IRS Gets Mystical and Some Other Minor Developments

Originally published on Passive Activities and Other Oxymorons on April 1st, 2011.
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Since you folks seem to resist clicking on ads, I've been hanging on to my day job.  I'm going to try to get a little ahead this last weekend in March.  Right now the preparers are more swamped than the reviewers so I'll be taking Sunday off.  This post will be the first April one.  As usual I have quite a few interesting items that won't quite make it into full length posts that I want to share before they go stale.

I'd spent the first week in January pining for material from the Chief Counsel.  When it finally came out I started a post called "Happy New Year Chief Counsel", but as the year developed I couldn't really make much out of them.  It seems that the primary role of the Chief Counsel's office is to be confused about TEFRA.  I can't say I blame them.  Here's what you missed if you have been relying on me to screen the CCA's for you:

CCA 201101023

This one might be of practical use at some point if you are a partner and you can't convince the general partner to fix something.  You would probably include Form 8082 with the amended return.

The failure of a non-TEFRA partnership to file an amended return does not procedurally bar partners from amending their own return to reflect changes to partnership income.

CCA 201101020

This one borders on the mystical:

 The determination that a partnership is not a partnership is a partnership item if the partnership filed a Form 1065. See I.R.C. 6233(b) and Petaluma v. Commissioner (recent D.C. Circuit Opinion)

I think it means: "If it says its a partnership we must agree that it is a partnership in order to be able to say that it is not a partnership".

I think somebody was just back from a Zen retreat and was trying to work up a koan.

CCA 201101012

Which brings us to the paradox of the partnership - the non tax paying taxpayer:

As long as the partnership had an obligation to disclose a listed or reportable transaction under section 6011 and the regulations, it is liable for the 6707A for failing to so disclose. You are correct that because a partnership is not a taxpaying entity there is no decrease in tax on which to compute the penalty. Instead, the penalty will be the maximum penalty permitted by the new law. ——————

So much for the Chief Counsel's meditations on partnerships.  Next comes

Asmark Institute, Incorporated v. Commissioner, TC Memo 2011-20

It was an appeal of a denial of exempt status.  Asmark was providing compliance services to agribusiness.  Appeals of exempt status denial sometimes have the makings of comic masterpieces like Free Fertility Foundation and this one had to do with fertilizer, so I thought there might be something there but overall it is pretty mundane.  Basically, there activities were too commercial:

First, the IRS argues that Asmark competed with commercial firms. Second, the IRS argues that providing services to agribusiness is not an inherently charitable activity. Third, the IRS argues that Asmark Institute offered the same services, charged the same prices, and employed the same workers as its for-profit predecessor, Asmark, Inc. Fourth, the IRS argues that the Asmark Institute's commercial nature is evinced by the fact that its clients were for-profit businesses. Fifth, the IRS observes that Asmark Institute's relationships with trade associations were designed to increase its client base. Sixth, the IRS argues that Asmark did not educate the public because its educational and compliance materials were available only for a fee.


The tax court agreed with the IRS.

Gary L. Greenberg, et ux. v. Commissioner, TC Memo 2011-18

This was a pigs get fed, hogs get slaughtered type of case.  Taxpayer had applied for disability benefits on an insurance policy that they purchased.  They were turned down and appealed.  They won and in addition to the disability benefits they dinged the Paul Revere Insurance for $2,400,000 in punitive damages.  Nice result.  Pay your taxes and go home happy.  Mr. Greenberg decided that he wanted to exclude the punitive damages just like he was allowed to exclude the disability payments.  Not surprisingly he lost.  The bad part is the penalty:

Petitioners do not separately address the penalty issue. Given the plain language of the statute and the applicable caselaw, the arguments they provide in support of their position on the deficiency itself do not amount to substantial authority or reasonable cause. Petitioners did not provide any evidence that they relied on professional advice, and they did not disclose their position on their return. See sec. 6662(d)(2)(B). Petitioners have therefore not met their burden of proof and are liable for the penalty.


So in addition to the tax deficiency of $1,161,134, there is a penalty of $232,227 and possibly six years of non-deductible interest.

U.S. v. DOVE, Cite as 107 AFTR 2d 2011-634

This was IRS looking for a permanent injunction to prevent someone from preparing returns.  It looks like they had a point:

Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property.

The court agreed that Dove should take up another trade.  There was one comment that was a little troubling:

Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations.


There seems to be an implication that preparers are supposed to be auditors.  We in fact provide that level of service to many of our clients so that when they do get audited we can walk in with a book that documents every number on the return, but that is a step beyond preparation.  Also as a practical matter, we will have all the W-2's, 1099's and K-1's since it is more efficient for us to interpret them.  The comment is perhaps less disturbing in context.

Well that will do to start April off anyway.