Fourth Circuit Overturns Million Dollar Judgment Against Charleston CPA Defended by LWC

The Fourth Circuit overturned a judgment last week issued at the District Court level against a Charleston CPA defended by Lindsey W. Cooper Jr.  The judgment of more than $2.5million in Section 6700 tax shelter promoter civil penalties was imposed by a jury after the admission of evidence the Fourth Circuit determined was inflammatory and prejudicial. 

At trial, Judge David C. Norton overruled Cooper's strenuous objection to the admission of the CPA's delinquent personal tax filings into evidence.  The Fourth Circuit found that the government offered no evidence linking Robert Nagy's failure to timely file or pay his personal taxes with work he performed for Derivium regarding their 90% Stock Loan tax shelter program, concluding that the admission of evidence regarding Nagy's personal returns violated Federal Rule of Evidence 404(b).   

Rule 404(b) prohibits admission of evidence of wrongdoing solely for purposes of proving a person's character and the government's evidence regarding Nagy's personal returns served only to reflect his character negatively, resulting in prejudice.  It also explained that the evidence was quite likely to influence the jury against Nagy. 

The case was remanded to U.S. District Court for a new trial.  Check back with us for updates.

Tax Court: Exchange of Partnership Interest for Annuity Agreements Was Not Disguised Gift

On February 7, the U.S. Tax Court held that a taxpayer's transfer of partnership interest to her children in exchange for private annuity agreements was not a disguised gift subject to gift tax  (Estate of Kite v. Commissioner, T.C., No. 6772-08, T.C. Memo. 2013-43, 2/7/13).

BNA reported that Judge Elizabeth Crewson Paris determined that the annuity transaction was a bona fide sale for adequate and full consideration.
 
Virginia Kite was the beneficiary of two qualified terminable interest property (QTIP) trusts, one marital deduction trust, and one revocable trust. In 2001, the QTIP trusts and the marital deduction trust were liquidated, and the trusts' assets, which consisted of family partnership interests, were transferred to Kite's lifetime revocable trust. The family partnership interests held by the lifetime revocable trust were then transferred to Kite's three children in exchange for 10-year deferred private annuity agreements.
 
IRS assessed more than $6 million for Kite's 2001 gift tax, and more than $5 million in estate tax.

Check back with us for updates and appeal information.  

Congressmen Introduce Bill to Repeal Medical Device Excise Tax

BNA reported yesterday that a bipartisan group of House lawmakers introduced a bill to repeal the Affordable Care Act's 2.3 percent medical device excise tax.
 
The group of 175 co-sponsors of the proposed Protect Medical Innovation Act (H.R. 523) was led by Reps. Ron Kind (D-Wis.) and Erik Paulsen (R-Minn.); the bill text was not available. The House  passed a similar version of the bill in June 2012, but was killed in the Senate.
 
Bipartisan companion legislation soon will be introduced in the Senate.
 
“Placing a new tax on the backs of U.S. medical innovators and entrepreneurs who employ more than 400,000 Americans is not a prescription for economic growth or job creation,” Paulsen said in a Feb. 6 statement. “In fact, companies have already laid off thousands of employees as a result of this onerous new tax, and more jobs will be lost now that this tax is in effect. It's not only costing our country jobs and deterring innovation, but more importantly, it will reduce patient access to cutting edge medical products and treatments that save lives.”

Check back with us for updates.  

Circuit Split: Are Severance Payments Subject to FICA?

BNA reported today that the government filed a petition Oct. 18 for rehearing en banc in the closely watched Quality Stores case involving the taxability of severance payments (United States v. Quality Stores Inc. (In re Quality Stores Inc.), 6th Cir., No. 10-1563, petition for rehearing filed 10/18/12).
 
The Sixth Circuit held Sept. 7 that payments a company made to employees as part of the company's severance program were not subject to tax under the Federal Insurance Contributions Act (FICA) .
 
In upholding the rulings of the bankruptcy court and the district court, the appeals court expressly rejected the Federal Circuit's holding in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008) that the payments were dismissal pay subject to tax.
 
The government noted in its petition for rehearing that the case “involves a question of exceptional importance” because of the conflict with the CSX case. The government also said that the total amount of FICA refund claims with IRS is more than $1 billion.
 
The petition for rehearing is available at http://op.bna.com/dt.nsf/r?Open=vmar-8zbt5v.

Check back for updates! 

Don't Trust the IRS!

BNA reported yesterday that the Internal Revenue Service failed to inform more than 1 million taxpayers who qualified in 2010 for relief from tax penalties totaling about $181 million of their right to ask for relief, the Treasury Inspector General for Tax Administration said in a report issued Oct. 17.
 
IRS penalizes those who fail to file tax returns or fail to timely pay the full tax shown on any tax return. However, it may waive the fines for taxpayers who have demonstrated full compliance over the prior three years, but only if the taxpayers request penalty relief, TIGTA said. 

The agency watchdog found that IRS does not widely publicize the opportunity to request this waiver, and that taxpayers or preparers must have knowledge of IRS processes to ask for them. 

It said the unfairness in administering penalty waivers for those who know to ask for them could jeopardize taxpayers' confidence in the tax system. 

Text of the report, Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance (2012-40-113), is at http://www.treasury.gov/tigta/auditreports/2012reports/201240113fr.pdf.

DOES NORTH CAROLINA KNOW THAT CIRCULAR 230 EXISTS?

North Carolina recently postponed the effective date of a new law that prohibits the department (as well as units of local government and the state treasurer) from employing an agent or auditor who is compensated in whole or in part by North Carolina for services rendered on a contingent fee basis or any other basis related to the amount of tax, interest, or penalty assessed against or collected.  This is amazing as Circular 230 specifically prohibits any tax practitioner from being compensated in a contingent manner based upon the amount of tax, and every person contracted by North Carolina on a contingent basis could be sanctioned for an ethical violation.  For the savvy tax controversy practitioner, I would be reminding the auditor of Circular 230’s ethical mandate.