Still Undefeated Against Department of Justice

In most court cases concerning federal tax matters, the Department of Justice does not represent the Government. That’s because those cases take place in Tax Court, where the IRS represents itself. Only when a taxpayer first pays up, then sues for a refund, or when a case goes up on appeal, does DOJ take over. Those situations don’t arise very frequently. So I may not be alone as a tax lawyer having only had a few cases against DOJ, and even fewer resulting in an actual court opinion.

And, happy to say, I’m still undefeated, a proud 2-0 after a recent victory. In May v. United States, 115 AFTR 2d 2015-827 (D.C. Ariz. 2015), the Federal District Court for the District of Arizona ruled that the assessment of a penalty against the taxpayer was untimely under the applicable statute of limitations. The case was one of first impression. It was decided on a motion for summary judgment.

In my humble opinion, the court got this one exactly right, and it would have been a travesty had it gone the other way. The statute of limitation in question, Internal Revenue Code Section 6501(c)(10), extends the otherwise applicable statute of limitations with respect to liabilities arising from certain transactions until one year from the date information related to the transaction is furnished to the IRS. In this case, the IRS agent auditing the taxpayer’s return asked for and received all the necessary information and was fully prepared to make the assessment, but the IRS nonetheless waited about two years to actually assess the penalty. In defending against the suit for a refund, the Department of Justice claimed that the information the IRS requested, received and acted upon should not be considered “furnished” to it because it was not placed on a certain IRS form. Thus, according to DOJ, the one-year period of Section 6501(c)(10) never commenced to run. It was a hollow argument, and the court appropriately rejected it.

When In Doubt Regarding the IRS, Don’t Sign

I’ve recently had three different clients ask me for a second opinion on an IRS situation because they had doubts about their tax position. Turned out in all cases their doubts were well founded. In two of the cases, the clients signed with the IRS first, then consulted me. In the third, the client consulted first. Check out how much better the third client fared:

Client 1 had been audited by the IRS. The agent proposed a tax increase of several hundred thousand dollars. Under pressure from a tax return preparer he had hired to assist him in the audit, the client signed off on the changes made by the agent. Did he give up his rights completely? No. He could still seek a refund. But he would have to pay the tax first, which he has not been able to do. Until he can, the IRS can exercise its enforcement power to collect the tax, even though a large portion of it likely isn’t owed. Had he not signed off on the audit, he could be fighting the issue in Tax Court, before having to pay the tax. 

Client 2 signed her tax return, as prepared by her return preparer, and filed, even though she was not comfortable with the tax liability reflected. When she mentioned this to me at a meeting on an entirely different matter, I ultimately concluded that she’d failed to claim a substantial loss. She amended her tax return to claim the loss. But amended returns are scrutinized more closely than original returns. Her amended return was audited. Although the IRS allowed the loss, it made unfavorable changes to other items on the return.

Client 3 thought her tax return wasn’t quite correct. Before filing, she asked me to take a look. I found a mistake in the treatment of the foreclosure on her house. The return was corrected, with a substantial tax savings.

The bottom line: If you are in doubt regarding an IRS matter, get your questions answered before you sign.

Tax Planning Never Was the Main Reason to Plan Your Estate

Most people know by now that unless they are members of the elite group of Americans with a net worth of over $5.3 Million ($10.6 Million for married couples), they likely won't need an estate planner to manage the potential tax on their estates. 

So, far fewer people are planning their estates these days. 

That’s unfortunate. You see, tax saving never was the primary reason to engage in estate planning. Consider the benefits that flow from estate planning that have nothing to do with taxation:

First, a carefully planned estate can provide legal protection for your loved ones’ inheritances which they could never achieve themselves after your death. In the absence of this planning, there is an unnecessarily increased risk the inheritance you pass could land in the hands of a claimant or a divorcing spouse of a child, or the future stepchildren of a spouse who survives you. 

Second, you have the ability through an estate plan to nominate the individuals you want to act for you should you become incapacitated and, if you have minor children, the individuals who will act as their guardian should you die before they reach adulthood.  

Third, without an estate plan, your estate likely will require a probate upon your death and could require a conservatorship should you become incapacitated.

The bottom line? Estate planning still makes sense, even though it may not save you a dime in taxes.


Year-end tax planning in 2012 will be more difficult than in prior years. Ordinarily, the objective at year-end is to accelerate deductions and postpone income, with the idea being to defer, but probably not avoid, tax.

But 2012 is different, for several reasons. First, there is a likelihood at this point that income tax rates will increase for high-income taxpayers. Second, the preferential rate on long-term capital gains likely will increase and the preferential rate on dividends may disappear entirely. Third, there are tax provisions in the Affordable Care Act that will subject additional income to the Medicare tax. Specifically, wages in excess of $250,000 for a married couple will be subject to an additional .9% Medicare tax and investment income will be subject to a 3.8% Medicare tax to the extent it causes adjusted gross income to exceed a specified threshold ($250,000 for married taxpayers filing jointly).

So, if you’re a high income taxpayer, is the game plan in 2012 to accelerate income and delay deductions? Yes, but not entirely yes. Remember the rules that limited itemized deductions? Those may be returning. In addition, Congress is looking at limitations on the total amount of itemized deductions. Thus, itemized deduction may be worth more in 2012 than it will be in 2013.

As if all that were not complicated enough, there are looming changes in the estate and gift tax rules, the details of which are less predictable than the changes to the income tax rules. Currently, a married couple may pass up to $10 Million free of estate tax to the next generation, with the excess subject to tax at a 35% rate. In the absence of new legislation, the so-called exemption will decrease to $2 Million for a married couple, with the excess subject to tax at a maximum rate of 55%. Ultimately, the exemption amount could land anywhere in between. My guess is that it will land at $7 Million for a married couple, with the excess taxable at 45%.

How does all this translate? First, if you have a large estate, see your estate planner immediately to determine whether any action should be taken before 2013.

Second, if you’re not a high income taxpayer ($250,000 of adjusted gross income for a married couple filing jointly, $200,000 of adjusted gross income for a single person), relax. There’s probably just not that much at stake. Yes, there’s a chance that total gridlock in Congress will cause your rates to increase back to pre-2001 levels, but there’s no way to quantify that risk and the effect would not be overwhelming. If you expect to make substantially more in 2013 than 2012, you may want to accelerate income into 2012 to even things out, but going beyond that point could prove to be a bad play. These general rules don’t apply to everyone. For example, if you’re considering converting a traditional IRA to a Roth IRA, 2012 may be the optimal time. If you have unrealized gains in investment assets, it may make sense to accelerate those gains. Even though the increased rates largely are limited to high income taxpayers, the increased rates on capital gains likely will apply to all taxpayers.

Third, if you are a high income taxpayer, you should get together with your tax advisor and consider whether there are opportunities to accelerate income. For example, if you have appreciated stocks, you could sell them and buy them back, thereby triggering the gain (the wash sale rules do not apply to gains). This could you save you 8.8% in tax (15% capital gains rate, as compared to 20% capital gains rate plus 3.8% Medicare tax). There may be various other opportunities to accelerate income (or delay deductions). Among the most common are:

·         Accelerating January bonus compensation to December
·         Maximizing retirement distributions
·         Converting Roth IRAs
·         Triggering unrecognized installment sale income
·         Accelerate billing and collection of business income
·         Declaring special dividends from closely held corporations
·         Postponing mortgage payments
·         Postponing state income tax payments
If your income in 2013 is likely to exceed $380,000, this planning may be especially important. At that level, your marginal income tax rate in 2013 could be 4.6 percentage points higher, and you will be subject to the additional Medicare tax as well. At a minimum, your overall rate increase will exceed 5 percentage points and, on some types of income, it could be exceed 8 percentage points.

This post only touches upon some of the tax law changes that will occur at the end of the year. There are others, and it is quite possible new legislation may be enacted late this year or early next. Thus, the analysis in this post is not intended to be exhaustive. It is  general in nature and is not intended as legal advice.

November 15, 2012


By no means is this list exhaustive, but these items should be on everyone’s estate planning to do list  

Life Insurance 

The life insurance most Americans carry is woefully inadequate, especially if they have young children or a dependent spouse. Quite often, the breadwinner in a family carries life insurance with a death benefit equal to only one year’s income. What your family needs is a death benefit that will generate income equal to your annual income, which typically is between ten and twenty times your annual income.  

Succession Planning 

Too many businesses are lost to unexpected death of the business owner. Succession planning is, no doubt, a challenge. More often than not, the business owner is the heart and soul of a small business. But leaving succession planning unaddressed is not an option. Do you have a child who is active in the business and who could take over? Could your employees take over and buy out your surviving family members? Can the business be sold without tremendous value being lost? Even if there are no “good” options, it’s important to identify the “least bad” option and implement it, as the financial stakes are enormous. 

Guardianship Nomination 

Couples usually think of where the money will go when they consider the need to execute Wills.  But there’s a more urgent matter addressed in your Will: Who will raise your children? In legal terms, that translates into who will serve as guardian for your children and conservator of their estates? These matters are handled in a Will, and should never be left unaddressed. And they require careful consideration. For example, it may seem sensible to name your 65 year-old parent as guardian of your three-year old child, but doing so means your 80 year old parent could be faced with the task of raising a potentially rebellious teenager.  

Structuring Your Children’s Inheritance 
Deciding how an estate will be shared among children and others typically is a straightforward decision. Indeed, the intestacy laws of most states usually will vest the estate in those whom the decedent most likely would have named in a Will. But intestacy laws, simple wills and canned living trusts utterly fail to address the critical question of that age at which your children will take control of their inheritance and who will manage the money for them until they reach that age. So, unless you’re comfortable with your eighteen year old child getting a six or seven figure check to spend as he wishes, some planning here is critical.  

Asset Protection Planning For Your Children
In today’s litigious society, many people consider their own asset protection planning. Planning to protect your assets from adverse claimants, however, can be complex, costly and often only marginally effective. But protecting your children’s inheritance through basic estate planning is straightforward and cost effective. If your children follow your plan, the likelihood that claimants could reach their inheritance will be remote. And this planning also will protect them from divorcing spouses and estate taxes. This basic planning on your part provides benefits to your children that no amount of planning on their part could achieve.

October 29, 2012

From the simple to the most complex transactions, we’ve looked to Bob to assist us with the negotiation and drafting of LLC operating agreements. His attention to detail, broad knowledge on corporate tax issues and his ability to prioritize and expedite have consistently yielded great results for us.
David Dewar, Principal, Trillium Residential, L.L.C.
Bob offers the perfect blend of an outstanding legal mind with a common sense approach toward tax, legal and estate issues. His uniquely refreshing approachable style of practice and humble personality provide a comfortable and easy environment to address any legal problem. Bob’s legal advice is a product of his strong intellect, vast experience and reasonable perspective, which has consistently led to positive experiences and excellent results for us.
Howard Luber, President, Southwest Skin Specialists, LTD
Bob's knowledge of tax and estate law combined with his intelligence,quick mind and superior negotiating skills has provided exceptional outcomes for us. Employing a straightforward communication style with prompt responses, Bob approaches challenges from multiple angles, analyzing all possible solutions before forming a strategy and moving forward. His counsel has been invaluable to us over the past five years.
Victoria McCarty, McCarty Enterprises, Inc.
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