IRS Statistics of Income

The IRS has published it 2009 Statistics of Income (SOI) Bulletin. This publication has a wide range of tables, articles, and data that describe and measure elements of the U.S. tax system. This publication is available here.

Tax Court Rejects Everyone is Doing It As Reasonable Cause Penalty Defense In Son-of-Boss case

In 3k Investment Partners v. Commissioner; 133 T.C. No. 6 (9/3/09), the taxpayer, an "investor" in a Daugerdas / Jenkens deal, sought to assert this defense to a penalty and, in support of the defense, sought discovery from the IRS of all the Son-of-Boss opinions in its bowels or wherever. In his typical straight-forward fashion, Judge Thornton opined:

Petitioner alleges and respondent does not dispute that in connection with many Son-of-BOSS transactions, one or more law firms or accounting firms wrote opinion letters to the investors supporting the claimed tax treatment. Petitioner alleges, and respondent does not dispute, that respondent has a large number of these tax opinion letters. Petitioner contends: "The availability of a large number of law firms and accounting firms issuing tax opinion letters determining that so-called 'Son of Boss' transactions * * * would produce the tax results as reported by Petitioner on its subject tax return would bolster Petitioner's position that it had reasonable cause and that Petitioner acted in good faith." Similarly, at the hearing petitioner's counsel argued that "based upon the general consensus of national law firms across the country that were issuing tax opinion letters that were taking the same position as the Petitioner in my case was taking, I wanted to show that reasonable cause does exist to take the position that we took on the tax return."

Petitioner's argument appears to be a variant of the refrain, familiar to parents of teenagers, that "Everyone's doing it." For the same reason that this does not constitute reasonable cause for teenagers, it would not constitute reasonable cause for petitioner. Petitioner must establish the reasonableness of its position on the basis of the facts and merits of its own case. n6 See Avedisian v. Commissioner, supra ("each individual must rest on the validity of his own position under the applicable taxing provisions, independently of others"). The legal analysis, conclusions, and recommendations that some tax advisers may have given other taxpayers are irrelevant to the reasonableness of the positions the partnership took on its return. See P.T. & L. Constr. Co. v. Commissioner, 63 T.C. 404, 414 (1974).

n6 We also reject any suggestion that the requested information, which appears to involve only a small subset of tax advisers, shows any "general consensus" of tax advisers regarding Son-of-BOSS transactions.

With a follow-up punch, the Court held that the opinions were not relevant or likely to lead to the discover of admissible evidence, as required by the discovery rules.

Finally, the court held that the opinions sought were in any event tax return information prohibited from disclosure under § 6103. The court held that redaction of taxpayer identifying information did not make it any the less tax return information subject to the strictures of § 6103. Reliance on cases dealing with § 6110 is misplaced because that code section specifically lifts the veil if § 6103, with appropriate redactions, for the types of IRS general legal interpretation documents that Congress said should be in the public domain once shorn, by redaction, of taxpayer identification information.

IRS Expands Use of Reported Interest on Mortgage Payments

Banks and other mortgage lenders provide annual statements to the borrowers and the IRS of the mortgage interest they paid. The IRS can use the data to confirm the amount of an interest deduction claimed by the borrower. The data can also be used to identify potential nonfilers. The Wall Street Journal reports here that the IRS is now poised to use the data to identify discrepancies between the reported interest paid and a taxpayer's income.

Are Tax Collectors Your Friends?

The Wall Street Journal has an article this morning here on tax collectors' use of various "friend" sites to gather information to assist in tax collection. The anecdotal instances discussed involved state tax collection, but "An Internal Revenue Service spokesman declined to say whether its agents use social-networking sites to pursue delinquent taxes or assist audits."

Commonly Asked Questions of Work Status

The IRS has issued Notice 989 , "Commonly Asked Questions When IRS Determines Your Work Status is Employee". Interesting questions that relate to employee and independent contractor issues. You can see the notice here.

Legal Advice Issued to Program Managers

The IRS has issued a list of legal advice, signed by attorneys in the National Office of the Office of Chief Counsel and issued to Internal Revenue Service personnel who are national program executives and managers. They are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. See the list here.

Textron En Banc Decision -- Government Wins

The First Circuit has held that tax accrual workpapers disclosed to the outside accountants preparing the audited financial statements are not subject to the work product privilege. The decision, rendered en banc in a 3 - 2 split by the full court, reverses the prior panel's decision (a 2 -1 split). The opinion can be viewed here.

Tax talking heads had proclaimed loudly and often about this case for a long time and will now have something new to fulminate about. Much of the practicing bar will see the decision as taking from them some of the magic they offer clients for high fees and thus will complain loudly. Such magic and the fees it produces, after all, is as much their entitlement as, say, welfare for the indigent.

I think this quote from the majority en banc decision pretty much sums it up:

Textron apparently thinks it is "unfair" for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection. If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government unless privileged.

And, of course, the court held these documents were not privileged.

It is Not My Income - Is That Form 1099 Correct

The IRS matches third-party information reports with items reported on taxpayer’s tax returns. Typically this involves the IRS sending a CP2000 letter to a taxpayer advising that a W-2 or Form 1099 was not reported on the taxpayer’s tax return. We are now seeing many cases where in particularly Forms 1099 are being issued to taxpayers who did not work for the company shown on the Form 1099.


The United States Tax Court has recently addressed this issue in Martin v. Commissioner, T.C. Summary Opinion 2009-121, August 4, 2009. Pursuant to Section 7463(b), this decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.


On June 21, 1999, Steed A. Martin, Taxpayer, purchased a 1988 Toyota 4-Runner automobile. He financed the automobile through Heritage Community Credit Union (Heritage) by entering into a "Simple Interest Motor Vehicle Contract and Security Agreement" indicating that the price was $12,360.48, of which $8,872.34 was being financed with Heritage. Taxpayer stopped making payments on his loan with Heritage during 2001, and Heritage "charged-off" and "canceled" the $6,704.92 outstanding principal of Taxpayer’s loan.


Taxpayer was notified by Heritage in 2002 that his automobile was going to be repossessed, and soon thereafter a person came to his residence to repossess the automobile. Taxpayer turned over the keys for the automobile, and it was placed on a truck and transported from the vicinity of Taxpayer’s residence. Taxpayer did not subsequently see or have access to the automobile. During 2005 Heritage issued a Form 1099-C, Cancellation of Debt, to Taxpayer reflecting the cancellation of Taxpayer’s debt of $6,704.92. That information was also communicated to the Internal Revenue Service. Taxpayers did not report the $6,704.92 in income for 2005, and Respondent made an adjustment for increased income due to cancellation of indebtedness. The records of Heritage reflect that Taxpayer’s automobile was assigned for repossession.


At some point Taxpayer stopped making payments on the loan and was advised that the automobile would be repossessed. The automobile, which Taxpayer believed had a value equal to the outstanding principal on the loan, was taken from Taxpayer during 2002. Heritage had charged off the loan in 2001, but sent Taxpayer a Form 1099-C in 2005 reflecting cancellation of indebtedness income in the amount of the outstanding balance of the loan.


The only evidence in the record that supports Rrespondent’s determination of cancellation of indebtedness income is the Form 1099-C Heritage issued.


Section 6201(d) provides that in any court proceeding, where a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return (such as a Form 1099) filed by a third party, the Commissioner may have the burden of producing reasonable and probative information concerning the deficiency in addition to information on the information return.


Taxpayer disputed the correctness of the information return. Taxpayer testified that the automobile was repossessed by Heritage at a time when it had a value equal to the outstanding debt. That would mean that Heritage had received an asset with sufficient value to substantially reduce or eliminate the outstanding debt and would call in question whether the Form 1099-C was correct.


The Tax Court found that Taxpayer effectively called into question the validity of the Form 1099-C, and Commissioner did not placed in evidence any information that would rebut Taxpayer’s testimony, which is also supported by documentary evidence in the record. Therefore, the Tax Court found in accord with Section 6201(d), the Commissioner is not able to rely solely upon the Form 1099-C in support of the determination that Taxpayer has cancellation of indebtedness income.


Generally, a taxpayer must include income from the discharge of indebtedness. See Section 61(a)(12); sec. 1.61-12(a). Where indebtedness is being discharged, the resulting income would equal the difference between the amount due on the obligation and the amount paid, if any, for the discharge. See, e.g., Cronin v. Commissioner, T.C. Memo. 1999-22. This principle derives from the seminal case of United States v. Kirby Lumber Co., 284 U.S. 1 (1931), where the Supreme Court held that a taxpayer may realize income by paying an obligation at less than its face value.


Accordingly, income from cancellation of indebtedness would not include the entire amount of the outstanding debt if the creditor received payment or assets of value from the debtor. A cancellation of indebtedness generally produces income to the debtor equal to the difference between the amount due on the obligation and the amount paid for the discharge. If, however, no consideration is paid to or received by the creditor for the discharge, then the entire amount of the debt is considered income to the debtor. Section 61(a)(12).


The Tax Court accepted Taxpayer’s testimony on the value of the automobile, as an owner is presumed to know or have a good sense of the value of his property. There is no evidence in the record that is contrary to Taxpayer’s testimony. In addition, Taxpayer purchased the automobile during 1999 for $12,360.48. Two years later, when it was repossessed, a value of $6,704 would appear to be reasonable (one-half of its original value).


The Tax Court found under these circumstances, that the Form 1099-C has been refuted and discredited. Taxpayer showed that the debt was satisfied, and the Tax Court accordingly held that Taxpayer was not required to report cancellation of indebtedness income for 2005.


If there is any doubt that a taxpayer owes taxes as the result of an errouneous Form W-2 or Form1099, the taxpayershould challenge the IRS.

IRS Alerts Public to New Identity Theft Scams

The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury. For more information click here.

Should Cancellation of Credit Card Debt Be Cancellation of Debt Income?

Should the cancellation of credit debt be treated as cancellation of debt income. For an article on this issue click here.