Tax Practice & Procedure
David Wooldridge
QUESTION 1 (15 max)
Upon the issuance of a statutory notice of deficiency and if a petition is filed within ninety days,
the Tax Court has jurisdiction over matters of income, estate and gift tax plus certain limited
excise taxes but not payroll taxes such as FICA and FUTA. Tax Court also has declaratory
judgment jurisdiction on qualified plan status, employment status and tax exempt organization
status. District Court has general jurisdiction over income, estate, gift, excise and payroll tax
matters. The Court of Federal Claims has jurisdiction over income, estate, gift, and excise taxes.
However both the District Court and the Court of Federal Claims hear only refund claims since
their jurisdiction first requires 100% payment of the tax and additions to tax under the Flora
Rule. Only the Tax Court has jurisdiction in unpaid deficiency actions. There is a fourth
“oddball”, i.e., Bankruptcy Court, which only has jurisdiction during a bankruptcy petition. If
the Bankruptcy Court chooses to assert jurisdiction over tax issues, pending deficiencies and
refunds may be determined. The Bankruptcy Court usually defers to the Tax Court. Bankruptcy
Court tends to treat the IRS as just another creditor and this can be advantageous to a taxpayer.
QUESTION 2 (30 max)
Ability to pay can dictate the forum. Only the Tax Court allows pre-assessment judicial review
and avoids the Flora Rule. Thus 95% of the cases are in Tax Court, 4% in District Court and 1%
in Court of Federal Claims. Cost favors the Tax Court and trial is estimated at $15,000 to
$50,000 or half the cost of going to District Court or the Court of Federal Claims. Judiciary
Expertise is important to complex technical issues. The Tax Court has the advantage with a
judiciary populated by experienced tax professionals who hear only tax matters. The Court of
Federal Claims caseload is about 40% tax thus ranking its judiciary second in tax expertise. The
District Court has a generalist caseload and tax matters may even be disliked. The District Court
pros may lie in attorney fees awards [granted routinely in non tax matters]; non-technical equity
issues; and, allowing jury trials [usually a bad idea]. Controlling precedent varies. Any court
will do for issues the Supreme Court decided. Otherwise, the District Court will follow the local
Circuit Court of Appeals. The Court of Federal Claims will follow the Federal Circuit precedent.
Under the Golsen rule [a self-imposed rule preventing ability-to-pay from controlling outcomes],
the Tax Court follows the same Circuit that the local District Court does. Absent local
precedent, the Tax Court follows its own cases. The Statute of Limitations on Assessment is
tolled for Tax Court petitions. The Tax Court trap arises when a taxpayer petitions to challenge a
$3,000 deficiency but the IRS discovers and proves an overlooked $5 million deficiency is owed.
Had the $3,000 been paid and a refund action brought after the statute of limitations, then the
worst outcome would have been be a zero refund. Informality of Procedures and Discovery
favors the Tax Court. Tax Court rules of evidence and procedures are relaxed versus the District
Court and Court of Federal Claims which follow the Federal Rules of Evidence and Rules of
Civil Procedure. Expensive discovery is eschewed in Tax Court which requires extensive fact
stipulations and expects stipulation to unchallenged facts. Discovery is normally not a factor
since the taxpayer controls his documents and witnesses. But, if responsible persons have
scattered in a Trust Fund Recovery Penalty, the bag holder may prefer the national subpoena
power of Tax Court and Court of Federal Claims over the District Court. Tax Court informality
extends to Small Case procedures for deficiencies ≤ $50,000. It allows no appeal but is a cheap
solution allowing for pro se representation. Settlement is the focus of the IRS, its attorneys and
the Tax Court. The other courts do not and Dept. of Justice attorneys focus on trial, require
levels of bureaucratic approval, are wary of “wool-over-eyes” and then require IRS approval.
QUESTION 3 (20 max)
Assume the taxpayer does not file an 8275. If the IRS were to audit and disallow the position,
there would be no penalty if there were substantial justification which is equivalent to reasonable
possibility of being sustained on the merits [a 1 in 3 chance using only primary authority and
drawing an informed conclusion by a knowledgeable tax practitioner]. Thus if RPBSOM
applies, there is no reason to file the 8275 and thus no disadvantage to not filing it. However, if
the position were less than RPBSOM, i.e., reasonable basis, then not filing an 8275 could result
in a penalty. With only reasonable basis there is a reason to file an 8275. But filing an 8275
may call attention to the return. Thus the penalty can be avoided but the taxpayer invites the IRS
to audit and disallow the position. [Income tax return preparers cannot advise this reasonable
basis standard nor advise playing audit odds, audit issue discovery odds and audit discovered
issue settlement odds.] Arguing in favor of filing an 8275 when taking a weak position is that a
taxpayer may protect himself from criminal penalties should his aggressive position prove
merely “frivolous” – a standard below the “not frivolous” reasonable basis standard.
QUESTION 4 (7 max)
Jeopardy assessments are made on completed tax periods and allow the IRS to levy on the assets
before they are beyond its reach. If the tax period has not ended, a jeopardy termination allows
the IRS to cut short the tax period. The IRS then computes the tax on income to date but allows
full year personal exemptions. The assessment is then made against this short period and the
assets levied upon. Another type of jeopardy termination exists for unclaimed cash [or near cash
assets] when the possessor denies ownership. The IRS notifies the possessor and assesses
against the cash at the highest marginal rate.
QUESTION 5 (10 max)
The statute of limitations on assessment expires on August 12, 2007. The statutory notice of
deficiency on March 15th starts a 90 day period in which assessment is prohibited thus
suspending the 3 year statute of limitations on assessment. The 90 day suspension ends on May
14th. When the suspension is over, the remaining 30 days on the 3 year statute of imitations
starts running and ends on June 13th. Whenever the IRS is prohibited from making an
assessment, an extra 60 days is added on to the statute of limitations. The added on 60 day
period runs until August 12th. [Double-checking: since March, May and July have 31 days, the
final ending date six months later is (15-3) = 12th of August, 2007.]
QUESTION 6 (10 max)
Interest ran from April 15, 2005 through May 31, 2006. Interest on the deficiency started
running when the return was due on April 15, 2005. The IRS must complete its audit and
assessment within 18 months otherwise Congress has provided interest will stop running. The
October 15, 2006 limitation was not triggered herein and interest was running when the taxpayer
signed the waiver on May 1st. Congress wants the IRS to act promptly on a taxpayer’s waiver
and the IRS had 30 days until May 31st to assess or the interest stops. Thus no interest ran
commencing on June 1st. When the assessment was made on June 5th, the Notice of Assessment
and Demand for Payment allowing 21 days to pay off the liability was sent. To avoid having
interest run while payment is in the mail, no interest is charged during the 21 days if paid off.
QUESTION 7 (3 max)
Wage & Investment Division for W-2’s and 1099’s. Small Business Self Employed for schedule
C, E, F, Estate and Gift, and businesses ≤ $10 million assets. Large and Medium Size Business
for >$10 million assets. Tax Exempt Organizations and Government Entities for same.
QUESTION 8 (10 max)
Congress created TEFRA in response to the difficulties of individually auditing thousands of
partners scattered across the USA for one single tax shelter partnership. With TEFRA, only one
audit at the partnership level need take place with respect to partnership items. The duty of
consistency is a statutory requirement that all partners must conform the partnership items on
their individual returns to the partnership’s treatment of those items. If the partnership
capitalizes an expense then the partner must conform to capitalization treatment. If an individual
partner reports it as an expense, then he must file a disclosure to avoid penalty. The IRS may
audit the individual and require him to conform to the partnership’s treatment. The IRS may
audit the partnership and issue a FPAA requiring the item be treated as partnership expense item
and then each individual partner must conform the item and related items on his/her return.
TRUE FALSE QUESTIONS
9.
FALSE
10.
FALSE
11.
TRUE
but it arises on “Notice & Demand” & relates back to date of assessment
12.
FALSE
but it would work if suit was filed before the statute of limitations lapses.
13.
TRUE
14.
FALSE
15.
FALSE
16.
FALSE
since can recover $ within 3 yrs after filing or 2 yrs after payment
17.
FALSE
assuming he did not prepare the preceeding and subsequent years
18.
FALSE
19.
TRUE
20.
FALSE
21.
FALSE
22.
FALSE
23.
TRUE
24.
TRUE
25.
TRUE
26.
FALSE
27.
TRUE
28.
FALSE
29.
TRUE
30.
FALSE
31.
FALSE
32.
FALSE
33.
FALSE
but he can recover the $10,000 part just not the rest
34.
TRUE
35.
FALSE
36.
TRUE
37.
TRUE
38.
TRUE
39.
TRUE
40.
TRUE
41.
TRUE
42.
TRUE
43.
FALSE
44.
TRUE
45.
FALSE
46.
FALSE
47.
TRUE
48.
TRUE
49.
TRUE
50.
TRUE
but banks first hold funds in trust for IRS for 20 days to allow a challenge
but filed tax liens survive although levy discharged
but “no” could be ruled “indirect” compensation if ongoing client relations