TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Son-of-BOSS is one of the more infamous tax shelter scams of the late 1990s, early 2000s. The BASR Partnership engaged in a Son-of-BOSS tax shelter to save its partners millions in taxes.  The IRS proposed adjustments to BASR’s partnership return.  If the adjustments were sustained, BASR’s partners would have owed tax on $6.6 million of gain, plus penalties and interest.  BASR beat the government on procedural grounds.  It then got an award of attorney fees and costs against the government.

The IRS did not issue a Final Partnership Administrative Adjustment (FPAA) until after the normal period of limitations had expired. The government argued that the fraud of the return preparer extended the period of limitations.  The “return preparer” was an attorney at Jenkins & Gilchrist and not the accountant who actually prepared the returns.  The Court of Federal Claims rejected the government’s argument.  The Court of Appeals for the Federal Circuit affirmed.

While the case was pending in the claims court, BASR made a written offer to settle by paying $1 to the IRS. After the claims court was affirmed, BASR moved for an award of attorney fees and costs under Internal Revenue Code §7430, which allows a prevailing party to recover attorney fees from the government in a tax case.  The court granted the motion and awarded BASR attorney fees and costs of $314,710.69.  https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2010cv0244-76-0.

Under §7430, a court may award “litigation costs,” including attorney fees, to a taxpayer who is a “prevailing party” if the government’s position in a case involving the “determination, collection or refund” of any tax is not “substantially justified” and the taxpayer’s net worth does not exceed a statutory amount ($2 million for an individual and $7 million for an entity) on the date the case is filed.  A taxpayer who makes a “qualified offer” during the “qualified offer period” (i.e., from the date that the IRS issues the first notice of proposed deficiency for which administrative review is available until 30 days before the case is first set for trial) can be awarded litigation costs if the amount of the offer is equal to or less than the amount of the taxpayer’s liability as determined by the court.  Where there is a qualified offer, the taxpayer does not have to show that it was the “prevailing party” or that the government’s position was not substantially justified in order to be awarded litigation costs.  The litigation costs that can be awarded are those incurred after the offer is made.

In reaching its decision, the court rejected each of the government’s arguments: that BASR Partnership was not a party (a position that was contrary to IRS regulations); that a tax liability was not an issue (while the partnership is not taxable, its partners are); that the offer was not a “qualified offer” and was a sham; and that BASR did not incur costs, since the fees were paid by its partners.

The court awarded attorney fees incurred from the date of the $1 offer, including those incurred in preparing and defending the motion for fees. The court awarded fees in an amount above the statutory rate because of the complexity of the issues raised at both the trial and appellate court levels.

The moral of the story: if you are in a dispute with the IRS and the IRS has issued a thirty-day letter, make a qualified offer.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com