Why this Case is Important:
This case is a great example of why attention to detail is important when dealing with the IRS, as something as seemingly insignificant as a missing or invalid signature can cost taxpayers thousands of dollars.
Facts:
The taxpayers in Gregory
filed their 2015 income tax return claiming a small refund. The IRS adjusted that return and assessed additional taxes, which assessment the taxpayers accepted and paid. The taxpayers later consulted with a tax preparer who advised them that they had overpaid their taxes by over $20,000. With that preparer’s assistance, the taxpayers submitted an amended return claiming a refund. Rather than the taxpayers signing the return, the tax preparer signed on their behalf. However, because the preparer did not submit an IRS power of lawyer with the return, that signature was invalid. Despite the lack of a valid signature, the IRS accepted the return and refunded all but $1,039 of the requested amount, which amount was related to a housing exclusion denied by the IRS. After receiving the refund, the taxpayers filed suit to recover the $1,039 that the IRS denied. The IRS filed a motion to dismiss the suit based on the taxpayers not having signed the amended return, asserting that the taxpayers had not filed a valid claim for refund, which is a prerequisite to filing suit. The taxpayers countered that because the IRS had already accepted the amended return and issued most of the requested refund, it no longer had the right to contest the validity of the return.
Law and Conclusion:
Under applicable case law and relevant provisions of the Internal Revenue Code and related regulations, to file a valid claim for refund with the IRS and obtain jurisdiction to file a refund suit against the U.S. government, a taxpayer generally must pay the tax subject to refund in full, file a valid claim for refund (which can be accomplished through the filing of an amended return), and provide the amount, date, and place of each payment to be refunded. At issue in this case was whether the taxpayers’ unsigned amended return constituted a valid claim for refund. Federal regulations state that, for a refund claim to be valid, it must be signed under penalties of perjury. That being the case, the taxpayers unsigned amended return did not constitute a valid claim for refund. Accordingly, with the Court rejecting the taxpayers’ argument that the IRS had waived its right to question the validity of the return, it found in favor of the IRS and dismissed the taxpayers’ suit.
IMPACT OF MARITAL property SETTLEMENT ON TAX BASIS – Matzkin and Schroeder v. Commissioner,
TC Memo 2020-117 (2020)
Why this Case is Important:
When a taxpayer pays cash in exchange for a business interest, the general rule is that his or her tax basis in that interest will increase by the amount of the payment. This case is an example of an exception to that general rule, which may catch taxpayers by surprise following a divorce.
Facts:
This case involved a recently divorced couple. The husband owned an LLC, taxed as a partnership, which operated a dental practice. In the divorce, his LLC interest was valued at $21 million. Under Auckland law, that interest was deemed a marital asset and the couple agreed to a property settlement under which they would divide their marital assets evenly. Because the wife did not want to be part of the dental practice, the husband agreed to pay her $10.5 million rather than transferring to her a 50% share of the LLC interest. Following the divorce, the husband sold his interest in the practice for over $90 million. In reporting his capital gain from the sale (on their final joint tax return), the taxpayers included in his tax basis the $10.5 million he paid his ex-wife under their property settlement. The IRS examined the return and adjusted it to exclude this amount from his basis. The IRS issued a notice of deficiency assessing a tax liability of over $800,000. The taxpayers filed a Tax Court petition contesting the deficiency.
Law and Conclusion:
When a taxpayer sells a capital asset, the taxpayer’s capital gain on that sale is equal to the difference between the amount realized from the sale (generally the purchase price) and the taxpayer’s basis in the asset. A partner’s basis in his or her partnership interest is generally determined under Sections 705, 722, 742, and 752 of the Internal Revenue Code. Under these Sections, a partner’s initial basis in his or her partnership interest generally is equal to the amount paid to the partnership in exchange for the interest. This basis is only increased by additional contributions to the partnership
of cash or property, and the partner’s distributive share of the partnership’s taxable income, tax-exempt income, and excess depletion deductions. In this case, the husband’s payment to his ex-wife was not a contribution to the LLC and did not impact his distributive share. Therefore, the Court determined that it did not increase his basis in his LLC interest and found in favor of the IRS.
