In Uncategorized on 03/20/2017 at 16:27

That seems to be the takeaway from Patrick Bitter, Jr., 2017 T. C. Memo. 46, filed 3/20/17. Pat’s prof’l S Corp fell foul of Situation 2 in Rev. Rul. 2004-20, 2004-1 C.B. 546.

This dealt with the SDLIA, whereby the S Corp pays life insurance premiums on the key employee (the sole shareholder, officer, director, etc.) and deducts the same. The premiums supposedly fund the defined benefit pension plan, but the death benefit under said plan is a puny fraction of the death benefit of the life insurance policy.

This is a major no-no.  And Pat’s deliction was not disclosing same on his individual return, earning him a Section 6707A 75% no-tell chop. Pat claims he put it on the 1120S, but that doesn’t get it, according to Appeals.

He’s got two other beefs, that this really wasn’t a Situation 2 but a whole ‘nother situation, and even if he’s wrong all the way, IRS got the arithmetic wrong by a factor of 200%. Appeals doesn’t buy either.

The problem comes up when Appeals bounces Pat and he goes for a CDP. As the 6707A no-tell is an assessable penalty, IRS need send no SNOD, so Pat can’t petition.

If he has a beef, he must either wait for the NITL and file a 12153 or go to Appeals on a post-examination conference. Pat asked for the latter.

Judge Lauber: “As assessable penalties, section 6707A penalties are not subject to deficiency procedures.  See Smith v. Commissioner, 133 T.C. 424, 428-430 (2009).  Notwithstanding the absence of a notice of deficiency, a taxpayer may be able to dispute his liability for such penalties (without paying them first) by resisting IRS collection efforts through the CDP process and then seeking review in this Court.  See id. at 430 n.6 (citing Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008), ] and Callahan v. Commissioner, 130 T.C. 44, 48 (2008)); cf. Gardner v. Commissioner, 145 T.C. 161 (2015) (upholding Tax Court jurisdiction to review section 6700 penalties in the CDP context).  But this route to prepayment judicial review is available only if the taxpayer ‘did not otherwise have an opportunity to dispute such tax liability.’  Sec. 6330(c)(2)(B).

“For example, in Yari v. Commissioner, 143 T.C. 157 (2014), aff’d, __ F. App’x __, 2016 WL 5940054 (9th Cir. Oct. 13, 2016), the IRS assessed a section 6707A penalty against the taxpayer and issued him a notice of intent to levy. After receiving a notice of determination sustaining the levy, the taxpayer petitioned our Court.  There was no evidence in the record that the taxpayer had received notice of the assessment, that he had been offered the opportunity to protest the assessment, or (if so) that he had taken advantage of that opportunity. Under these circumstances, we allowed the taxpayer to contest the amount of the penalty because he had not had a prior opportunity to dispute it.  Id., 143 T.C. at 162.” 2017 T. C. Memo. 46, at pp. 9-10. (Footnote omitted).

I blogged Yari when it first came out. See my blogpost “The $100,000 Misunderstanding,” 9/15/14.

Pat’s conference gave him the opportunity to contest, and he did, but lost all the way.

But even if he hadn’t gone to Appeals and conferred, but waited for the NITL instead, if he got the assessment notice (unlike Steve Yari, who claims he didn’t and IRS didn’t prove that he did), he had the opportunity and didn’t avail himself thereof.

Either way, Pat, no second chance in Tax Court. Maybe not even a first chance.

Of course, all is not lost, Pat.

“Although petitioner cannot contest his liability for the penalties in this CDP case, he does have a judicial remedy.  As the IRS informed him when sustaining the penalties after the initial Appeals Office conference:  ‘If you want to appeal the penalty assessment, you must file a formal suit with either the United States District Court or the United States Court of Federal Claims’ after first paying the balance due on the assessed penalties and filing a refund claim with the IRS.” 2017 T. C. Memo. 46, at p 13, footnote 8.


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