A district court has held that a taxpayer who participated in a distressed asset debt (DAD) tax shelter wasn’t liable for accuracy-related penalties. The court concluded that the overall facts of the case, including the taxpayer’s knowledge of tax law, efforts to assess the proper tax liability, and reliance on tax advice of qualified professionals, showed that he acted reasonably and in good faith within the meaning of Code Sec. 6664(c).
When he approached his retirement, Corbin McNeill, a former Navy Commander turned utility company executive, found himself slated to receive an $18 million payment which would generate a correspondingly large tax bill. McNeill entered into a complicated partnership-based DAD transaction and tax strategy to reduce the taxes owed. Before doing so, he consulted with a number of individuals about the actual strategy itself as well as the reputation of the company implementing it, including tax advisers at a Big 4 firm and attorneys at a law firm that provided a tax opinion letter on the strategy.
Fighting IRS Tax Penalties
IRS determined that the strategy was an abusive tax shelter, disallowed the tax benefits from it (namely, a $20 million paper loss) and imposed accuracy-related penalties under Code Sec. 6662. McNeill paid the deficiency and penalties but sought a refund of the penalties on the basis that he reasonably relied in good faith on the professional opinions and actions of competent tax and legal advisors.
IRS also asserted that McNeill made representations to the law firm that were false, including that he had the opportunity to make a return on his investment without regard to tax benefits and that his decision to enter the transactions was based on their economics. While the court found that these representations weren’t true, it found that they were consistent with his understanding of the scheme and what he was told about it.
The court also rejected IRS’s claim that McNeill should have known that the transaction, which promised “too good to be true” tax benefits, was abusive. The court concluded that, given McNeill’s level of sophistication with respect to the transaction, he independently investigated it and was consistently told that it was legitimate—by people who owed him a fiduciary duty to provide objective, professional advice and who “knew the partnership tax provisions well enough to paper the deal to their satisfaction”.
Getting IRS Penalties and Fees Reduced
Freeman Tax Law has extensive experience in dealing directly with the IRS. If you have received a notice from the IRS, or are currently dealing with the IRS and need assistance – we are here to help. Please contact our office to schedule a free, no-obligation tax consultation to discuss your tax situation.