, seventy-five percent of the tax reduction associated with the undisclosed tax shelter. I.R.C. § 6707A(b)(1).

To make matters worse, the Tax Court has ruled that it does not have jurisdiction to redetermine the penalty because it does not fit the definition of a deficiency and can be assessed and collected without a notice of deficiency. Smith v. Comm’r, 133 T.C. 424, 429 (2009).

Recently, the court addressed another method of invoking its jurisdiction: a petition following a collection due process hearing.… Read More

Return Preparer Penalties: Imposition of a Penalty Under I.R.C. § 6701 Requires Clear and Convincing Evidence.

The Internal Revenue Code contains a number of return preparer penalties: return preparers can be penalized for preparing returns on the basis of an unreasonable position, I.R.C. § 6694(a); they can be penalized for preparing returns in a willful or reckless manner, I.R.C. § 6694(b); and they can also be penalized for knowingly preparing a return that understates the taxpayer’s liability, I.R.C. § 6701(a). A recent case from the Eleventh Circuit explores the standard of proof necessary to sustain a return preparer penalty under Section 6701. Carlson v. United States, 2014 U.S. App. LEXIS 11001 (11th Cir. June 13, 2014).
Ms.… Read More

Attorney-Client Privilege: The Tax Court Looks at Implied Waiver.

While the attorney-client privilege provides protection for communications between lawyers and clients, that protection can be lost through waiver. The most obvious example is an express waiver, but courts also recognize that a waiver can occur in situation where an individual essentially puts privileged communications in issue by pleading a claim or defense. Last week, the Tax Court looked at implied waiver of privilege in the context of a challenge to penalty determinations. AD Inv. 2000 Fund LLC v Comm’r, 2014 U.S. Tax Ct. LEXIS 13 (Apr. 16, 2014).

AD Investment arose in a consolidated partnership level proceeding involving two LLCs that elected partnership treatment and engaged in a “Son of BOSS” tax shelter.Read More

The Last Word on Valuation Misstatement Penalties in Sham Transaction Cases.

An issue that has divided lower courts was resolved on Tuesday, when the Supreme Court addressed the applicability of the substantial valuation misstatement penalties in the context of sham transactions. United States v. Woods, 2013 U.S. LEXIS 8776 (Dec. 3, 2013).

As I have noted previously, courts have been divided on the applicability of the valuation misstatement penalty under Section 6662 of the Internal Revenue Code to cases involving a sham transaction. The majority has taken the view that the penalty applies. See, e.g., Crispin v. Comm’r, 708 F.3d 507, 516 n.18 (3d Cir. 2013). Some circuits, however, have taken the view that a sham transaction case does not trigger the penalty because the overstatement is due to an improper deduction and not a valuation misstatement.Read More

Valuation Misstatement Penalty-Seventh Circuit Joins the Majority.

Courts have been divided on the applicability of the valuation misstatement penalty under Section 6662 of the Internal Revenue Code to cases involving a sham transaction. The majority has taken the view that the penalty applies. See, e.g., Crispin v. Comm’r, 708 F.3d 507, 516 n.18 (3d Cir. 2013). Several circuits, however, have taken the view that a sham transaction case does not trigger the penalty because the overstatement is due to an improper deduction and not a valuation misstatement. See, e.g., Keller v. Comm’r, 556 F.3d 1056, 1059-11 (9th Cir. 2009). The Supreme Court has granted certiorari in a case from the Fifth Circuit, so presumably the question will be resolved at some point.Read More

Don’t Count on Your Accountant: the Ninth Circuit Looks At Reasonable Cause.

In Knappe v. United States, 2013 U.S. App. LEXIS 6809 (9th Cir. Apr. 4, 2013), the Ninth Circuit posed a question: “When can you trust your accountant’s advice about when your taxes are due?”  Knappe, 2013 U.S. App. LEXIS 6809, slip op. at *2.

The answer: at least in the Ninth Circuit, you can’t.

Peter Knappe was the executor of a friend’s estate. Id. at *3. As he had never been an executor before, Mr. Knappe did what any sensible person would do, he hired an accountant. The accountant, Mr. Burns, correctly advised him that an estate return would be required and that the deadline was nine months the date of death.Read More

Holding a Bad Hand: The Third Circuit Addresses Economic Substance, Part II.

In part I, I covered the Third Circuit’s discussion of economic substance in Neal Crispin v. Commissioner, No. 12-2275 (3d Cir. Feb. 25, 2013). This post will address the Court’s treatment of penalties.

Mr. Crispin was assessed with a forty percent gross valuation penalty because he had claimed a basis that was inflated by 400 percent or more; this penalty was sustained by the Tax Court. There is a Circuit split on the applicability of valuation misstatement penalties in economic substance cases, but the Third Circuit previously concluded that the penalty was applicable in Merino v. Commissioner, 196 F.3d 147 (3d Cir.Read More

Designated Payments and the Trust Fund Recovery Penalty: A Look at Potential Remedies.

To ensure that employers properly handle payroll taxes, Section 6672 imposes a penalty on individuals associated with the employer, making them potentially liable for any short fall in the payment of taxes that are withheld from employees’ paychecks. When payroll taxes are transmitted, the payments have two components: one portion represents the employer’s share of FICA and FUTA, and the other represents the employees’ withholding. The IRS accepts written direction on the application of voluntary payments, so that savvy employers will provide a designation with each tax payment, indicating that the funds transmitted are to be applied first to the satisfaction of trust fund taxes and then to the employer’s liability.Read More

Too Many Clients: A Cautionary Note on Payroll Tax Cases.

When an employer falls behind on payments of taxes withheld from employees’ paychecks, the IRS tends to take prompt enforcement measures. In addition to taking action against the employer, the government will generally look at individuals associated with the employer to determine whether they are potentially liable under Section 6672 of the Internal Revenue Code, which imposes potential liability for any shortfall in withholding upon “[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