On November 30, 2021, the Tax Court issued a Memorandum Opinion in the case of FAB Holdings LLC v. Commissioner (T.C. Memo. 2021-135). The primary issue presented in FAB Holdings was whether the statutory notices of deficiency (SNODs) were timely sent based upon a cockamamy argument that the petitioners’ CPA was a “promoter” because the petitioners paid for his services.

Held: The Tax Court was “not persuaded” by such argument.

Background to FAB Holdings LLC

Frank and Dana Berritto resided in New York during the years at issue, with Dana passing away in 2015. Mr. Berritto worked in the financial industry—specifically, for Merrill Lynch beginning in 2010. The couple hired a CPA firm to to prepare an integrated tax plan (ITP). The ITP included the formation of two entities: a C corporation (FAB) and a partnership (Berritto Enterprises, LLC). FAB was organized and Enterprises was formed in Delaware on November 30, 2010.

The Berrittos were the sole owners of FAB and the sole partners of Enterprises, each owning a 50% interest in each entity. During the years at issue Mr. Berritto was the managing member of Enterprises and the president of FAB. During the years at issue Mr. Berritto worked approximately 600 hours per year for FAB while Mrs. Berritto worked approximately 40 hours per year for both FAB and Enterprises.

The Notices of Deficiency

In July 2017, the IRS mailed statutory notices of deficiency (“SNODs”) for the Berrittos’ individual returns and FAB’s returns. The adjustments in the SNODs consisted of three main categories: (1) adjustments to Enterprises’ and FAB’s expense deductions; (2) constructive dividends to the Berrittos from FAB; and (3) penalties.

The SNOD issued to the Berrittos disallowed the deductions for management fees and performance bonuses paid to FAB, which resulted in passthrough adjustments to the Berrittos’ individual returns. The SNOD issued to FAB determined that certain expense deductions were in fact constructive dividends for the benefit of its shareholders. As a result, the expense deductions were reduced by amounts equal to the constructive dividends.

Authorizations and Consents for the Berrittos

In March 2014 the Berrittos each signed a Form 2848, Power of Attorney and Declaration of Representative, authorizing their CPA to sign consents to extend the assessment limitations periods on their behalf for the 2010-17 tax years. In April 2014, the IRS received the fully executed Forms 2848 for the Berrittos. In August 2017, Mr. Berritto signed a Form 2848 as executor of Mrs. Berritto’s estate, authorizing the CPA to sign consents to extend the assessment limitations periods on the estate’s behalf for the 2010-17 tax years. At the same time, Mr. Berritto signed a Form 56, Notice Concerning Fiduciary Relationship, on which he stated he was the executor of Mrs. Berritto’s estate. The IRS received the Form 2848 for Mrs. Berritto’s estate and the fiduciary notice the same month. Thereafter, the CPA signed four Forms 872, Consent to Extend the Time to Assess Tax, purporting to extend the time for the IRS to assess Mr. Berritto’s tax for 2010, 2011, and 2012 tax years to August 8, 2018.

Statute of Limitations

Ordinarily, the IRS must assess a tax within three years after a return is filed.^[1] This period for assessment may be extended if the IRS and the taxpayer have consented in writing to an extension, provided that their agreement is executed before the expiration of the otherwise applicable limitations period.^[2]

The petitioners contend that the assessment limitations periods expired before the SNODs were sent to them, insofar as they contend that the CPA was operating with such an inherent conflict of interest that the Forms 872 the CPA signed were not valid, and therefore, the extensions of the limitation periods expired before the SNODs’ being issued.

The Shifty Burden of Proof

The expiration of the assessment limitations period is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proving its applicability.^[3] To establish this defense, taxpayers must make a prima facie case establishing the date of the filing of their return, the expiration of the assessment limitations period, and receipt or mailing of the SNOD after the running of the period.^[4]

Where taxpayers have established a prima facie case that the IRS mailed the SNOD to them beyond the three-year period, the burden going forward is on the IRS to prove that an exception to the period of limitations applies.^[5] If the IRS can show a facially valid extension, then the burden shifts back to the taxpayers to show that the consent was ineffective to extend the limitations period.^[6]

The petitioners established a prima facie case, because the SNODs at issue were dated in July 2017, more than three years after the returns for those years were filed.^[7] Accordingly, the burden of going forward with respect to those tax years shifts to the IRS.

In satisfaction of its burden, the IRS showed the limitations periods were extended for Mr. Berritto and FAB by presenting multiple facially valid Forms 872. Therefore, the IRS met its burden to show that the SNODs were mailed within the assessment limitations periods as extended for Mr. Berritto and FAB. The burden of going forward now shifts to the petitioners to prove that the Forms 872 were invalid.

Validity of Forms 872

The petitioners assert that the Forms 872 are invalid and therefore did not extend the assessment limitations periods because the CPA had an inherent conflict of interest. According to petitioners, the CPA was a promoter because he advised them to implement the structure at issue and received payment for his advice. Consequently, petitioners contend the CPA’s status as a promoter invalidates his authority to act on their behalf.

The Tax Court found this argument “unpersuasive.”

The line of cases that the petitioners relied on, in which the taxpayers argued they reasonably relied on their tax adviser to avoid penalties, are taken out of context. Petitioners rely on 106 Ltd. v. Commissioner,^[8] to support their argument that the CPA was a promoter. In 106 Ltd. the taxpayer’s advisers coordinated the entire transaction and “profited from selling the transaction to numerous clients.”^[9] The Court in 106 Ltd. described a promoter as “an adviser who participated in structuring the transaction or is otherwise related to, has an interest in, or profits from the transaction.”^[10]

In 106 Ltd., the Tax Court cautioned that “one might need to be careful in applying the definition to some kinds of transactions—a tax lawyer asked by a businessman for advice on how to sell the family business through a tax-favored stock redemption might be said to have ‘participated in structuring the transaction.’”^[11] The mere fact that an adviser is being paid to help with a transaction does not transform the adviser into a promoter.

Here, the CPA did not benefit from or have an interest in the transaction outside of fees generated from time spent setting up the transaction and providing accounting and tax preparation services. Furthermore, while the CPA advised Mr. Berritto on the ITP, Mr. Berritto also participated in planning the structure. The petitioners have offered no evidence to show that Mr. Arias was offering multiple clients the same tax plan. Similar to the “tax lawyer” example in 106 Ltd., as any individual would go to an adviser for help in setting up a transaction, Mr. Berritto went to the CPA for general tax planning advice. The CPA helped the Berrittos with their ITP but was not a promoter with an inherent conflict of interest.

Conflict under Circular 230

The petitioners argue that Circular 230, which governs practice before the IRS, identifies the CPA’s conduct as a conflict of interest.^[12] Circular 230 notes that there is conflict of interest when there is a significant risk that the representation of one or more clients will be materially limited by a personal interest of the practitioner.^[13] The Tax Court cautions that the petitioners’ suggestion that because an individual is paid or part of a transaction’s planning that individual would automatically be unable to represent a taxpayer is not practical, as such a standard would invalidate the representation of taxpayers by numerous attorneys, accountants, and power of attorney holders because those individuals often perform tax planning and tax preparation and subsequently represent their clients before the IRS.

There will always be an underlying monetary tug between clients and their paid representatives. Circular 230 is a mechanism to allow sanctions for violating the regulations governing practice before the IRS; it is not a mechanism to determine whether a power of attorney is valid and confers authority to sign Forms 872.^[14] Accordingly, petitioners’ position has no merit.

(T.C. Memo. 2021-135) FAB Holdings LLC v. Commissioner

Footnotes:

1. See IRC § 6501(a). ↑
2. IRC § 6501(c)(4)(A). ↑
3. Tax Court Rules 39, 142(a); Mecom v. Commissioner, 101 T.C. 374, 382 (1993), aff’d without published opinion, 40 F.3d 385 (5th Cir. 1994); Heckman v. Commissioner, T.C. Memo. 2014-131, at *10-*11, aff’d, 788 F.3d 845 (8th Cir. 2015). ↑
4. Coleman v. Commissioner, 94 T.C. 82, 89 (1990); Robinson v. Commissioner, 57 T.C. 735, 737 (1972). ↑
5. Jordan v. Commissioner, 134 T.C. 1, 6 (2010), supplemented by T.C. Memo. 2011-243. ↑
6. Adler v. Commissioner, 85 T.C. 535, 541 (1985); see also IRC § 6501(c)(4). ↑
7. See Adler, 85 T.C. at 540-41. ↑
8. 136 T.C. 67 (2011), aff’d, 684 F.3d 84 (D.C. Cir. 2012) ↑
9. Id. at 80-81. ↑
10. Id. at 79 (quoting Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009-121, at *19). ↑
11. 136 T.C. at 80. ↑
12. See 31 C.F.R. § 10.0(a) (2021). ↑
13. Id. at § 10.29(a)(2). ↑
14. 31 C.F.R. § 10.0(a). ↑

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