Summary Opinions for 9/19/14

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Another great tax procedure week.  We have news on two (alleged for one) celebrity tax cheats.  More importantly, the Tax Court issued another qualified offer holding regarding concessions, and one on what constitutes a prior opportunity to dispute a liability when the Service denies such a request.  Plus a handful of other tax procedure matters, and an interesting case on when the proceeds from suing your accountant will not be taxable income.

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  • The Tax Court, in Bussen v. Comm’r, had another holding on whether a full IRS concession is tantamount to a settlement for purposes of qualified offers under Section 7430(c)(4)(E)(ii)(I).  For those of you unfamiliar with the issue, I wrote on it in the infancy of PT here , and Keith followed up with an excellent post focusing on interesting issues in the Knudsen appeal.  A full concession by the Service during the pendency of the court case has been held to both be a settlement and not a settlement in the past, although the majority of the holdings appear to be leaning towards concessions being settlements.  I am not sure I agree with the holdings, and think it advances a Service-favorable policy that is contrary to the statute, allowing the Service to go well beyond the ninety day qualified offer period and still thwart fees.  Unfortunately, Bussen is a terrible fact pattern for the taxpayer.  In Bussen, the taxpayer withheld the information from the Service that it needed to make its determination.  The Service requested the information repeatedly.  Only after filing with the court did the taxpayer provide the information, and the Service promptly conceded.  This is not the type of case where the taxpayer equitably seems entitled to costs.  Jan Pierce of Lewis and Clark Law school, who knows as much on this topic as just about anyone, also noted that in Bussen the Service conceded before the actual trial, where in other cases, notably Knudsen, the Service waited until after the trial.

 Given the bad facts, if a court were inclined to hold concessions were not settlements, perhaps an appropriate holding in Bussen would have been a limiting of the “reasonable administrative costs”  and “reasonable litigation costs” because it was unreasonable for the Bussens to protract the process and not provide the requested information-thereby making the costs unreasonable and not appropriately payable.   Keith also noted that the statute specifically provides that a prevailing party that unreasonably protracts the proceedings will not be entitled to costs.  See Section 7430(b)(3).

  • In Johnson v. Comm’r, the Tax Court offered an interesting discussion of what constitutes a prior opportunity to dispute a liability.  In a prior CDP hearing, the settlement officer affirmatively told the taxpayer he could not challenge amount or existence of the underlying liability in connection with an unclaimed notice of deficiency.  In a subsequent CDP hearing, the taxpayer was denied the opportunity to question the amount or existence of the underlying liability because he may have had the right in the first hearing and did not challenge the settlement officer’s preclusion.   It is hard to find that the second settlement office abused his or her discretion, but the Service did bar the taxpayer from contesting the underlying liability when it perhaps was allowed, leaving a somewhat inequitable result.
  • Not exactly tax procedure, but the Tax Court, in Cosentino v. Comm’r,  has held that malpractice proceeds received by taxpayers from their accountants was not taxable income.  The accountants assisted the taxpayers in the disposition of some rental property pursuant to a bunk plan that increased basis somehow offsetting boot received in a 1031 exchange.  The plan was disallowed, and the taxpayers paid tax on the gain (or at least the boot).  The taxpayers sued their accountants for bad advice, and were made reimbursed for the tax paid.  The Service took the position this was taxable income, while the taxpayers argued they would have otherwise done a 1031 exchange with no boot, thereby not recognizing the gain.  The Court agreed that the malpractice proceeds were a return of capital and not taxable.
  • In Dynamo Holdings, LP v. Comm’r, the Tax Court has allowed the IRS to use predictive coding in digging through very large quantities of electronic documents to determine what is and what is not privileged and relevant to the IRS discovery requests.  We may have more on this in the future, so I won’t delve too much into the topic.  And, my knowledge of coding is about as strong as Keith’s knowledge on the Jersey Shore (I would say Les also, but I think he secretly loves that show)…more on that below.
  • In the most recent celebs behaving tax badly, the Situation has ended up before a judge on tax evasion charges(Keith was not familiar with the Situation’s work, and is on a Jersey Shore binge this weekend after completing some amazingly long MS bike ride ).  Sometimes you just completely misjudge a celebrity.  I was certain that Mike “the Situation” Sorrentino was smart enough not to get embroiled in tax evasion, he just seemed to have such a good head on his shoulders.  TMZ (I am starting to question the amount of times we have referenced them) reports that the Sitch is blaming his business manager, who is, of course, his brother, and claiming he knew nothing of his finances (sort of believable).  His Bro, in turn, is blaming their accountant.  The NY Times reports (now I feel slightly better about covering this) the indictment was based on the Situation and his brother running personal expenses through their pass through entities to reduce their taxable income, including personal grooming expenses (appropriate tanning salon and hair gel jokes are made).  All of which may have been hidden from the accountant.
  • In the immortal words of just about every rapper ever, “I gotsta get paid”, and, as such, I’m a pretty big fan of Section 6323(b)(8) giving lawyers a super priority in settlement provisions for reasonable compensation in obtaining the settlement.  The Eastern District of Louisiana recently reviewed this provision in Barnett v. D’Amico.  Although the case did not break any new legal ground, it did provide an outline for the reasons behind the priority and what lawyer fees could be deemed to relate to the settlement (and were reasonable), and which advances were properly made under Louisiana law and could be part of the priority lien.
Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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Comments

  1. It’s too bad that Johnson v. Commissioner is a summary opinion because it is still another wrongly decided CDP NOD receipt case.

    The taxpayer may challenge his tax liability if he did not receive a notice of deficiency or receive a prior opportunity to challenge liability. Johnson did not receive his NOD because it was returned to the IRS as unclaimed. Case closed.

    Johnson involves an income tax, which comes within the Tax Court’s deficiency jurisdiction. The “prior opportunity” CDP language is therefore inapplicable. That language exists only to cover the various taxes not subject to deficiency procedures.

    The Johnson record shows the taxpayer did not receive his NOD. That is all Johnson had to show; he does not also have to show that he did not receive a “prior opportunity” to challenge his tax liability:

    “The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period at his CDP hearing if the person did not receive any statutory notice of deficiency for such tax liability [OR, not AND] did not otherwise have an opportunity to dispute such tax liability.”

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