Tax News

CCH (cch.taxgroup.com) reports:

  The IRS did not show by clear and convincing evidence that two attorneys filed their returns with the intent to evade tax with regard to contingency fees; consequently, the three-year period of limitations under Code Sec. 6501(a) applied, and the IRS was barred from assessing any deficiencies. As a result of their contingency fee agreement with their landowner clients, the taxpayers believed they had an ownership interest in land that was the subject of litigation. Pursuant to this interest, the attorneys, representing themselves as landowners, made an election to defer their contingency fee income under Code Sec. 1033(a). However, state law does not convert an attorney-client relationship into a partnership or joint venture for purposes of federal tax law; thus, the nonrecognition provisions of Code Sec. 1033(a) were not applicable to the attorneys.

  Although the taxpayers erroneously believed that the legal fees qualified for nonrecognition treatment and made an underpayment of tax based on that belief, their behavior with respect to the understatements did not demonstrate fraudulent intent. The attorneys did not understate their income, maintain inadequate records, present implausible or inconsistent explanations of their behavior or conceal income or assets. Furthermore, they filed tax returns, cooperated with tax authorities throughout the case and did not engage in illegal activities, file false documents or deal in cash. Because the statute of limitations was not extended due to fraud, the IRS could not assess deficiencies with respect to the tax year at issue.

D.C. Loeb, TC Memo. 2009-6, Dec. 57,707(M)

Other References:

 
Code Sec. 1033

  CCH Reference - 2009FED ¶29,650.71

 
Code Sec. 6501

  CCH Reference - 2009FED ¶38,967.28

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