Tax Procedure: Wells Fargo and the Negligence Penalty

STARS, Wells FargoThe recent opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017) provided a thoughtful application of the economic substance doctrine.

In the same opinion, the court also addressed the applicability of a negligence penalty for the underpayments associated with the aspects of the STARS transaction that lacked economic substance; the penalty potentially applied to its claims for foreign tax credits derived from the trust component of the transaction. Wells Fargo, 2017 U.S. Dist. LEXIS 80401 at *13. The question was what a taxpayer must establish to avoid a negligence penalty under section 6662(b)(1) of the Internal Revenue Code; Wells Fargo argued that it should not be penalized if the position it took on its tax return was objectively reasonable under relevant authority.… Read More

Tax Procedure: The Eleventh Circuit Sustains Penalty Defense Based upon an Accountant’s Advice

accountantTaxpayers frequently rely upon an accountant to prepare their returns, and that involves more than just filling out forms. In preparing a return, an accountant will need to make judgments about the appropriate treatment of tax items, including whether income represents capital gain or ordinary income and whether expenditures should be capitalized or treated as business expenses.

If the IRS concludes that one of these judgment calls is incorrect, the taxpayer can be exposed to penalties, such as the accuracy-related penalty under section 6662 of the Internal Revenue Code. Taxpayers frequently point to the accountant’s role in an effort to avoid liability for the penalty; the Code provides a defense where the taxpayer shows that that there was “reasonable cause” for the position taken on the return and that she acted in good faith.… Read More

Worker Classification: Homecare Provider Demonstrated Reasonable Basis for Classification of Companions as Independent Contractors

home healthCases challenging the classification of workers as independent contractors have been a significant enforcement priority for both the IRS and the Department of Labor. On May 10th, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to a business seeking a refund of employment taxes it paid after the IRS challenged the classification of its workers as independent contractors. Nelly Home Care, Inc. v. United States, Nos. 15-439 & 15-444, 2016 U.S. Dist. LEXIS 61524 (E.D. Pa. May 10, 2016). The case is of particular interest because the taxpayer did not qualify for one of the statutory safe harbors under Section 530 of the Revenue Act of 1978 but nonetheless prevailed by demonstrating “other reasonable basis” to support the classification decision.… Read More