Articles Tagged with Tax litigation

In a 2019 U.S. Tax Court case, Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4, (2019) (Palmolive II), the Tax Court held that both penalties determined by the Revenue Agent in a tax audit and additional penalties later determined  by an Appeals Officer in the IRS Independent Office of Appeals met the written approval requirements of I.R.C. § 6751; thus making Palmolive Building Investors, LLC (Palmolive) a two-time loser. Palmolive was initially in Tax Court in 2017 (Palmolive I) over a disallowed charitable deduction for a façade easement.  As the owner of a historical building in Chicago, it had donated a façade easement to a conservation organization and took a large charitable deduction for the easement. In addition to questioning the $33,410,000 valuation of the easement, the IRS argued that the mortgages on the building limited the easement’s protection in perpetuity. The Tax Court agreed and concluded that the façade easement was not protected in perpetuity and therefore failed to qualify for a charitable deduction under I.R.C. § 170(h)(5)(A).

Following the disallowance in Palmolive I, the taxpayer returned to the Tax Court to dispute whether the penalties assessed by the IRS complied with the provisions of IRC Section 6751(b)(1).  During a tax audit, a Revenue Agent had asserted in a 30-day letter that Palmolive was responsible for a 40% penalty for a gross valuation misstatement and a 20% negligence penalty. These two penalties were approved on Form 5701 by the Revenue Agent’s supervisor. Subsequently, a 60-day letter was issued. The taxpayer took its case to the IRS Office of Appeals. The Appeals Officer assigned to the case proposed four penalties: the two assessed by the Revenue Agent and the Substantial Understatement and Substantial Valuation Misstatement penalties. The Appeals Officer’s immediate supervisor approved all of these penalties on Form 5402-c. In Tax Court, Palmolive argued that the initial determination of penalties was made by the Revenue Agent who did not assert the Substantial Understatement and Substantial Valuation Misstatement penalties; therefore the penalties asserted by the Appeals Officer were not approved as part of the first determination of the penalties.

In examining the validity of the penalty assessments, the court cited I.R.C. § 6751(b)(1) which states that penalties can only be assessed when the initial determination of such penalties are approved in writing by the immediate supervisor of the person making the determination. The court also pointed out that the Congressional motive behind enacting this provision was to make sure penalties were not used as bargaining chips. The court first noted that all penalties were approved in writing. The next issue was what defines an “initial determination” for the purposes if I.R.C. § 6751(b)(1). The court held that the initial determination is when the penalties were first communicated to the taxpayer. The court stated that the Revenue Agent’s 2008 mailing of the 30-day letter was the date of the initial determination and the Appeals Officer’s 2014 issuance of the Notice of Final Partnership Administrate Adjustment are both initial determinations. Since the IRS forms were signed by the respective supervisors prior to the time of the initial determinations, the penalties met the requirements of Section 6751(b) (1).

How to Respond When the IRS Makes a Mistake
Charged with administering, enforcing, and collecting taxes from millions of Americans, the IRS understandably makes mistakes. If the IRS is trying to charge you penalties or assess taxes incorrectly, or is attempting to seize your bank account or put a lien on your house, you have options for disputing the IRS action and arguing your case.

How to Handle Incorrect Tax Assessments

If the IRS sends you a Notice of Deficiency and you do not believe you actually owe the tax, you should file a petition in Tax Court. You have 90 days from the date of the notice to file your petition. If you miss this chance, you will only be able to argue your case in court AFTER paying the full amount and filing a refund claim.

IRS “Substance Over Form” Argument Fails
The Sixth Circuit reversed a Tax Court decision and denied the IRS’s “substance over form” argument by allowing a clever tax reduction technique that was legal under the letter of the law. In Summa Holdings v. Commissioner, the court rejected the IRS’s position and declined to let Congress off the hook for allowing a loophole that was used by the taxpayer to avoid the contribution limits on Roth IRAs.

The Beneson family used a domestic international sales corporation” (DISC) to transfer money from their family-owned company to their sons’ Roth IRAs. DISC dividends are subject to a tax on unrelated business taxable income, but once the DISC dividends go into a Roth IRA, the earnings would grow tax-free, and the distributions would also not be subject to tax.

In other words, the Benesons avoided the Roth IRA contribution limits (currently $5,500 per account annually) using this strategy. Between 2002 and 2008, the Benesons transferred over $5 million into two Roth IRA accounts.

Can a California Tax Lawyer Help Me with Tax Problems in Other States
Tax laws vary greatly from state to state, and in fact, nine states don’t even charge a state income tax. With such diversity of tax laws, it isn’t feasible for a tax lawyer to be fully versed in the statutes of all the other 41 states. However, federal tax laws apply to all 50 states, and a tax attorney with experience dealing with the IRS may be able to assist you with federal tax problems even if you live or do business in another state.

A California Tax Lawyer for State and Federal Tax Problems

For federal tax problems, it’s important to find an attorney that specializes in tax matters. The United States Tax Court will admit attorneys that are members of the bar in any state or Washington D.C. without requiring an examination. If you have a case before the Tax Court, an attorney from another state can help you if they are admitted to practice before the Tax Court.

Tax litigation
Tax laws change regularly, and are a challenge to adequately decipher under the best of circumstances. Even with the requisite due diligence and the help of a CPA, you may find yourself the recipient of a letter from the IRS “inviting you to an audit.” If you’ve been audited by the IRS and disagree with their findings, all is not lost.

Your rights as a U.S. taxpayer include the right to contest an IRS bill which you feel is inaccurate or unfair by filing an appeal. The key to gaining a satisfactory result from an appeal is strict adherence to each step of the process. Guidelines and deadlines must be closely followed.

How it Works