In Uncategorized on 02/10/2016 at 15:57

But It Isn’t Advice

That’s Judge James S. (“Big Jim”) Halpern’s take on Brinks Gilson & Lione A Professional Corporation, Formerly Brinks Hofer Gilson & Lione A Professional Corporation, 2016 T. C. Memo. 20, filed 2/10/16.

Brinks & Co. played the zero-out gambit, more particularly bounded and described in my blogpost “Over-Compensation,” 3/31/11, which case got affirmed by Seventh Circuit, whence Brinks & Co would be appealed.

Of course, the gambit loses. Brinks & Co are fighting the ten-and-ten chop, as they’re a C Corp and the magic numbers are 10% of understatement or $10 million, which Brinks & Co hits. They’re a heavy-hitting Chicago IP firm.

I won’t trek through the 38 (count ‘em, 38) pages of Judge Big Jim’s prose that show that the “substantial authority” Brinks & Co want to interpose between IRS and their wallets isn’t.

Here’s the gist of the Brinks & Co argument. “If petitioner is correct that it had substantial authority for its position, the disallowance of a portion of its claimed officer compensation deduction for each year would not increase its ‘understatement’ within the meaning of section 6662(d)(2)(A). In that case, the substantial understatement penalty would not apply to the portion of the underpayment for each year attributable to the disallowance of part of those deductions, regardless of whether petitioner had reasonable cause and acted in good faith. Moreover, a determination that petitioner had substantial authority for its position would prevent imposition of the negligence penalty as well. Taking a position that has a ‘reasonable basis’ is not negligent, sec. 1.6662-3(b)(1), Income Tax Regs., and substantial authority is a more stringent standard than reasonable basis, sec. 1.6662-4(d)(2), Income Tax Regs.” 2016 T. C. Memo. 20, at p. 11.

Clear? Thought not.

Howbeit, Judge Big Jim finds no substantial authority that it’s OK to zero-out each year’s earnings by divvying the loot amongst the shareholder-partners as compensation, not dividends. It’s the old outside-investor test; would an outside equity investor, not an employee, be satisfied with a dividend of zero, in a non-public company, year after year?

And the argument that law firms have no capital is beside the point. The shareholders bought in based on book value, and that was in the millions. And though they had to sell for book if they left the firm, picking up accumulated growth when they sell compensates for paying for accumulated growth when they bought in.

So what else is new?

Well, Brinks & Co used M, a well-known Big Five accounting firm, which passed on its books and tax returns for all those years. And M never said Word One about compensation-vs-dividends.

Not enough for good-faith reliance, says Judge Big Jim.

“Petitioner argues that M’s failure to apprise it of any issue concerning the deductibility of the yearend bonuses constituted ‘advice’ on which it reasonably relied. The regulations define advice as ‘any communication * * * setting forth the analysis or conclusion of a person, other than the taxpayer, provided to (or for the benefit of) the taxpayer and on which the taxpayer relies * * * with respect to the imposition of the section 6662 accuracy-related penalty.’ The parties have stipulated that, before filing its return for each of the years in issue, petitioner did not specifically ask M whether the full amount of the yearend bonuses it paid to shareholder attorneys was deductible as compensation for services and M did not comment on the deductibility of the bonuses. In effect, petitioner argues that silence can be a ‘communication’. In that regard, petitioner observes that the regulations do not require advice to take ‘any particular form.’” 2016 T. C. Memo. 20, at p. 31 (Name and citation omitted).

Maybe not form, but content is specific, when you’re talking advice. You have to tell the adviser all the facts, tell the adviser why you’re doing what you’re doing, and the adviser can’t make unreasonable assumptions. Likewise the 31 C.F.R. 10.34(d) (2008) regs don’t require the adviser (if a Circular 230 type, as M surely is) to sweat the client. So, says Judge Big Jim, “Silence cannot qualify as advice because there is no way to know whether an adviser, in failing to raise an issue, considered all of the relevant facts and circumstances, including the taxpayer’s subjective motivation. Indeed, an adviser’s failure to raise an issue does not prove that the adviser even considered the issue, much less engaged in any analysis, or reached a conclusion.” 2016 T. C. Memo. 20, at p. 32.

Talk may be not be cheap when dealing with lawyers and CPAs. But silence can be even more expensive.


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