An LLC taxed as a partnership with 128 partners failed to file its partnership tax return electronically, resulting in the IRS asserting a penalty of $224,640 under IRC section 6698(a)(1). Partnerships with more than 100 partners are required to file their tax returns electronically under IRC section 6011(e). Williams Parker represented the partnership in connection with a penalty waiver request pursuant to IRS Announcement 2002-3, 2002-1 CB 305 (Jan. 14, 2002). Shareholder Mike Wilson at Williams Parker convinced the IRS that the partnership was entitled to a penalty waiver under the criteria of the Announcement, and therefore the IRS withdrew the entire $226,640 penalty. Information regarding the Announcement criteria and related guidance can be found at irs.gov.
Earlier this month, the Tax Court rejected an argument by the IRS that in order to establish good faith reliance on a tax advisor, for purposes of avoiding penalties, the taxpayer, a foreign corporation, needed to have (1) conducted an independent investigation into the tax advisor’s background and experience instead of merely relying upon the recommendation of the tax adviser by the taxpayer’s US legal counsel, and (2) hired a tax expert that specialized in international tax law or an attorney with an LL.M. degree. The Tax Court found that the IRS attempted to impose greater conditions on the taxpayer than what is required under existing law. The Tax Court ruled that the taxpayer reasonably relied upon the recommendation of its legal counsel in hiring the tax advisor. Furthermore, the standard is not whether the tax advisor was an expert in international tax law or an attorney with an LL.M. degree, but instead whether the tax advisor was “a competent professional who had sufficient expertise to justify reliance.”
The opinion in the case, Grecian Magnesite, Industrial & Shipping Co., S.A. v. Commissioner, 149 T.C. 3 (2017), can be found here.
In CNT Investors, LLC v. Commissioner, 114 T.C. No. 11 (2015), the Tax Court recently held that a retired mortician reasonably relied on the advice of his long-time corporate and estate planning attorney in participating in a Son-of-BOSS tax shelter transaction to divest real estate holdings. Although the court ruled that the transaction was a sham, it declined to impose valuation misstatement penalties due to the taxpayer acting with reasonable cause by relying on his “go-to attorney and trusted counselor.” The three-prong test for determining whether a taxpayer acted with reasonable cause, and thus avoid penalties, is: (1) the adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment. The most interesting part of this case is that the court held that under the first prong the question is not whether the adviser is a tax expert and has sufficient tax expertise from the perspective of the IRS or other tax experts, but instead whether the adviser would appear to be a competent professional with sufficient expertise from the taxpayer’s layperson perspective. In this case, the court found that the taxpayer justifiably viewed his long-time corporate and estate planning attorney of 20 years as competent and with sufficient expertise, even though the attorney was not a tax expert.
A copy of the opinion can be found here: