Latest Article: Calculating the Sec 6707A Penalty: When a Return is not THE return--Yari v. Commissioner
David Neufeld today published his latest article in the Leimberg Information Services Inc. Income Tax Newsletter. The article discusses the recent Tax Court decision in Yari v. Commissioner that found that the first filed return is used to calculate the listed transaction penalty even when that return is replaced with a corrected return showing zero tax liability and zero impact from the listed transaction. Accordingly this taxpayer had a $100,000 penalty in a year when he had zero tax liability. The article is reproduced below.
Steve Leimberg's Income Tax Planning Email Newsletter - Archive Message #75
From: Steve Leimberg's Income Tax Planning Newsletter
Subject: David Neufeld on Yari v. Commissioner: When a Return is Not the Return for Purposes of Calculating the Section 6707A Penalty
David Neufeld provides members with his analysis of Yari v. Commissioner. David S. Neufeld is a tax and T&E lawyer in Princeton, NJ. He represents clients throughout the world, doing both planning and controversy work (administrative and Tax Court). David is also an expert witness in civil cases around the country arising from 419 plans. Most notably, David represents the government of the Island of Nevis, for which he has drafted several laws, including the Nevis LLC Ordinance and recent proposed amendments to permit series LLCs and cell captive insurance companies. For more, go to www.DavidNeufeldLaw.com
Now, here is David Neufeld’s commentary:
In Yari v. Commissioner, the Tax Court sided with the Service in upholding a$100,000 penalty under Section 6707A(b)(2)(A) assessed against Yari for failing to report a listed transaction, despite the fact that during the course of the case, Congress passed the Small Business Jobs Act of 2010 that retroactively modified how the penalty should be calculated. Yari is significant for a number of reasons, not the least of which is that is a case of first impression dealing with the proper calculation of penalties under Section 6707A(b). [TO READ MORE CLICK ON "READ MORE" TO THE RIGHT]
Here's one you need to be aware of...say Joe dies in 2011 and his estate is worth, at best, $2 million. No need to file an estate tax return if all is going to the widow, right? Well...maybe. Sure his $5 million lifetime exclusion is enough to absorb this $2 million without doing anything. And who would ever expect his wife to need anything more than her own $5 million exclusion to cover the money she got from Joe and her own $2 million, so why bother. And anyway, it costs, what, hundreds of dollars to file the return; money down the toilet.
But what if Joe died in an accident and his estate succeeds in obtaining a multi-million award? Or his life insurance was several million dollars. Or Mrs. Joe hits the lottery. Or Joe's business turns out to own a very valuable asset and Mrs. Joe sells it for the very windfall Joe had been chasing his whole life. Or her combined $4 million is invested really, really well. On Mrs. Joe's death her estate is worth $8 million (let's assume the current law has been retained). Do Joe's and Mrs. Joe's children take all $8 million since they can apply Mrs. Joe's $5 million (all still intact) and Joe's remaining $3 million (remember he had $5 million and his estate was $2 million, presumably leaving $3 million). Sorry, no, you lose.
Remember the hundreds of dollars and aggravation the family saved by not filing an estate tax return on Joe's death? Well, by not doing that Mrs. Joe's estate cannot claim the $3 million Joe left on the table. Lost. Vanished. Gone for good. Instead of applying all $8 million against Mrs. Joe's $8 million estate and having no...zip...zero federal estate tax, the estate will have to pay tax on $3 million. That's about $900,000 to Uncle Sam. Good for the federal deficit, bad for the Joe family. And all to save a few hundred dollars.
So what do we learn here? File the return on the first estate and make the appropriate election to use the DSUEA.
Next time...what if Mrs. Joe had remarried?