Procedural Issues
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Extinguishment of Liens on Defeasible Property

A part of you couldn’t be happier that Uncle Bill obtained the services of another lawyer for one of his stick-it-to-the-man schemes. In this case, Bill wanted to avoid probate and transfer his home in Dixie County, Florida to his son Jethro. Bill and Ethel, however, still wanted to live in the house and wanted to be able to sell the house if Jethro pissed them off, which, in your experience, was a foregone conclusion. Bill, who fancied himself somewhat of a Presidential historian, caught wind of a device known as a “Ladybird deed,” apocryphally named after the first lady, Ladybird Johnson.  Also known as an enhanced life estate deed, it transferred the property to Jethro while retaining a life estate in the property as well as the right to transfer and alienate the property at Bill and Ethel’s discretion. They recorded the ladybird deed sometime in the early 2000s,…

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April 29, 2021
Income Tax Issues
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Successor Liability in a Purchase of Corporate Assets

As a tax controversy lawyer, most of your clients come to you in quite a predicament with the IRS, rather than coming to you to avoid said predicament. Such is the case when Cousin Elmer comes to visit you one dismal winter day. You may remember Elmer from our article on FBARs, but if not, Cousin Elmer has seven and a half fingers from trying, rather unsuccessfully, to eradicate his attic’s squirrel population through the use of what can only be described as an Vietnam-era improvised explosive device (IED). It turns out that Elmer took some of his foreign inheritance and bought the assets of a 50-year-old diner in Biddeford, which had been condemned a year ago, but which remained open due to the mayor’s bi-weekly buckwheat pancake habit.  When the roof of the diner finally collapsed after a particularly brisk snowstorm, the owner—an old man named Ray—who had been…

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April 29, 2021
Procedural Issues
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Understanding Parallel Civil and Criminal Investigations

Jedediah was an entrepreneurial soul.  You may remember him from the Deductibility of Criminal Restitution article, but if not, he may or may not have been pinched for embezzling money from Ned’s Tire Rack.  It turns out that he had embezzled the money from Ned, a true southern gentleman, who could sell a whitewall to a Goodyear heir, in order to finance a pyramid scheme involving ethnocentric vitamins and supplements, like his personal hero Joseph Lander, the native son of Cross City, Dixie County, Florida. As the IRS caught wind of Lander’s shenanigans, they too discovered Jed’s poorly constructed pyramid scheme (think stucco rather than stone).  Although the scheme was initially discovered through a relatively routine audit of a not-so-routine tax return (Jed was a bit of a tax protester, as well), the IRS’s Criminal Investigation (CI) Division soon became involved. Side note:  If you are going to engage in…

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April 29, 2021
Procedural Issues
Tax Articles / All Articles / Penalties Under the Code / Procedural Issues

Administrative Waivers of Penalties

The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. An administrative waiver may be necessary when there is a delay by the IRS in printing or mailing forms, publishing guidance (e.g., writing Regulations), or other conditions. The IRS may also waive penalties under the first time abate relief, or for undue hardship, erroneous advice, casualty, a correction of an IRS error, all of which are discussed further below. First Time Abate First implemented in 2001, the IRS offers an administrative waiver of certain penalties when the taxpayer, for the first time, is subject to one or more penalties for a single return.[1]  These penalties…

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April 29, 2021
Income Tax Issues
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The Cohan Rule and the IRC § 274 Exception

A taxpayer may deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.[1] In contrast, a taxpayer may not deduct personal, living, or family expenses unless the Code expressly provides otherwise.[2] The determination of whether an expense satisfies the requirements of IRC § 162 is a question of fact for the Tax Court.[3] Proving Entitlement A taxpayer must prove his entitlement to all deductions and credits.[4] Taxpayers, therefore, must maintain sufficient records to establish the amount of the deduction to enable the IRS to determine the taxpayer’s correct tax liability.[5] The Cohan Rule If the taxpayer is able to establish that he paid or incurred a deductible expense but is unable to substantiate the precise amount, the Tax Court may approximate the deductible amount, but only if the taxpayer presents sufficient evidence to establish a rational basis for making the…

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April 29, 2021
Income Tax Issues
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Personal Liability under the At Risk Rules

So, you have a business loss.  Join the club.  The real question is whether you have personal liability under the at risk rules of IRC § 465. Personal Liability under the At Risk Rules of IRC § 465 For certain taxpayers (including individuals and certain closely held corporations), who are engaged in certain activities (including each activity engaged in by the taxpayer in carrying on a trade or business or for the production of income), IRC § 465 generally limits loss deductions to the amount for which the taxpayer is considered “at risk.”[1] For purposes of the at risk rules, a loss is defined as the excess of allowable deductions (before application of IRC § 465) allocable to an activity to which the at-risk rules apply over the income received or accrued by the taxpayer during the taxable year from that activity.[2] If losses are disallowed under IRC § 465,…

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April 29, 2021
Procedural Issues
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IRS Failure to Communicate Does not Violate IRC § 7605(b)

No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.[1] If a taxpayer's books and records are inspected while in the hands of his accountant or attorney, the taxpayer can object to a second inspection.[2] An inspection of a tax return is not an inspection of “books of account.”[3] The mere matching of third-party reported payment information against a taxpayer's already-filed tax return is not considered an examination of the taxpayer's books and records such to warrant consideration under IRC § 7605(b).[4] The Tax Court has held on multiple occasions that the protections under IRC § 7605(b) are tenuous at best. Indeed, the Supreme Court has held that Congress intended “no…

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April 29, 2021