Even A Tax Lawyer Can Get The IRA Rollover Rules Wrong – Part 3

by Stinson Leonard Street - Employee Benefits & Compensation
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I blogged recently about a tax court case in which a tax attorney failed to follow the strict rules for IRA rollovers and wound up with a large tax bill. I made the point in the blog that the position taken by the tax attorney was supported by an IRS publication. I also blogged on the IRS’s later announcement that it would revise its publication and issue regulations consistent with the tax court’s ruling in the case although not enforce its new position until January 1, 2015.

As I noted in blog number 1, in addition to losing on the merits, the tax attorney was also hit with an understatement penalty for taking a position without substantial authority. The tax attorney asked the tax court to reconsider its decision, particularly in the light of the IRS publication and an IRS proposed regulation that supported the taxpayer’s position. The American College of Tax Counsel, a membership organization of experienced tax practitioners, filed an amicusbrief, arguing that the accuracy-related penalty should be eliminated on the rollover issue because the proposed regulation provided substantial authority for the taxpayer’s position.

The tax court denied reconsideration for two reasons. First, the court noted that the parties had settled the matter so any motion to reconsider was moot. Second, the court noted that the IRS had agreed to extend the benefit of its announcement postponing enforcement of its new position on rollovers to the tax attorney in the tax court case. That reduced the attorney’s tax liability and the understatement penalty.

The court order went on to state that although not addressed in its decision, the court had been aware of the IRS publication before the court issued its opinion. The court did not address the publication in its opinion because neither party addressed the publication in their filings. The court went on to note that IRS publications are not binding precedent and that taxpayers rely on them at their peril. The court said that the IRS publication would not constitute substantial authority for a tax return position. The tax court order did not address the fact that proposed regulations also supported the taxpayer’s position and that Treasury Reg. § 1.6662-4(d)(3)(iii) provides that proposed regulations are substantial authority for positions taken on tax returns.

The IRS uses its publications to explain the tax rules to taxpayers who may not be tax experts. The case on which the tax court relied for the proposition that a taxpayer relies at the taxpayer’s peril on an IRS publication was not a case in which understatement penalties were at issue. Instead, it was a case in which the court found that the publication would not support the tax principle for which the taxpayer sought reliance. Other tax cases have reached similar results: statements in IRS publications are not statements of law and do not bind the IRS. While it is clear that taxpayers rely on IRS publications at their peril with respect to underlying tax principles, it is not at all clear that, for penalty purposes, taxpayers may not rely on the publications. The cases cited do not go that far. It is unfortunate that the tax court seemed to conflate reliance on an IRS publication for the substantive tax point and reliance on the publication for penalty avoidance. I would hope that the IRS would not assess a penalty against a taxpayer who followed guidance in an IRS publication.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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