U.S. Tax Court Rules in Favor of Good Faith Taxpayers
On March 1, 2011, the Tax Court held that a husband and wife were not liable for accuracy-related penalties related to their 2005 income tax return where they acted in good faith and made reasonable efforts to accurately report their income. The entire Bengtson v. Commissioner opinion is available here.
The married taxpayers made an express agreement with the wifes sister to invest in the shares of two companies. In 1999, 2000, and 2001, the sister purchased stock through her brokerage account with funds provided by the taxpayers. The investments completely devalued when one companys shares were delisted in 2001 and the other company ceased operations in 2002. The taxpayers requested information about the stock from the wifes sister, who did not comply with their requests. The taxpayers thereafter claimed a long-term capital loss from the investment in each company on their 2005 tax return. The Internal Revenue Service subsequently denied the capital losses on the basis that the stocks became worthless prior to 2005. Further, the IRS asserted that there was insufficient evidence to prove that the taxpayers were even the actual stock owners, since the wifes sister never provided such information. The IRS then went on to correct the taxpayers characterization of income from the sale of options, which was reported as a capital gain but should have been reported as ordinary income.
Ultimately, the husband and wife conceded that the sale of options should have been reported as ordinary income and that their stock investments became worthless prior to 2005, but argued that the IRS penalties were inapplicable due to reasonable cause and good faith. Responding to the taxpayers defense, the Tax Court noted that the taxpayers read IRS publications, took reasonable measures to properly report the sale of options, and sought to obtain the necessary stock information from the wifes sister. The court held that the sisters lack of responsiveness was irrelevant to its decision that the taxpayers actions were sufficient to clear them of accuracy-related penalties.
The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS in both the Tax Court and District Courts. You can contact an attorney by emailing us at contact@fidjlaw.com