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Archive for Freeman Law

Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

This is from Freeman Law: Tax Court In Brief

Crim v. Comm’r, T.C. Memo. 2021-117 | October 4, 2021 | Lauber, J. | Dkt. No. 16574-17L

Short Summary: During tax years 1999 through 2003, Mr. John Crim promoted a tax shelter scheme involving domestic and offshore trusts. In 2008, Mr. Crim was convicted of certain crimes (conspiracy to defraud the United States and a corrupt endeavor to interfere with the administration of the internal revenue laws) and imprisoned until 2014.

The Internal Revenue Service notified Mr. Crim that it proposed to assess penalties under Section 6700(a) by letter dated June 16, 2010. On July 26, 2010, the Internal Revenue Service assessed the proposed penalties. On November 18, 2011, the Internal Revenue Service filed a notice of federal tax lien. On March 8, 2017, the Internal Revenue Service sent Mr. Crim a Letter 1058, Notice of Intent to Levy.

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Estimating Tax Deductions: The Cohan Rule

Estimating Tax Deductions: The Cohan Rule

Travel and Entertainment Tax Deductions In The Absense of Records

The “Cohan rule” is derived from a Second Circuit’s 1930 decision, Cohan v. Commissioner, which allowed for the approximation of travel and entertainment expenses in the absence of records indicating an exact amount.[1] The rule has since flourished, with later noted exceptions, into use with taxpayers who either produce incomplete records or cannot produce any records at all regarding contested disallowed tax deductions.[2]

This holding can be attributed to the one and only, George M. Cohan. Mr. Cohan was perhaps the original Broadway pioneer. He has been credited with writing and publishing over 300 songs (including ‘You’re a Grand Old Flag’), over a dozen musicals, being a fabulous entertainer, networker, and generally credited with making Broadway into the global landmark it is today (see his statute and plaque in Manhattan’s famous Duffy Square).[3] His most memorable accomplishment, however, may be his memorialization in the tax code. After failing to keep atop his substantial Broadway expenditures, Mr. Cohan offered for the court’s approval his tax code debut. Despite grossly inadequate records, Mr. Cohan was allowed a deduction based on close approximations provided to the court.[4] The court then recognized that strict proof of otherwise deductible business expenses is not always available.[5] In the words of the Cohan court, “absolute certainty in such matters is usually impossible” and it is “not fatal that such results will inevitably be speculative; many important decisions must be such.” [6]

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Applicability Of Foreign Tax Credit Against The Net Investment Income Tax Under U.S., France, And Italy Tax Treatries

Applicability Of Foreign Tax Credit Against The Net Investment Income Tax Under U.S., France, And Italy Tax Treatries
Catherine S. Toulouse v. Comm’r, 157 T.C.| August 16, 2021 | Goeke, J. | Dkt. No. 19122-19

Short Summary:  The case discussed the applicability of the foreign tax credit (FTC) against the Net Investment Income Tax (NIIT) under the tax treaties between the U.S. and France and Italy. The Court concluded that under the text of such treaties, the foreign tax credit cannot be applied against the NIIT.

Catherine Toulouse (the petitioner), a U.S. citizen residing in a foreign country, filed her tax return for 2013 claiming FTC paid to France and Italy to offset her income tax. She also reported a carryover of FTCs to offset her income tax. Despite having NIIT in the amount of $11,540.00 USD, the petitioner claimed that her NIIT was zero. This calculation resulted because the petitioner added two lines to the return: the first to claim an FTC against the NIIT and the second resulting in NIIT due in the amount of zero. The petitioner disclosed her tax position by filing forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and form 8275, Disclosure Statement, where she explained that under article 24(2)(a) of the U.S.-France tax treaty, and article 23(2)(a) of the U.S.-Italy tax treaty, she was allowed to apply FTC against the NIIT.

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What Is A Kovel Accountant? A Deep Dive

Kovel Agreement

The Internal Revenue Service (IRS) has broad statutory authority to investigate and audit taxpayers.[i]  In many cases, the IRS attempts to fulfill this statutory authority through seeking communications made between taxpayers and third parties, such as tax return preparers and CPAs.  Oftentimes, the IRS is authorized to obtain these communications.

However, there are methods to protect communications made between taxpayers and accountants.  One such method is referred to as a Kovel agreement.  Under that agreement, the taxpayer engages a tax attorney who, in turn, engages the services of a tax accountant.  When done properly, federal courts have recognized that communications amongst these parties are not subject to disclosure under the theory that such communications are protected by the attorney-client privilege.

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FBAR Penalties: Another Court Holds That FBAR Penalties Can Exceed The Regulatory Ceiling

FBAR Penalties: Another Court Holds That FBAR Penalties Can Exceed The Regulatory Ceiling

The Report of Foreign Bank and Financial Accounts (i.e., the “FBAR”) was for many years confined to the lonely backwaters of Title 31 of the United States Code—the intriguingly-named Bank Secrecy Act.  For years, compliance levels were abysmal.  But penalties were generally not enforced.  To put the situation in perspective, in the course of more than a decade, you could probably have counted the number of penalties assessed against non-compliant account holders on one hand—maybe, just maybe, two hands—at least according to contemporary reports from the Treasury Department to Congress.

But my how the times have changed.  FBAR penalties are most certainly enforced these days.  Some might argue that they are enforced with a vengeance—a vengeance that is disconnected with the purpose behind the FBAR filing requirement.  Truly, the penalties associated with failing to file an FBAR are among the most punitive civil penalties on the books.

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A Summary Of The IRS’ Streamlined Filing Compliance Procedures

A Summary Of The IRS’ Streamlined Filing Compliance Procedures

The IRS’ streamlined filing procedures were first offered by the IRS on September 1, 2012.  Since that time, the IRS has made several revisions.  A current summary of the IRS’ Streamlined Filing Compliance Procedures is discussed below.

Do I Qualify for the IRS’ Streamlined Filing Compliance Procedures?

To qualify for the IRS’ Streamlined Filing Compliance Procedures (either Domestic or Foreign), taxpayers must meet the following initial requirements:

  1. The taxpayer must be an individual taxpayer or an estate of an individual taxpayer.
  2. The taxpayer must certify in a narrative under penalties of perjury that the conduct was not willful. The relevant conduct requiring certification relates to not only the failure to report income and/or pay tax, but also to submit all required information returns, including FBARs (e., FinCEN Form 114).
  3. The IRS must not have initiated a civil and/or criminal investigation of the taxpayer for any tax year.
  4. The taxpayer must have a valid Taxpayer Identification Number (e., TIN).

For streamlined filings under the IRS’ Domestic procedure, the taxpayer must also meet the following requirements:

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The Tax Court in Brief: Independent Contractor Case

The Tax Court in Brief: Independent Contractor Case

Delgado v. Commissioner, T.C. Memo. 2021-84 | July 7, 2021 | Greaves, J. | Dkt. No. 191-20

Short Summary

Two companies paid the Petitioner for services performed as an independent contractor.  The companies submitted Forms 1099-MISC, Miscellaneous Income, to the IRS reporting the payments.  For the tax period, the Petitioner timely filed two Forms 1040EZ, Income Return, reporting zero income.  Based on the two Forms 1099-MISC it received, the IRS issued a Notice of Deficiency, which provided an increase in tax liability as well as a section 6662(a) penalty.  Petitioner timely petitioned the court for redetermination based on the Petitioner’s interpretation of section 7701(a)(26).

Key Issues:

  • Whether the IRS’s determination of the Petitioner’s tax liability and accuracy-related penalties is correct?
  • Whether the Petitioner engaged in a trade or business as defined by section 7701(a)(26)?

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Passport Revocation Challenges – Shitrit v. Commissioner

Passport Revocation Challenges—Shitrit v. Commissioner

Section 7345. Perhaps it’s the challenge it poses to U.S. taxpayers and their rights and freedoms (i.e., international travel). Perhaps it’s the type of method employed by the U.S. government to promote federal tax compliance. Or perhaps U.S. taxpayers don’t want to think about passport issues after being stuck inside for over a year. Regardless of the reasons, U.S. taxpayers continue to pose challenges to Section 7345 of the Internal Revenue Code. I covered one such challenge in a previous blog regarding the constitutionality of Section 7345: Is Section 7345 Constitutional? – Jones v. Mnuchin. However, in a recent memorandum opinion, the Tax Court dispensed with a taxpayer’s contest of certain tax issues related to Section 7345 based on mootness and jurisdictional grounds.

Section 7345, Generally

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Everything That You Need To Know About International Tax Penalties

Everything That You Need To Know About International Tax Penalties

International information return penalties are civil penalties assessed by the IRS against a United States person for failing to timely file complete and accurate international information returns required by specific Internal Revenue Code (IRC) sections.  Those information returns cover a broad spectrum of reporting obligations, and include IRS Forms 5471, 5472, 3520, 3520-A, 8938, 926, 8865, 8621, 8858 and others.

U.S. taxpayers are required to report their worldwide income. International information returns require taxpayers to report information relating to foreign assets, interests in various entities, certain transactions, and information relating to foreign-sourced income.

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Recent Tax Court Case: Unassessed Taxes Are Not Discharged In Bankruptcy

Recent Tax Court Case: Unassessed Taxes Are Not Discharged In Bankruptcy

A recent Tax Court opinion demonstrates the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  The case emphasizes the need for an attorney knowledgeable in both tax and bankruptcy cases to ensure that the the best, most-viable tax arguments are put forward in the proceedings.

A brief outline of the case is set forth below:

Barnes v. Comm’r, T.C. Memo. 2021-49 | May 4, 2021 | Lauber, J. | Dkt. No. 6330-19L

Short Summary:  The taxpayers challenged a proposed deficiency in the Tax Court related to their 2003 tax year.  Prior to the Tax Court issuing an opinion, the taxpayers filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia.  The IRS participated in the bankruptcy proceedings and filed a proof of claim for tax deficiencies—however, the 2003 tax year was not included.

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The Tax Court Addresses The Origin-Of-The-Claim Doctrine And Legal Fees

The Tax Court Addresses The Origin-Of-The-Claim Doctrine And Legal Fees

A recent Tax Court decision addressed the deductibility of legal expenses and the so-called “origin-of-the-claim” doctrine. The Mylan decision demonstrates that the deductibility of a legal expense generally depends on the origin and character of the underlying claim or transaction out of which the legal expense was incurred. An expenditure, such as legal expenses, may be deductible in one setting but nevertheless required to be capitalized in another. Legal expenses directly connected with (or pertaining to) the taxpayer’s trade or business are deductible under I.R.C. Section 162 as ordinary and necessary business expenses, while expenses arising out of the acquisition, improvement, or ownership of property are capital expenditures under I.R.C. Section 263(a) and are not currently deductible.

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Taxes and Bankruptcy: Taxes In Bankruptcy Case

Greg Mitchell - Taxes And Bankruptcy

In re Minor; 127 AFTR 2d 2021-XXXX (DC CA); Case No. 2:20-cv-03626 (DC, C.D. CA)

This case involves taxes in a bankruptcy case that were priority taxes under the Bankruptcy Code.

The Debtor in this case filed for Chapter 7 bankruptcy in May, 2013 and received a discharge in May, 2015.  In March, 2018, the IRS filed an amended proof of claim in the bankruptcy case for almost $26 million for unpaid federal income taxes owed by Minor for tax years 2007, 2008, 2009, and 2011 (the “IRS Claim”).  The IRS Claim consisted of a secured claim of $24,857,210.48, a priority claim of $997,869.07, and an unsecured claim of $61,398.90.

The California Franchise Tax Board (“FTB”) also filed its own proof of claim, the details of which were not relevant for purposes of this case.  What was relevant was that the bankruptcy trustee did not have enough funds to pay both the IRS and the FTB claims in full.  Therefore, the bankruptcy trustee (“Trustee”), the IRS, and the FTB entered into a stipulation regarding the division of available funds (the “Stipulation”).

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