Paul L. Caron

Saturday, September 13, 2014

Clark Redux: Recovery From Accountants for Disallowed Tax Shelter Constitutes Nontaxable Recovery of Capital

In Tax Court Logo 2Cosentino v. Commissioner, T.C. Memo. 2014-186 (Sept. 11, 2014), the Tax Court followed Clark v. Commissioner, 40 B.T.A. 333 (1939), Concord Instruments Corp. v. Commissioner, T.C. Memo. 1994-248, and Rev. Rul. 57-47, 1957-1 C.B. 23, in holding that $375,000 received by the taxpayers in settlement of a lawsuit against their accountants for advising them to purchase an abusive tax shelter constituted a return of capital and did not have to be included in income:

All of the damages that petitioners alleged in the complaint were damages that they sought in order to compensate themselves for the loss that they suffered because the accountants were negligent and breached their fiduciary duties to petitioners by erroneously advising them to use the tax-avoidance plan in order to dispose of the rental property. The $375,000 payment that petitioners received in settlement of the lawsuit was to compensate them for a loss that is similar to the respective losses in Clark, Concord Instruments, and Rev. Rul. 57-47.

Update:  Forbes, Client Sues Tax Advisor For Bad Advice: Is The Settlement Payment Tax-Free?, by Tony Nitti

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