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Requirements For NOL Carryforward Utilization Surviving Scrutiny in IRS Examination

Joe and Mary operate a closely held business that generates a net operating loss in 2005 and 2007. The net operating loss from 2005 and 2007 are carried forward and are used to offset business income on Joe and Mary’s 2015 tax return. Joe and Mary’s 2015 tax return is selected by the IRS for examination. The first IRS information document request (“IDR”) includes a request for a copy of the 2005 and 2007 tax return, along with substantiation for the 2005 and 2007 loses. Do Joe and Mary have to comply with this request? General Statute of Limitations Generally, the statute of limitations for a tax return is three years from the date of filing the return or the date the tax return is [...]

November 20th, 2017|

Tax Court Rejects Taxpayer’s Reasonable Cause Argument Regarding Automatic Penalties from Failure to File Forms 5471

Flume v. Commissioner (here) revolved around one noteworthy issue: did the taxpayer’s reliance on the advice of his tax return preparer spare the taxpayer from $110,000 in penalties for the taxpayer’s failure to report foreign investments on Form 5471? The taxpayer argued that he relied on the expertise of his tax return preparer to guide him to prepare the necessary forms. The IRS argued that the taxpayer could not escape penalties because the taxpayer failed to advise the tax return preparer of his foreign investments. Brief Summary of Facts The taxpayer is a U.S. expat living in Mexico and owned a majority interest in a Belizean corporation and a Mexican corporation.[1]  From 2001 to 2008 the taxpayer did not tell [...]

March 10th, 2017|

Goldsmith v. Commissioner: Can An Owner of A Personal Service Based S Corporation Take Distributions Without Also Taking a Salary?

In Goldsmith v. Commissioner, T.C. Memo. 2017-20 (link) the Tax Court held that the payments from the shareholder’s S corporation were not wages. The Tax Court reasoned that the payments to the taxpayer constituted a non-taxable return of capital. The court reached this conclusion even though the taxpayer did not draw a salary for the years in question. Background: The taxpayer was an attorney that left the relative safety of a stable law firm to establish his own practice. The law firm was established as an S corporation, which had up to 4 associates at one point. The taxpayer experienced some early success, but his practice was ultimately unprofitable. As a result, the taxpayer got behind on his payroll taxes obligations. To make ends meet, [...]

February 18th, 2017|

Shaffran v. Commissioner: Tax Court Rejects IRS’s “De Facto Officer” Argument in TFRP Case

The taxpayer in Shaffran v Commissioner, T.C. Memo. 2017-35 (link) was not an owner, officer, or employee of a restaurant that got behind in its federal payroll taxes. Yet, the IRS still attempted to assert the Trust Fund Recovery Penalty ("TFRP") against the taxpayer under the theory that he was a “de facto officer”. How does one become a "de facto officer" for purposes of TFRP investigation? The IRS argued that he became a de factor officer by signing four checks and writing out several others for the business’s manager’s signature. This is despite the fact that the taxpayer did not have check signing authority and he was not an owner, officer, or employee of the business. Fortunately, the Tax Court rejected this argument and [...]

February 16th, 2017|

Basis in Partnership Interest: Is your word good enough to support a loss deduction?

In Namen v. Commissioner[1], the taxpayer was a podiatrist in private practice. He was one of 6 members of an LLC that operated a surgical center, which closed in 2009. For federal income tax purposes, the LLC was treated as a partnership. The taxpayer claimed a loss on his personal 2009 income tax return from his interest in the LLC, but the IRS denied the deduction on the grounds that the taxpayer lacked inadequate basis in his partnership interest. The Tax Court provided this background: Section 704(d) limits the deductibility of a partner’s distributive share of partnership losses. Those losses are deductible only to the extent of the adjusted basis of a partner’s interest in the partnership. Id.; Sennett v. [...]

January 31st, 2017|