Income Tax Issues
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Examining the Method of Accounting and the IRS’s Broad Discretion to Change Them

The Practical Limits of IRC § 446(a) A taxpayer must compute taxable income under the method of accounting it regularly uses in keeping its books.[1] The IRS has rather broad statutory discretion to change a taxpayer’s accounting method in certain circumstances.[2] If the method of accounting used by the taxpayer does not clearly reflect income, the IRS generally will see fit to change the taxpayer’s method of accounting to a method that, in its not so humble collective administrative opinion, more clearly reflects income.[3] The IRS’s discretion in deciding whether to consent to a change of accounting method, though not limitless, has the breadth and girth of the average waistline of a Golden Corral patron.[4] The IRS’s determination with respect to a change in accounting methods may be challenged only upon a showing of abuse of discretion, which, in turn, depends upon whether the IRS’s determination is without sound basis…

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April 29, 2021
Income Tax Issues
Income Tax Issues / Memorandum Opinions / Tax Opinions

Haghnazarzadeh v. Commissioner
T.C. Memo. 2021-47

On April 29, 2021, the Tax Court issued a Memorandum Opinion in the case of Haghnazarzadeh v. Commissioner (T.C. Memo. 2021-47). The primary issue presented in Haghnazarzadeh v. Commissioner was whether certain deposits into the petitioners’ nine bank accounts are ordinary income or nontaxable deposits. A Bit of Context to Haghnazarzadeh v. Commissioner This is an unreported income case, and the opinion is all of six pages long.  One has expectations of a couple thousand dollars-worth of unreported income.  But not in this case.  In this case, the IRS determined that petitioners had unreported taxable income of $4,854,849 and $1,868,212 for 2011 and 2012, respectively. Wowza.  Those are two huge amounts of unreported income.  Surely the petitioners hired some hotshot tax counsel, and provided the IRS with EVERYTHING it asked for.  Nope, and nope. The petitioners appeared pro se, and they gave the IRS absolutely no substantiation whatsoever. The Bank…

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April 29, 2021
Income Tax Issues
Income Tax Issues / Memorandum Opinions / Tax Opinions

Baum v. Commissioner
T.C. Memo. 2021-46

On April 27, 2021, the Tax Court issued a Memorandum Opinion in the case of Baum v. Commissioner (T.C. Memo. 2021-46). The primary issues presented in Baum were whether the petitioners were entitled to deductions for expenses as reported on Schedules C (Profit or Loss from Business) for the years in issue and whether the petitioners were entitled to a theft loss deduction pursuant to IRC § 165 for 2015. Background to Baum v. Commissioner: Bamboozled, Hoodwinked, Swindled, and Scammed In 2010, the petitioner-husband was looking for new investment opportunities. He met an individual, who offered him the opportunity to invest in a business.  It seemed like a good investment, so the petitioners entered into a stock purchase agreement in June 2012 with the individual’s mother (no idea why, but these are the facts, Jack) for 100,000 shares at $1.50/share and a similar agreement with the individual for the same…

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April 27, 2021
Business Related Issues
Business Related Issues / Memorandum Opinions / Tax Opinions

Plentywood Drug Inc. v. Commissioner
T.C. Memo. 2021-45

On April 26, 2021, the Tax Court issued a Memorandum Opinion in the case of Plentywood Drug Inc. v. Commissioner (T.C. Memo. 2021-45). The primary issues presented in Plentywood Drug, Inc. were whether the petitioner’s owners received “fair rent” or constructive dividends for the rental of the petitioner’s drug store, and whether the petitioner (a corporation) satisfied its burden to show that the IRS failed to receive prior supervisory approval for the accuracy-related penalties at issue under IRC § 6751(b)(1). Background to Plentywood Drug Inc. v. Commissioner Up in Big Sky country, there is the town of Plentywood, Montana.  The town is sparsely populated, even by Montana standards, at approximately 2 people per square mile.  Plentywood Drugs serves a four-county area (approximately 7,200 square miles, or 14,400 people).  There is also a post office in Plentywood, which will come into play when the IRS came a’knockin’ and cast aspersions towards…

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April 26, 2021
Business Related Issues
Tax Articles / All Articles / Business Related Issues

How to Implement the New Centralized Partnership Audit Regime of the BBA – Part Three

This post, entitled "How to Implement the New Centralized Partnership Audit Regime of the BBA," is the third and final of a series on the new centralized audit regime that came into effect in 2018 under the Bipartisan Budget Act, replacing the old TEFRA procedures with new partnership-level adjustments.  The first article provided an overview of the primary differences between the BBA regime and that of the old TEFRA procedures.  The second article takes a deep dive into the Code and Treasury Regulations, explaining each new provision under the BBA.  This third article wraps everything up in a nice bow and provides guidance for partners and practitioners alike in implementing the centralized audit regime of the BBA. A Fundamental Change The BBA fundamentally changes the way that the IRS conducts partnership audits, assessment, and collection of any resulting income tax deficiencies. Congress enacted these sweeping changes in response to the…

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April 20, 2021
Business Related Issues
Tax Articles / All Articles / Business Related Issues

Understanding the New Centralized Partnership Audit Regime – Part One

This is the first of a series of three posts on the new centralized partnership audit regime that came into effect in 2018 under the Bipartisan Budget Act, replacing the old TEFRA procedures with new partnership-level adjustments.  This first article provides an overview of the primary differences between the BBA regime and that of the old TEFRA procedures.  The second article takes a deep dive into the Code and Treasury Regulations, explaining each new provision under the BBA.  The third article wraps everything up in a nice bow and provides guidance for partners and practitioners alike in implementing the new centralized audit regime. A New “Centralized” Audit Regime is Created On November 2, 2015, the Bipartisan Budget Act (BBA) effectively repealed the longstanding TEFRA and electing large partnership (ELP) audit procedures, replacing them with a new centralized partnership audit regime. The new procedures fundamentally change how partnership adjustments are determined,…

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April 20, 2021
Business Related Issues
Tax Articles / All Articles / Business Related Issues

The New Centralized Partnership Audit Regime – Part Two

This is the second of a series of three posts on the new centralized partnership audit regime that came into effect in 2018 under the Bipartisan Budget Act, replacing the old TEFRA procedures with new partnership-level adjustments.  The first article provided an overview of the primary differences between the BBA regime and that of the old TEFRA procedures.  This second article on the new centralized partnership audit regime takes a deep dive into the Code and Treasury Regulations, explaining each new provision under the BBA.  The third article wraps everything up in a nice bow and provides guidance for partners and practitioners alike in implementing the new centralized partnership audit regime. The Default Regime of IRC § 6221(a) and “Electing Out” under IRC § 6221(b) Due to the sharp increase in large entities choosing to be taxed as partnerships, TEFRA’s procedure for making partnership adjustments at the individual partner level…

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April 20, 2021