Tax Procedure Grab Bag – Preparer Problems

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Two quick items here.  First, the IRS in late April 2016 has issued final regs under Section 6708 regarding the penalty for material advisors for failure to make available lists with respect to reportable transactions.  General write up can be found on the TaxAdvisor webpage here.  Some changes have been viewed positively, as easing slightly the penalties on advisors.

More interesting to me, but somewhat substantive, is an update to the Cosentino case we covered in SumOp back in 2014, which can be found here.  In Cosentino, the Tax Court held that malpractice proceeds received by a taxpayer against his accountant were not taxable income.  The accountant had advised the taxpayers to enter into a transaction that was later determined to be a tax shelter.  The shelter was used to artificially inflate the basis in real estate, which didn’t work (very oversimplified, and you can find more on the specifics from Roberts and Holland here).  The taxpayers claimed they would not have entered into the transaction had they known it was bunk, and, as such, should be entitled to the tax back from the accountant.  They ended up getting $375,000.

The taxpayer’s argued that this was a replacement of capital, and, to the extent the replacement of capital didn’t exceed  basis, was not taxable.  The Service disagreed, stating the correct amount of tax on the sale of the property was sold (which it believed removed the case from a set of precedent that held if more than the proper amount of tax was paid, the recovery of the excess was not taxable).  The Court held that the taxpayers would have sold the property, but used Section 1031 to defer the tax, had they known the accountant was providing shady shelter advice, and then got a step up in basis at death—a bit speculative.  The Court holding essentially gave them the step up during lifetime, without possibly passing through the estate tax system.  An interesting result, but this is a difficult situation to put the parties back into their prior positions.

The Service did not appeal the case.  Apparently it didn’t view this as the winning case to take on appeal, didn’t like the venue, or wasn’t ready to keep arguing this point.  In April, however, the Service let us all know that it intends to continue litigating this issue in other cases.  See AOD 2016-001.  We do not see many IRS actions on decisions anymore these days, so this is pretty exciting.

There has been lots of other great coverage on this case.  We haven’t linked Ed Zollar’s writing enough here on SumOp, but we check his blog pretty frequently.  He wrote about the AOD here.   The always entertaining Tony Nitti also wrote about the case back in 2014 for Forbes.  You can find more background in that article, which is found here.

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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