FINANCIALLY SPEAKING: Best Individual Taxpayer Victories of 2001
These best personal taxpayer victories of 2001 may point out ways that you can cut your taxes in 2002.
∑ Fraud is addressed retroactively to avoid tax that was really owed. A taxpayer filed fraudulent tax returns for two years, but then voluntarily filed amended non-fraudulent returns for those years. An IRS auditor later discovered the fraud and determined that tax was underpaid on the amended returns. He asked to invoke fraud penalties, and if the fraud exception kept the statute of limitations open. If so, tax could still be assessed on the returns, even though three years had passed since they were filed.
IRS Decision: The fraud had been addressed by amended filings, so neither fraud penalties nor any unpaid taxes can be collected.
∑ Inheritance may be disclaimed upon first learning of it, no matter how long ago it occurred. An individual inherited an interest in a trust when he was a child, but did not learn of it until many years later as an adult. He now wishes to disclaim his interest in the trust so he can pass it to his children without owing gift or estate tax on the transfer.
IRS Ruling: A disclaimer normally must be made within nine months after an inheritance. But an individual who is unaware of an inheritance can request a disclaimer within nine months of first learning of it. The disclaimer made within this time limit is valid.
∑ Filed when FedEx-ed is upheld. A lawyer filed a tax court petition by FedEx on Friday just before the deadline. But he checked the "Hold Saturday at FedEx Location Box" on the shipping bill, thinking this told FedEx to hold it for Monday delivery. " Hold Saturday" really meant someone would pick it up from the depot on Saturday. When no one did, FedEx returned it. The lawyer then resent it, but the IRS said it was late.
Tax Court: A tax filing is "filed when mailed" when sent on time, to the correct address, and with sufficient postage, even if it is not properly delivered. The FedEx package met all three requirements. The mistaken check-mark was the equivalent of putting a wrong zip code on a filing, which does not cause it to be misaddressed, so the petition was timely.
∑ Tax refund claim preserved by informal protests. During a long-running tax dispute, the IRS levied a coupleís bank accounts, garnished their wages and seized their tax refunds. Each time they complained, the IRS ignored them. Finally, the IRS investigated their complaints and determined they had overpaid their taxes for the year, but said it was now too late to request a refund.
Court of Appeals: The IRSís investigation of the coupleís complaints indicated it knew a refund might be owed. This kept the statute of limitations open until the couple filed a formal refund claim.
∑ Home rented to others can qualify as a "personal residence". An individual owns a vacation home that he rents to others. He wants to transfer the home to his children through a Qualified Personal Residence Trust (QPRT). A QPRT lets an individual transfer a home to another in a future year, continue to use the home in the meantime and greatly reduce gift tax on the transfer by obtaining a valuation discount on the home for gift tax purposes. But a QPRT can be used only with a personal residence - not an investment property.
IRS Ruling: The owner makes personal use of the vacation home each year which exceeds the greater of 14 days or 10% of the number of days it is rented to others, so the home does qualify as a personal residence.
∑ IRSí "presumption of correctness" is lost when it makes a mistake. The IRS valued an estate at more than $100 million, but the estateís executor valued it at only $28 million. In Tax Court, the IRSís expert witness lowered its valuation by more than $30 million. The Court accepted this valuation - which was still triple the estateís - saying the estate had failed to meet its "burden of proof" in refuting the IRS valuation. The estate appealed.
Court Of Appeals: IRS tax assessments normally are presumed correct but the presumption is lost when the IRS makes a mistake. Here, the IRSís reduction of its own valuation by $30 million showed its initial valuation was arbitrary. The decision was thrown out, and the IRS had to assume the burden of disproving the estateís valuation.
∑ Partner under investigation canít bind others. The IRS began a criminal investigation of the managers of a partnership it suspected of being an illegal tax shelter. The IRS obtained a waiver of the statute of limitations from the partnershipís designated "tax matters partner" (TMP), who allowed them extra time to conduct an investigation. Later, the IRS assessed taxes against the partnershipís other investors.
Tax Court: When the TMP became the subject of criminal investigation, a clear conflict of interest arose between him and the other partners; he lost his authority to bind them with the tax waiver. Thus the limitation period had expired for the other partners and they were safe from the assessment.
∑ Late refund allowed when first request was never officially denied. The IRS responded to a tax return refund requesting by saying the request contained math errors and asking for more information. The taxpayer didnít respond until after the refund deadline had passed.
IRS Ruling: Since a math error notice is not a refund disallowance notice, the IRS never formally disallowed the refund request. A disallowance notice is sent by certified or registered mail, is clearly marked and informs the taxpayer of the right to appeal. Since no such notice was sent to the taxpayer, the original, timely refund request remained in effect. The taxpayer would receive the refund.
∑ Husband not liable for tax on wifeís distributions from IRA. After a womanís father died she received large distributions from his IRA. Her husband believed they were tax-free on the basis of conversations he had with the estateís lawyer and an ex-IRS agent, so he didnít include them on their joint tax return. Later the couple divorced, and the IRS tried to collect back-taxes on the IRA distributions from him. He claimed "innocent spouse" status, but the IRS said he didnít qualify because he had known about the distributions.
Tax Court: The husband hadnít known of the tax due on the distributions, so he did qualify as an innocent spouse. The husband knew about the distributions, but not about the tax due, so he did qualify as an innocent spouse and escaped the tax.
∑ IRS pays for not looking for document that didnít exist. An individual filed a Freedom of Information Act request asking the IRS to search for a document. But it delayed doing so until he filed in court to compel it. Then the IRS searched and found the document didnít exist. The individual petitioned the court to order the IRS to pay legal costs he had incurred. But the IRS objected stating that because it didnít ultimately have to produce any document, it was the "prevailing party".
Tax Court: The only reason the IRS didnít produce the document was that it didnít exist, which the IRS wouldnít have known had not the individualís court filing "sped up the IRSís search." So the individual was the prevailing party and the IRS must reimburse.
∑ Retroactively expanded innocent spouse relief gives refund. The IRS seized a womanís property to satisfy taxes owed on her husbandís income from an illegal activity. Under the law at the time, she was ineligible for innocent spouse relief because she knew of the income, which her husband reported on their joint return as "privileged income," without paying any taxes on it.
Relief: Congress later changed the law to permit innocent spouse relief whenever collecting tax on one spouseís income from the other spouse would be "inequitable". The new law is retroactive, so the wife could use it to seek a refund of the tax that was collected.