Paul L. Caron

Sunday, April 20, 2014

Tax Court: 'Taxpayers Rely on IRS Guidance at Their Peril'

Forbes:  'Taxpayers Rely on IRS Guidance at Their Own Peril,' Tax Judge Rules, by Janet Novack:

Tax Court Logo 2Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered on April 15th —an order [No, 7022-11 (Apr. 15, 2014)] denying a motion that he reconsider his earlier decision [T.C. Memo. 2014-21 (Jan. 28, 2014)] to penalize tax lawyer Alvan L. Bobrow [Partner, Mayer Brown, New York] for making an IRA rollover move that IRS Publication 590, Individual Retirement Arrangements (IRAs), says is allowed. Technically, Nega denied the motion as moot, since Bobrow and his wife Elisa had reached a settlement with the government. But the judge wrote in his order that IRS guidance isn’t “binding precedent” or even sufficient “substantial authority” to get a taxpayer excused from penalties if he follows that guidance and the IRS’s interpretation of the tax law turns out to be wrong.

Huh? Sound unfair? Some of the nation’s most prominent tax lawyers sure think so. In a friend of the court brief urging Nega to reconsider his original decision, the Board of Regents of the American College of Tax Counsel had argued that it undermines public confidence in the tax system to tell taxpayers who have followed the IRS’ own guidance that they “have made an error with potentially catastrophic financial consequences.” Nega was unimpressed. He cited in his order Tax Court and Appeals Court decisions holding that IRS published guidance doesn’t count in court and added that he had been well aware of what Pub 590 said before his original ruling.

At issue in the Bobrows’ case is a decades old provision of the tax code—408(d)(3)– that allows IRA owners, once a year, to withdraw funds from an IRA without having the money taxed or subjected to the 10% early withdrawal penalty so long as they redeposit the cash, or roll it over to a different IRA, within 60 days after the date of withdrawal. In proposed (but never finalized) regulations issued in 1981 and in editions of Publication 590 since 1984, the IRS has told taxpayers that the one-a-year restriction applies separately to each IRA. ...

On April 14, 2008, Bobrow took $65,064 out of one of his IRAs at Fidelity Investments . On June 6, as the 60 day rollover deadline approached, he withdrew the same amount from a second IRA he had at Fidelity, moved the cash into his Fidelity checking account and then, on June 10, into the first IRA. On July 31, 2008, Bobrow’s wife, Elisa, took $65,064 out of her Fidelity IRA, and on August 4, the couple transferred that cash from their joint Fidelity checking account into Alvan’s second IRA—just in time to meet the 60 day rollover deadline on that account.

In a decision handed down in January, Tax Court Judge Joseph W. Nega ruled that Alva Bobrow’s June 6th withdrawal from his second IRA could not qualify for rollover treatment because the “plain language” of the law makes it clear that the once a-year rollover restriction applies to all of a taxpayer’s IRAs combined. (The American College of Tax Counsel brief says the law is “at least ambiguous” as to whether the one per year rule applies on a per taxpayer, or per IRA basis.) ...

Bobrow also appears to have teed off the judge, Steiner observes, by arguing that he had reasonable cause for treating the rollovers as tax exempt because he was a tax lawyer who had “analyzed the transactions at issue in the light of the provisions of section 408(d)(3), and concluded that the three transactions should all be treated as nontaxable.” Wrote Nega: “It appears that petitioners would have us conclude that petitioner husband’s career as a tax attorney is proof that they acted with reasonable cause and in good faith.”

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The galling thing about this case is that it is about a penalty, not the underlying tax liability. The IRS does get technical explanations wrong sometimes. For the Tax Court to impose a penalty because an IRS statement made the issue ambiguous is simply unfair. But, as a colleague of mine has said, "The Tax Court is a wholly-owned subsidiary of the Office of Chief Counsel." So, what else should we expect?

Posted by: TexEcon | Apr 22, 2014 6:54:42 AM

Eric: A simple statement by an individual at the IRS isn't substantial authority for purposes of avoiding penalties, nor should it be (see U.S. v. Kapp), but a PLR or a determination letter from the IRS does constitute substantial authority for purposes of avoiding penalties. It is an odd result to me that a PLR constitutes substantial authority, but an IRS publication does not. I think the judge got this wrong...even if the ruling was moot.

Posted by: John Treu | Apr 21, 2014 4:30:06 PM

The judge has spent his entire career from 1985 on the staff of the Joint Committee. He has probably never actually represented a taxpayer.

Posted by: TexEcon | Apr 20, 2014 3:14:15 PM

It sounds crazy, but it has to be the case that relying on IRS advice isn't enough to avoid liability. Otherwise, a corrupt IRS could advise some millionaire that it was OK for him to not pay taxes, and he'd be safe in court.
Remember: litigation isn't always IRS vs. citizen--- soemtimes it's IRS and taxpayer vs. other taxpayers.

Posted by: Eric Rasmusen | Apr 20, 2014 2:57:19 PM