UNIVERSITY OF HOUSTON
SCHOOL OF LAW

PAST TAX PROCEDURE EXAMINATIONS

UNIVERSITY OF HOUSTON SCHOOL OF LAW
TAX PROCEDURE EXAMINATION
FALL 2008

Instructions:

1.. Resource Materials: Students may use only the following in the examination:
    a. the text book;
    b. the Code;
    c. the student's personal notes.

2. A computer may be used to access the resource materials and to type the answers to the examination. If you type the answers, you may use either MS Word or Word Perfect or a processor that can be imported into those formats. If you are not sure whether your processors meet these criteria, ask before the examination. For all examination answers received in computer format, I will have my assistant cut and paste them into new files so as to scrub any identifier information before I review the examination answers.

3. The examination is two hours.

3. Please read the facts and the questions carefully.

4. Please think your answer through. I recommend that you outline your answer on a separate sheet of paper or in a separate word processor file before you start answering. Succinct, correct answers are valued over long, unfocused correct answers. Each answer should be as crisp as possible (yes or no, if possible, followed by any explanation you feel appropriate).

5. Some questions are framed as advice that you will provide orally to a client. Advise the client in plain, succinct answers. Since you would not normally cite Code sections to a client, be sure and conclude your answer with a short “Note to File” citing the specific Code sections (subsections as appropriate) forming the basis for your answer.

6. Please letter/number your answers using the same letter/number used in the question.

7. If you are handwriting your examination, please write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

8. If you are turning in hard copy answers (either handwritten or manually typed), please provide prominently on the bluebook or other sheet your student number and whether you are an LL.M. or J.D. candidate. If you are turning in a computer disk, please provide the same information in writing on a label on the disk and also at the beginning of your word processor file and name your file your student number with the degree you are working on (e.g., 727 LL.M or 7032 JD).

9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

10. Assume today’s date for all questions unless indicated otherwise. Examination:

1. Weight: 35%

    Your client (“T”), a large corporation, timely filed its 2005 and 2006 returns on 3/15/06 and 3/15/07, respectively. The normal three-year statute of limitations closes on 3/15/09 and 3/15/10, respectively. On Monday, 12/8/08, the agent delivers to T the following along with a cover letter:

    (1) a “30-day” letter;

    (2) an RAR (“revenue agent’s report”) indicating proposed adjustments increasing taxable income by $20,000,000 ($10,000,000 for each of the two years), resulting in a tax for the two years of $7,000,000 and a $200,000 negligence penalty for 2005 (based on $1,000,000 of the proposed adjustment for the year 2005);

    (3) a Form 870 Waiver of Restrictions on Assessment with respect to the amounts so proposed; and

    (4) a consent to extend the statute of limitations, Form 872 providing an extension for the 2005 year through 3/15/10 (the date that the statute for the 2006 year will expire).

In the cover letter delivered with the foregoing, the agent explains that, although T would normally have the right to go to the IRS Appeals Office by protesting the 30-day letter to see if any differences could be resolved, because of the nature of the matter and the expected time to resolve in Appeals, a consent to extend the statute of limitations for 2005 will be required in order to permit the matter to be considered by the Appeals Office. The agent advises that, unless he receives the Form 872 from you by Wednesday, 1/2/09, he will cause the notice of deficiency for both years to issue no later than Thursday, 2/28/09. You believe that about $4,000,000 of the agent's proposed adjustments are wrong and that the negligence penalty proposal is wrong and should be contested. If you contest the agent’s proposed adjustments, therefore, you might be able to knock out $1,400,000 in tax (the corporate tax rate of .35 times the $4,000,000) and the penalty of $200,000 and interest on both. You are also aware of a potential adjustment in 2005 related to a non-tax shelter item that would add $7,500,000 in income that the agent did not spot. The tax that would arise from adding the unspotted $7,500,000 to income is $2,625,000. As to this unspotted potential adjustment, T’s Tax Director strongly believes that he had at least substantial authority to omit the item from the original return, so the Tax Director does not feel that, even if it is discovered and prevails as to the principal tax liability, the IRS could successfully assert the accuracy related penalty. So the amount potentially at risk with respect to that unspotted adjustment is just the tax of $2,625,000. You concur with the Tax Director that T would not be subject to the accuracy related penalty on this item. You have paid careful attention during the audit and you do not believe that there is anything in the IRS's audit files that would “red flag” the unspotted issue to an Appeals Officer, but you also know that a curious and intelligent Appeals Officer might sniff it out. You also know that the Appeals Officers as a group are a lot sharper than this agent and you cannot therefore foreclose the possibility that the Appeals Officer would spot this new issue. Advise the Tax Director and the CFO as to T's alternatives at that point, addressing specifically the following questions. You may use conclusions without detailed explanation, but in doing so please cite the Code Sections. Remember that you are addressing your answers to a sophisticated Tax Director who understands the lingo; the CFO wants the conclusions and will rely upon the Tax Director for the details behind the Code Sections cited.

    a. Whether and where T can litigate the adjustments proposed in the RAR and, if so, what are the risks in the various forums for litigation as to the unspotted adjustment? Assume in answering this question that you do not believe that T would obtain any relief in the Appeals Office with respect to the issues the corporation would protest. In answering this question, advise how to best minimize any risk with respect to the unspotted issue.

    b. What are cash flow implications to T of the various forums in which T may litigate? Assume that the interest on the proposed deficiency and penalty through the date of your advice (12/13/08) is approximately $1,000,000.

    c. If T were to choose to litigate in the Tax Court where T is not required to pay first to litigate and payment may await the outcome of the litigation, is there any reason that T might consider paying anyway and, if so, when should T pay, how should T pay it, and how much should T pay?

    d. What would be the effect if your client were to pursue a successful appeal with the IRS Appeals Office, resulting in a $4,000,000 decrease in the proposed adjustments and no assertion of the negligence penalty, and entered a Form 870-AD with the IRS?

    e. What is the effect of the Form 870 if T were to execute and file it with the IRS on January 1, 2009?

-------------------

CAVEAT FOR QUESTIONS 2-4: The year convention used is 01, 02, etc., and is not 2001, 2002. The 01 is just to establish the first year and the subsequent year indications relate to 01. Where I give a day for a date, just assume that the day indicated falls on that date. Read carefully and answer on the basis of the questions asked because they are not answer-date specific.

2. Weight: 35%

For each question state the date and the Code Section(s) relied upon. If for any reason, you cannot answer with a date certain, explain how the date is derived. For example, if the date is x number of days from an event that has occurred or has not yet occurred, that will be sufficient. The subparts of this question are progressive. In each subpart, you may assume the facts that preceded, unless I state otherwise.

    a. T, an individual, filed her year 01 federal income tax return (Form 1040) on 3/28/02. Assuming that the return is not fraudulent and there is no 25% omission of income, when does the statute of limitations on assessment of additional tax for the year 01 expire?

    b. Assuming that the IRS sends T a 30-day letter on 1/15/05, when does the statute of limitations on assessment expire?

    c. Assuming that T signs a Form 870, waiver of restrictions on assessment, on Wednesday, 2/1/05:

        (1) when does the statute of limitations on assessment expire? (State the date but not the day.)

        (2) when is the earliest the IRS may assess? (State the date but not the day of the week.)

        (3) what happens if the IRS assesses the tax on Monday, 4/17/05?

        (4) what happens if the IRS assesses the tax on Monday, 5/1/05?

        (5) what happens if the IRS assesses the tax on Tuesday, 5/1/06?

For subsections d. and e. make no further assumption about a Form 870; indeed, assume that the taxpayer did not execute and file a Form 870.

    d. Assume that, on 1/30/05, T executes a Form 872-A. What is the earliest date the IRS may assess?

    e. Assume that on Friday, 4/1/05, the IRS issues a notice of deficiency to T. When is the earliest date the IRS may assess under the following scenarios:

        (1) T does not petition the Tax Court?

        (2) T does petition the Tax Court, the Tax Court enters its decision on 6/1/07, and the taxpayer appeals to the Court of Appeals on 8/30/07 (the 90th day, which is the last day an appeal may be taken)?

3. Weight 15%

    On 3/1/02, A, an individual files his 01 Form 1040, individual income tax return, reporting tax of $1,000,000. The return is non-fraudulent and does not omit 25% of gross income. During the 03 year, the IRS audits the 01 Form 1040. On 12/28/03, the IRS sends a 30 day letter and an agent’s report proposing an additional assessment of $100,000. The taxpayer timely protests on 1/14/03, but has since heard nothing from the IRS. The taxpayer then comes to your office with a notice and demand for payment dated 6/14/05 and a notice of intent to levy dated 9/15/05. He wants to know his rights and, if he has any, how to pursue them. Advise him, but in answering do not assume any facts not given except that the notice and demand for payment was contemporaneous with the assessment. Also, remember that this is a client, so express your advice as you would talk to a client.

4. Weight: 15%

On 3/15/02, A, an individual, files his 01 tax return. A reported on that return only his year 01 wages of $100,000 and omitted $50,000 in year 01 consulting income for which the payor did not give him a Form 1099. On 4/1/02, A meets you at a cocktail party. Upon your advising A what you do (tax lawyer extraordinaire (although modestly stated), a description you give with all the clarity you can muster after three margaritas), A says that he would like to meet with you. You meet on 4/7/02. A advises you about the return he just recently filed and asks your advice as to his options and exposures. Advise A as to his civil and criminal exposures. (As to his criminal exposure, address only the major crimes in the Internal Revenue Code; do not address crimes in other federal laws.) Keep in mind that the discussion is a preliminary discussion to give the client an idea of the range of matters he should consider without too much detail. Attachments:

[END OF 2008 EXAMINATION QUESTIONS]

Attachments to 2008 Examination
Form 870
Form 872
Form 872-A
Form 872-AD

UNIVERSITY OF HOUSTON SCHOOL OF LAW
TAX PROCEDURE EXAMINATION
FALL 2007

Instructions:

1. Resource Materials: Students may use only the following in the examination:
1. the text book;
2. the Code;
3. the student's personal notes.

2. A computer may be used to access the resource materials and to type the answers to the examination. If you type the answers, you may use either MS Word or Word Perfect or a processor that can be imported into those formats. If you are not sure whether your processors meet these criteria, ask before the examination. For all examination answers received in computer format, I will have my assistant cut and paste them into new files so as to scrub any identifier information before I review the examination answers.

3. The examination is two hours.

3. Please read the facts and the questions carefully.

4. Please think your answer through. I recommend that you outline your answer on a separate sheet of paper or in a separate word processor file before you start answering. Succinct, correct answers are valued over long, unfocused correct answers. Each answer should be as crisp as possible (yes or no, if possible, followed by any explanation you feel appropriate).

5. Some questions are framed as advice that you will provide orally to a client. Advise the client in plain, succinct answers. Since you would not normally cite Code sections to a client, be sure and conclude your answer with a short “Note to File” citing the specific Code sections (subsections as appropriate) forming the basis for your answer.

6. Please letter/number your answers using the same letter/number used in the question.

7. If you are handwriting your examination, please write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

8. If you are turning in hard copy answers (either handwritten or manually typed), please provide prominently on the bluebook or other sheet your student number and whether you are an LL.M. or J.D. candidate. If you are turning in a computer disk, please provide the same information in writing on a label on the disk and also at the beginning of your word processor file.

9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

10. Assume today’s date for all questions unless indicated otherwise. Examination:

1. Weight: 35%

Your client ("T"), a large corporation, timely filed its 2004 and 2005 returns on 3/15/05 and 3/15/06, respectively. The normal three-year statute of limitations closes on 3/15/08 and 3/15/09, respectively. On Wednesday, 12/5/07, the agent delivers to the client the following along with a cover letter:

    (1) a "30-day" letter;

    (2) an RAR ("revenue agent’s report") indicating proposed adjustments increasing taxable income by $20,000,000 ($10,000,000 for each of the two years), resulting in a tax for the two years of $7,000,000 and a $200,000 negligence penalty for 2004 (based on$1,000,000 of the proposed adjustment for the year 2004);

    (3) a Form 870 Waiver of Restrictions on Assessment with respect to the amounts so proposed, and

    (4) a consent to extend the statute of limitations, Form 872 providing an extension for the 2004 year through 3/15/09.

In the cover letter delivered with the foregoing, the agent explains that, although the corporation would normally have the right to go to the IRS Appeals Office pursuant to a protest of the 30-day letter to see if any differences could be resolved, because of the nature of the matter and the expected time to resolve in Appeals, a consent to extend the statute of limitations for 2004 will be required in order to permit the matter to be considered by the Appeals Office. The agent advises that, unless he receives the Form 872 from you by Wednesday, 1/2/08, he will cause the notice of deficiency to issue no later than Thursday, 2/28/08. You believe that about $4,000,000 of the agent's proposed adjustments are wrong and that the negligence penalty proposal is wrong and should be contested. If you contest the agent’s proposed adjustments, therefore, you might be able to knock out $1,400,000 in tax (the corporate tax rate of .35 times the $4,000,000) and the penalty of $200,000 and interest on both. You are also aware of a potential adjustment related to a non-tax shelter item that would add $7,500,000 in income that the agent did not spot. The tax that would arise from adding the unspotted $7,500,000 to income is $2,625,000. As to this unspotted potential adjustment, T’s Tax Director strongly believes that he had at least substantial authority to omit the item from the original return, so the Tax Director does not feel that, even if it is discovered and prevails as to the principal tax liability, the IRS could successfully assert a penalty. So the amount potentially at risk with respect to that unspotted adjustment is just the tax of $2,625,000. You concur with the Tax Director. You have paid careful attention during the audit and you do not believe that there is anything in the IRS's audit files that would “red flag” the issue to an Appeals Officer, but you also know that a curious and intelligent Appeals Officer might sniff it out. You also know that the Appeals Officers as a group are a lot sharper than this agent and you cannot therefore foreclose the possibility that the Appeals Officer would spot this new issue. Advise the Tax Director and the CFO as to T's alternatives at that point, addressing specifically the following questions. You may use conclusions without detailed explanation, but in doing so please cite the Code Sections. Remember that you are addressing your answers to a sophisticated Tax Director who understands the lingo; the CFO wants the conclusions and will rely upon the Tax Director for the details behind the Code Sections cited.

    a. Whether and where T can litigate the adjustments proposed in the RAR and, if so, what are the risks in the various forums for litigation as to the unspotted adjustment? Assume in answering this question that you do not believe that T would obtain any relief in the Appeals Office with respect to the issues the corporation would protest. In answering this question, advise how to best minimize any risk with respect to the unspotted issue.

    b. What are cash flow implications to T of the various forums in which T may litigate? Assume that the interest on the proposed deficiency and penalty through the date of your advice (12/6/07) is approximately $1,000,000.

    c. If T were to choose to litigate in the Tax Court where T is not required to pay first to litigate and payment may await the outcome of the litigation, is there any reason that T might consider paying anyway and, if so, when should T pay, how should T pay it, and how much should T pay?

    d. What would be the effect if your client were to pursue a successful appeal with the IRS Appeals Office, resulting in a $4,000,000 decrease in the proposed adjustments and no assertion of the negligence penalty, and entered a Form 870-AD with the IRS?

    e. What is the effect of the Form 870 if T were to execute and file it with the IRS on January 1, 2008?

-------------------

CAVEAT FOR QUESTIONS 2-4: The year convention used is 01, 02, etc., and is not 2001, 2002. The 01 is just to establish the first year and the subsequent year indications relate to 01. Where I give a day for a date, just assume that the day indicated falls on that date. This means that you cannot use today’s date as the date of the answer. Read carefully and answer on the basis of the questions asked because they are not answer date specific.

2. Weight: 35%

For each question state the date and the Code Section(s) relied upon. If for any reason, you cannot answer with a date certain, explain how the date is derived. For example, if the date is x number of days from an event that has occurred or has not yet occurred, that will be sufficient. The subparts of this question are progressive. In each subpart, you may assume the facts that preceded, unless I state otherwise.

    a. T, an individual, filed her year 01 federal income tax return (Form 1040) on 3/28/02. Assuming that the return is not fraudulent and there is no 25% omission of income, when does the statute of limitations on assessment of additional tax for the year 01 expire?

    b. Assuming that the IRS sends T a 30-day letter on 1/15/05, when does the statute of limitations on assessment expire?

    c. Assuming that T signs a Form 870, waiver of restrictions on assessment, on Wednesday, 2/1/05:

        (1) when does the statute of limitations on assessment expire? (State the date but not the day.)

        (2) when is the earliest the IRS may assess? (State the date but not the day.)

        (3) what happens if the IRS assesses the tax on Monday, 4/17/05?

        (4) what happens if the IRS assesses the tax on Monday, 5/1/05?

        (5) what happens if the IRS assesses the tax on Tuesday, 5/1/06?

For subsections d. and e. make no further assumption about a Form 870; indeed, assume that the taxpayer did not execute and file a Form 870.

    d. Assume that, on 1/30/05, T executes a Form 872-A. What is the earliest date the IRS may assess?

    e. Assume that on Friday, 4/1/05, the IRS issues a notice of deficiency to T. When is the earliest date the IRS may assess under the following scenarios:

        (1) T does not petition the Tax Court?

        (2) T does petition the Tax Court, the Tax Court enters its decision on 6/1/07, and the taxpayer appeals to the Court of Appeals on 8/30/07 (the 90th day, which is the last day an appeal may be taken)?

3. Weight 15%

T reported $500,000 income reported on her 01 income tax return which she filed on 8/1/02 after receiving an extension. The $500,000 she reported arose from salary, dividends and interest. She failed to report $100,000 of income that she earned as a finder’s fee for putting a deal together independently of her regular employment. She says that she just forgot about that income when delivering her papers to the return preparer and had not received any type of 1099 or other information document for it that would have reminded her of it. The IRS audits. On 11/1/04, the IRS sent her a notice of deficiency proposing tax and the 20% accuracy related penalty, with respect to the $100,000 omitted income. Upon questioning, you have determined that your client did not willfully omit the income from her return and are satisfied that you can defend any allegation of fraud that the IRS could make if it chose to make such an allegation.

    a. What is the last day that T can file a petition with the United States Tax Court?

    b. Should T file a petition in the Tax Court?

    c. Should T pay the tax and file a claim for refund? If your answer is yes, explain the steps required.

    d. What is the last day that the IRS can assess additional tax with respect to T’s 01 tax return under either of these scenarios if T does not file in the Tax Court?

    e. What is the last day that the IRS can assess additional tax with respect to T’s 01 tax return, if she had filed this tax return on 3/1/02, instead of 8/1/02?

4. Weight: 15%

On 3/15/02, A, an individual, files his 01 tax return. A reported on that return only his year 01 wages of $100,000 and omitted $50,000 in year 01 consulting income for which the payor did not give him a Form 1099. On 4/1/02, A meets you at a cocktail party. Upon your advising A what you do (tax lawyer extraordinaire, a description you give as tastefully as you can after three margaritas), A says that he would like to meet with you. You meet on 4/7/02. A advises you about the return he just recently filed and asks your advice as to his options and exposures. Advise A as to his civil and criminal exposures. (As to his criminal exposure, address only the major crimes in the Internal Revenue Code; do not address crimes in other federal laws.) Keep in mind that the discussion is a preliminary discussion to give the client an idea of the range of matters he should consider without too much detail.

[END OF EXAMINATION QUESTIONS]

Attachments:
Form 870
Form 872
Form 872-A
Form 872-AD

Fall 2006

UNIVERSITY OF HOUSTON SCHOOL OF LAW
TAX PROCEDURE EXAMINATION
FALL 2006

Instructions:

1. Resource Materials: Students may use only the following in the examination:
    a. the text book;
    b. the Code;
    c. the student's personal notes.

2. The examination is two hours.

3. Please read the questions carefully.

4. Please think your answer through, preferably outlining your answer on a separate sheet of paper before you start answering. Succinct, correct answers are valued over long, unfocused correct answers. Each answer should be as crisp as possible (yes or no, if possible, followed by any explanation you feel appropriate).

5. Each of the answers assume that you are advising a client. Please advise the client in plain, succinct answers. Since you would not normally cite Code sections to a client, be sure and conclude your answer with a “Note to File” citing the specific Code sections (subsections as appropriate) forming the basis for your answer.

6. Please letter/number your answers using the same letter/number used in the question.

7. If you are handwriting your examination, please write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

8. Please indicate on your blue book (or other examination answer paper) whether you are an LL.M. or J.D. candidate.

9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

10. Assume today’s date for all questions unless indicated otherwise. Examination:

1. Weight: 25%

Ms. Johnson comes to you on December 7, 2006 with the following facts: She filed her 2005 return on April 15, 2006. She reported her salary of $500,000 and claimed appropriate deductions. She advises you that she is now concerned that she omitted $100,000 in alimony income. She says that, at an early Christmas cocktail party just yesterday (December 6, 2006) she heard that alimony might be taxable. She advises she was divorced in January 2005 and, pursuant to the divorce, began receiving alimony on March 1, 2005 at the rate of $10,000 per month. She says that, at the time of filing her 2005 return on April 15, 2006, she did not realize the alimony income was taxable. You review the divorce settlement agreement which she had signed, and the alimony paragraph states that the parties acknowledge that the payments will be income to the wife and deductible to the husband. You confirm to Ms. Johnson that the alimony is indeed taxable to her.

a. Is Ms. Johnson required to file an amended return?

b. If she is not required to file an amended return, should she file an amended return?

c. What is the civil tax statute of limitations if Ms. Johnson does not file an amended return?

d. What is the civil tax statute of limitations if Ms. Johnson does file an amended return?

2. Weight: 30%

Client B comes to you on December 7, 2006. Client B was the CFO for a service organization, a local accounting firm, which operates in corporate form and is taxed as a C Corporation. The corporation began experiencing major financial problems starting in early 2005 and, rather than cut back, stopped paying to the IRS the payroll withholding taxes beginning in March 2005 and continued the failure to pay the withholding taxes to the IRS through December 2005 when it went under. The records are now held by the liquidator of the business, but B did manage somehow to keep a copy of the 1st Quarter 941 and underlying payroll records for that 1st quarter. From those documents you ascertain the following:

Employee	Amount Withheld From Salary	Amount Paid to IRS	Amount Unpaid
A	$40,000	$24,000	$16,000
B	$18,000	$13,000	$5,000
C	$18,000	$12,000	$6,000
D	$18,000	$10,000	$8,000
E	$14,000	$10,000	$4,000
F	$14,000	$11,000	$3,000
G	$14,000	$10,500	$3,500
H	$1,000	$ -0-	$1,000
TOTALS	$137,000	$90,500	$46,500

Although B does not have records for the other three quarters in 2005, he advises that there was withholding without any payment to the IRS in those quarters. B further advises that all of the employees are CPAs who are shareholders. The nonshareholder employees (i.e., the staff) are leased through an independent firm that takes care of the employment taxes with respect to those individuals. The CFO advises that the president of the corporation (A in the above table) actually made the decision not to pay the withheld tax to the IRS and forced B to implement it by signing payroll checks which withheld the tax and not signing the checks to the IRS (which A required that B give to him for “safekeeping”). Both A and B had signatory authority over all corporate bank accounts, although B typically signed the checks after A approved the payables that would be paid. A is a powerful and imposing man. In September 2006, the IRS assessed the Trust Fund Recovery Penalty under § 6672 against A and B for all four quarters in 2005. The aggregate amount of the assessments for all 4 quarters is $680,000. The IRS has now begun collection measures against your client. Advise B as to whether he has a remedy and, if so, how he might pursue it.

3. Weight: 30%

Your client is X Corp. You typically work with the CFO of X Corp. On 3/1/05, the CFO calls to advise as follows: On X Corp’s calendar year 01 income tax return which was filed 3/15/02, X Corp reported $1,000,000 of accrual income and paid tax accordingly. In preparing X Corp’s year 04 income tax return in February of year 05, the outside accountants determined that the accrual in year 01 was improper and that the proper year for accrual was year 04. The accountants say that X Corp must include the $1,000,000 item on its year 04 return. The CFO calls you in a panic, fearing that X Corp may have to pay tax twice on the same income. You confirm that 04 is the proper year of accrual and thus that the income should not have been accrued in 01. Advise him as follows:

a. Is X Corp required to report the $1,000,000 on its year 04 income tax return?

b. Assume that you believe that X Corp is required to report the $1,000,000 on the year 04 return, can X Corp get a refund of its year 01 tax overpaid as a result of the erroneous accrual in year 01? If so, what are the steps X Corp must take to get the refund?

c. Would it make a difference to your answer to subpart 2 (immediately above) if X Corp had obtained an extension on the 04 return through 9/15/05 and the accountants made the discovery in August of 05 rather than February of 05? If it would make a difference, explain.

4. Weight 15%

During 2003, T had income of $500,000 that she reported on her 2003 tax return which she filed on August 1, 2004 after receiving an extension. The $500,000 she reported arose from salary, dividends and interest. She failed to report $100,000 of income that she earned as a finder’s fee for putting a deal together independently of her regular employment. She says that she just forgot about that income when delivering her papers to the return preparer and had not received any type of 1099 or other information document for it that would have reminded her of it. After an audit, on November 1, 2006, the IRS sent her a notice of deficiency proposing tax and the 20% accuracy related penalty, with respect to the $100,000 omitted income. Upon questioning, you have determined that your client did not willfully omit the income from her return and are satisfied that you can defend any allegation of fraud that the IRS could make if it chose to make such an allegation.

a. What is the last day that T can file a petition with the United States Tax Court?

b. Should T file a petition in the Tax Court?

c. Should T pay the tax and file a claim for refund? If your answer is yes, explain the steps required.

d. What is the last day that the IRS can assess additional tax with respect to T’s 2003 tax return under either of these scenarios if T does not file in the Tax Court?

e. What is the last day that the IRS can assess additional tax with respect to T’s 2003 tax return, if she had filed this tax return on March 1, 2004, instead of August 1, 2004?

I WISH YOU THE BEST AND HAVE A GREAT NEW YEAR!!!!!

 

FALL 2005

UNIVERSITY OF HOUSTON SCHOOL OF LAW

FALL 2004

Instructions:

    1. Resource Materials: Students may use only the following in the examination:
        a. the text book;
        b. the Code;
        c. the student's personal notes.

    2. The examination is two hours.

    3. You may use Code Sections and terms of art so long as you give sufficient indication that you know what you are talking about. The only exception is if the question asks you to explain something to a client. Then you should explain in ordinary English and not use lawyer jargon (either Code Sections or terms of art).

    4. Please read the questions carefully. Some hints or roadmap may be contained in the question.

    5. Please think your answer through, preferably outlining your answer on a separate sheet of paper, before you start answering. Succinct, correct answers are valued over long, unfocused correct answers.

    6. Please letter/number your answers using the same letter/number used in the question.

    7. Write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

    8. Please indicate on your blue book (or other examination answer paper) whether you are an LL.M. or J.D. candidate.

    9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

    10. Assume today’s date for all questions unless indicated otherwise. Examination:

1. Weight: 20%

   On 3/15/02, A, an individual, files his tax return for year 01. A reported on that return only his year 01 wages of $100,000 and omitted $50,000 in year 01 consulting income for which the payor did not give him a Form 1099. On 4/1/02, A meets you at a cocktail party. Upon your advising A what you do (tax lawyer extraordinaire, a description you give as tastefully as you can after three margaritas), A says that he would like to meet with you. You meet on 4/7/02. A advises you about the return he just recently filed and asks your advice as to his options and exposures. Advise A as to his civil and criminal exposures. (Address only the major crimes in the Internal Revenue Code; do not address crimes in other federal laws.) Keep in mind that the discussion is a preliminary discussion to give the client an idea of the range of matters he should consider without too much detail.

2. Weight: 30%

    On Monday, May 3, 2004, your client comes to you with a notice of deficiency for income tax for the tax year 2000. The client is a lawyer. During the year 2000, she received $300,000 gross revenue from her law practice and reported the $300,000 as gross income on her return on Schedule C. Her net from the practice was $130,000 after related expenses which were also reported on Schedule C. In the notice of deficiency, the IRS determines that she had $40,000 additional income from a corporate reorganization in 2000 that failed to qualify for tax-free nonrecognition exchange treatment. She originally had received the stock that she gave up in the reorganization pursuant to a divorce settlement in 1995. In the reorganization in 2000, she had received stock of an acquiring company. Her ex-husband, a tax lawyer, prepared her return for 2000 (they are still good friends). Incident to preparing her 2000 return, her ex-husband reached the good faith conclusion that the reorganization qualified for tax-free nonrecognition exchange treatment under the reorganization provisions of the Code. He did not include the transaction on her 2000 return or disclose it in any way. She signed the return as prepared by her ex-husband. Her ex-husband now says that, based on new information, the transaction did not qualify for tax-free reorganization treatment and that she is properly taxed on the gain in 2000. She has become comfortable with her ex-husband’s advice and does not desire to engage you to advise independently on whether the reorganization is properly income that should be taxed in 2000. You are to accept that conclusion. She seeks your advice with respect to procedural issues and specifically whether she can mitigate or even eliminate the amount she may owe. You are satisfied that there was no criminality or other fault on her part in omitting the income, and the IRS has not asserted any penalty given the highly technical basis for adjustment it proposes. You then elicit the following additional facts:

    Return Mailed to IRS: 4/13/2001 Friday
    Return Filing Extension Date: None (Return was mailed timely)
    Date Return Received by IRS: 4/17/2001 Tuesday (The Agent told her this.)
    Notice of Deficiency Date: 4/16/04 Wednesday
    Forms 872 or 872-A: None

Please begin your answer with a yes or no, if it is possible to answer yes or no. Then, since your client is a lawyer, explain your answer, citing the relevant Code Sections.

    a. Does your client have a defense of limitations to the notice of deficiency? If your answer is conditional in any way, state the condition.

    b. Does it make any difference if the taxpayer had only $50,000 in net income from her law practice (because her expenses were larger than noted above) and, on her original 2000 return, reported that as her only income for the year? Assume for answering this question that she had $20,000 in itemized (Schedule A) deductions, with no other items of income or deductions reported on the return.

3. Weight: 20%

    Your client, an individual, proposes to buy certain real property from a corporation which your client knows is in substantial financial difficulty. Your client has heard, for example, that the corporation is not paying some of its creditors timely. A corporate officer has told your client that the corporation owes taxes to the IRS and is currently trying to work out an installment agreement to pay those taxes. You have checked the real property records for the county and find that no IRS tax lien has been filed.

    a. Advise your client as to whether the IRS has a tax lien. If you don't have enough information to answer the question, please advise what further information you need and whether you can get that information either from public documents or from the IRS.

    b. Advise your client as to whether the IRS has a claim that could prevail over your client's right to the property if your client were to purchase the property from the corporation. If all of the facts necessary to answer the question are not set forth in the facts above, advise your client as to what additional facts you need to know or what additional conditions need to be present to protect your client if he purchases the property.

4. Weight: 30%

    Your client has been audited for the year 2000 and was represented in the audit by a CPA. You client filed his 2000 return on 4/15/01. In January 2004, the agent requested and your client signed a Form 872-A which was then signed by the IRS. The agent is now (December 2004) concluding the audit and has sent a revenue agent’s report (“RAR”) proposing to deny $100,000 in deductions. The agent included with the RAR a Form 870, Waiver of the Restrictions on Assessment, incorporating the calculated bottom-line tax liability. The agent did not spot another issue as to whether your client had reported all of his income. Your client’s Schedule C business received revenue via checks, credit or debit cards and cash. Gross revenue was $2,000,000. Cash represented about 15% of the client's gross revenue, or $300,000. Your client did not report his cash receipts on his Schedule C, thus reporting only $1,700,000 gross revenue instead of the proper gross revenue of $2,000,000. You are aware that, during the course of the audit, the agent prepared a spreadsheet identifying each check deposit and reconciling the indicated gross revenue ($1,700,000) to the amount reported on the Schedule C. Amazingly, the agent did not think to ask about cash revenue. Your client also advises that he had not disclosed this omitted income to the CPA because of potential limitations on privilege communications with the CPA. Advise your client as to how he might proceed and the risks of doing so under each of the following alternative scenarios.

    a. Assume that the audit adjustment the agent proposes ($100,000 disallowance) is not a good adjustment and that the taxpayer could avoid the adjustment either at Appeals or in litigation.

    b. Assume that the audit adjustment ($100,000) is a good adjustment and that the taxpayer could not avoid the adjustment either at Appeals or in litigation.

I WISH YOU THE BEST AND HAVE A GREAT NEW YEAR!!!!!

[ATTACHED COPIES OF FORMS 870, 872, 872-A, and 870-AD]

FALL 2003

Instructions:

1. Resource Materials: Students may use only the following in the examination:

a. the text book;
b. the Code;
c. the student's personal notes.

2. The examination is two hours, start to finish.

3. You may use Code Sections and terms of art so long as you give sufficient indication that you know what you are talking about. The only exception is if the question asks you to explain something to a client. Then you should explain in ordinary English and not use lawyer jargon (either Code Sections or terms of art).

4. Please read the questions carefully. Some hints or roadmap may be contained in the question.

5. Please think your answer through, preferably outlining your answer, before you start answering. Succinct, correct answers are valued over long, unfocused correct answers.

6. Please letter/number your answers using the same letter/number used in the question.

7. Write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

8. Please indicate on your blue book (or other examination answer paper) whether you are an LL.M. or J.D. candidate.

9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

10. Assume today’s date for all questions unless indicated otherwise. Examination:

1. Weight: 25%

On Thursday, May 1, 2003, your client comes to you with a notice of deficiency for income tax for the tax year 1999. She is a lawyer and, during the year in question, her law practice was her sole source of cash flow. During that year, she received $300,000 gross revenue from her law practice and reported the $300,000 as gross income on her return on Schedule C. Her net from the practice was $130,000 after related expenses which were also reported on Schedule C. In the notice of deficiency for 1999, the IRS determines that she had $40,000 additional income from a corporate reorganization in 1999 that failed to qualify for tax-free nonrecognition exchange treatment. She received the stock in the company as a result of a divorce settlement in 1995. Incident to preparing her 1999 return, her ex-husband, a tax lawyer, had told her that the reorganization qualified for tax-free nonrecognition exchange treatment under the reorganization provisions of the Code. She accordingly did not report the transaction on her return. Her ex-husband now says that, based on new information, the transaction did not qualify for tax-free reorganization treatment and that she is properly taxed on the gain in 1999. She has become comfortable with her ex-husband’s advice and does not desire to engage you to advise independently on whether the reorganization is properly taxed in 1999. You are to accept that conclusion. She is more concerned with procedural issues and specifically whether she can mitigate or even eliminate the amount she may owe. You are satisfied that there was no criminality or other fault on her part in omitting the income, and the IRS has not asserted any penalty given the highly technical basis for adjustment it proposes. You then elicit the following additional facts:

Return Mailed: 4/13/2000 Thursday
Return Filing Extension Date: None (Return was filed timely)
Date Return Received by IRS: 4/17/2000 Monday (The Agent told her this.)
Notice of Deficiency Date: 4/16/03 Wednesday
Forms 872 or 872-A: None

Please begin your answer with a yes or no, if it is possible to answer yes or no. Then, since your client is a lawyer, explain your answer, citing the relevant Code Sections.

     a. Does your client have a defense of limitations to the notice of deficiency? If your answer is conditional in any way, state the condition.

     b. Does it make any difference if the taxpayer had only $50,000 in net income from her law practice (because her expenses were larger than noted above) and, on her original 1999 return, reported that as her only income for the year? Assume for answering this question that she had $20,000 in itemized (Schedule A) deductions, with no other items of income or deductions reported on the return.

2. Weight: 15%

    Assume the same facts as set forth in Question Number 1 except that, regardless of your answer in question number 1, assume that the notice of deficiency was timely mailed by the IRS on April 4, 2003. What is the earliest date that the IRS can assess the deficiency under the following scenarios, in each case explaining your answer (citing in each instance the Code section, if any, for the answer):

    a. Prior to receiving the notice of deficiency, the taxpayer signs a waiver of the restrictions on assessment (Form 870) on Tuesday 4/1/03 and delivers it to the IRS on the same date. (For this sub-question a. alone, assume that the IRS does not issue a notice of deficiency.)

    b. Assume that the taxpayer does not file a Form 870, so that the IRS must issue the deficiency and does so, as the facts indicate on Monday 4/4/03. The taxpayer timely receives the notice of deficiency but does not petition the United States Tax Court.

    c. Same as b., except (i) on Wednesday 6/4/03, the taxpayer timely petitions the United States Tax Court, (ii) on Thursday 7/1/04, the Tax Court issues its decision sustaining a deficiency, and (iii) taxpayer does not appeal the Tax Court’s decision.

    d. Same as c., except (i) on Wednesday 9/1/04, the taxpayer appeals the decision of the Tax Court to the United States Court of Appeals for the Fifth Circuit and (ii) on Tuesday 3/1/05, the Fifth Circuit affirms Tax Court’s decision.

3. Weight: 30%

    Your client ("T"), a large corporation, has finally concluded an audit for its calendar year ending in 2000. Since the corporation filed its original return on Wednesday 3/15/01, the normal three-year statute of limitations closes on Monday 3/15/04. On Monday 12/1/03, the agent sends T (copy to you) a "30-day" letter along with the following: (1) the RAR ("revenue agent’s report") indicating the proposed adjustments and proposed deficiency of $10,000,000 and negligence penalty of $1,000,000 (based on a portion of the deficiency); (2) a request that the client waive the restrictions on assessment (Form 870), and (3) a consent to extend the statute of limitations, Form 872, proposing to extend the statute until 3/15/05. In the cover letter, the agent explains that, although you would normally have the right to go to the IRS Appeals Office to attempt to resolve any differences, because of the nature of the matter and the expected time for effective consideration by the Appeals Office, a consent to extend the statute of limitations will be required in order to permit the matter to go to the Appeals Office. The agent advises that, unless he receives the Form 872 from you by Friday 1/2/04, he will cause the notice of deficiency to issue no later than Friday 2/27/04. You believe that several of the agent's proposed adjustments are wrong but you are also aware of a very large potential adjustment that the agent has not yet spotted. T has (and had) a good return reporting position with respect to the large potential adjustment, as yet unspotted by the agent, but T's tax advisors (i.e., you) are sure that the IRS would contest the issue if it were spotted and it is not easy to predict an ultimate outcome on that large adjustment if the IRS were to discover it. This unspotted adjustment could result in the IRS asserting a $20,000,000 tax liability based on that adjustment alone. You have paid careful attention during the audit and you do not believe that there is anything in the IRS's audit files that would "red flag" the issue to an Appeals Officer, but you also know that a curious and intelligent Appeals Officer might sniff it out. Advise the Tax Director and the CFO as to T's alternatives at that point, addressing specifically the following (as well as anything else you feel material to the corporation’s decision making process).

    a. The effect of the Form 870 if T were to execute and file it with the IRS.

    b. Whether and where T can litigate the adjustments proposed in the RAR and, if so, what are the risks in the various forums for litigation as to the unspotted adjustment? In answering this question, advise the client how to best minimize any risk with respect to the unspotted issue.

    c. What are cash flow implications to T of the various forums in which T may litigate? Assume that the interest on the deficiency and penalty through the date of your advice (12/8/03) is approximately $2,500,000.

    d. If T were to choose to litigate in the Tax Court where T is not required to pay first to litigate and payment may await the outcome of the litigation (usually 3 years for litigation of this magnitude), is there any reason that T might consider paying anyway and, if so, when should T pay and how should T pay it?

    e. Assume that the Client asks you to go to Appeals and you successfully negotiate a $2,000,000 reduction in the proposed tax liability and a waiver of the proposed penalties (for a net $3,000,000 savings for the client, without considering interest). The Appeals Office proposes to settle on Form 870-AD. Advise your client as to the effect of the Form 870-AD.

4. Weight: 30%

    Mrs. Put Upon (“PU”) has been referred to you by her divorce attorney. PU advises that she regularly signed joint returns with her husband, a dentist, but did not know anything about his business. She thought that the only source of his income was his dental practice, and the returns only reported income from the dental practice. In fact, however, he was also a drug dealer who failed to report the income on their joint returns who used his net drug dealing income on multiple extra-marital affairs (including housing and cars for his girl friends). She was not aware of that activity, although in retrospect in going over her expenses for the last several years she now realizes that the couple were spending slightly more than his reported dental income. She did not realize it at the time, however. The IRS recently sent a statement of tax due indicating that she and her husband had been assessed additional income tax for the years 1999 and 2000 aggregating $2,000,000, exclusive of interest. Until she saw this statement, she was unaware of any IRS audit and claims for additional tax. Upon inquiry, you determine that she was not aware that they had earlier received a notice of deficiency. Upon receiving the statement of tax due, she questioned her husband and he came clean, acknowledging his illegal income and how he had earned that income. That drove her to the divorce attorney. She and her husband live together for convenience now, but the marriage and the trust are over. She will follow through with the divorce. She asks for your help with regard to the tax bill she now faces. Advise her as best you can on these facts as to what defenses she may have and what lines of inquiry she might pursue in search of other defenses.

I WISH YOU THE BEST AND HAVE A GREAT NEW YEAR!!!!!!

[ATTACHED COPIES OF FORMS 870, 872, 872-A, and 870-AD]

FALL 2002

Instructions:

1. Resource Materials: Students may use only the following in the examination:

a. the text book;
b. the Code;
c. the student's personal notes.

2. The examination is two hours, start to finish.

3. You may use Code Sections and terms of art so long as you give sufficient indication that you know what you are talking about. The only exception is if the question asks you to explain something to a client. Then you should explain in ordinary English and not use lawyer jargon (either Code Sections or terms of art).

4. Please read the questions carefully. Some hints or roadmap may be contained in the question.

5. Please think your answer through, preferably outlining your answer, before you start answering. Succinct, correct answers are valued over long, unfocused correct answers.

6. Please letter/number your answers using the same letter/number used in the question.

7. Write legibly. Lawyers must communicate. You are not communicating if I can't read your writing. Your grade will suffer if you do not communicate your knowledge to me (on the other hand, it might suffer if you do, but I hope that is not the case).

8. Please indicate on your blue book (or other examination answer paper) whether you are an LL.M. or J.D. candidate.

9. The percentages at the beginning of each paragraph number are guides as to the relative importance of the questions and answers. You may use this as a guide in budgeting your time.

10. Assume today’s date for all questions unless indicated otherwise.

Examination:

 

1. Weight: 25%

    On Thursday, May 1, 2002, your client comes to you with a notice of deficiency for income tax for the tax year 1998. She is a lawyer and, during the year in question, her law practice was her sole source of cash flow. During that year, she received $300,000 gross revenue from her law practice and reported the $300,000 as gross income on her return on Schedule C. Her net from the practice was $130,000 after related expenses which were also reported on Schedule C. In the notice of deficiency for 1998, the IRS asserts that she had $40,000 additional income from a corporate reorganization in 1998 that failed to qualify for tax-free nonrecognition exchange treatment. She received the stock in the company as a result of a divorce settlement in 1995. Incident to preparing her 1998 return, her ex-husband, a tax lawyer, had told her that the reorganization qualified for tax free nonrecognition exchange treatment under the reorganization provisions of the Code. She accordingly did not report the transaction on her return. Her ex-husband now says that, based on new information, the transaction did not qualify for tax-free reorganization treatment and that she is properly taxed on the gain in 1998. She has become comfortable with her ex-husband’s advice and does not desire to engage you to advise independently on whether the reorganization is properly taxed in 1998. You are to accept that conclusion. She is more concerned with procedural issues and specifically whether she can mitigate or even eliminate the amount she may owe. You are satisfied that there was no criminality or other fault on her part in omitting the income, and the IRS has not asserted any penalty given the highly technical basis for adjustment it proposes. You then elicit the following additional facts:

Return Mailed: 4/15/99 Thursday
Return Filing Extension Date: None (Return was filed timely)
Date Return Received by IRS: 4/19/99 Monday (The Agent told her this.)
Notice of Deficiency Date: 4/16/02 Tuesday
Forms 872 or 872-A: None

Please begin your answer with a yes or no (which you have thought through to the end before you begin your answer), if it is possible to answer yes or no. Then, since your client is a lawyer, explain your answer, citing the relevant Code Sections.

    a. Does your client have a defense of limitations to the notice of deficiency? If your answer is conditional in any way, state the condition.

    b. Does it make any difference if the taxpayer had only $50,000 in net income from her law practice (because her expenses were larger than noted above) and, on her original 1998 return, reported that as her only income for the year? Assume that she had $20,000 in itemized (Schedule A) deductions, with no other items of income or deductions reported on the return.

2. Weight: 15%

    Assume the same facts as set forth in Question Number 1 except that, regardless of your answer in question number 1, assume that the notice of deficiency was timely mailed by the IRS on April 15, 2002. What is the earliest date that the IRS can assess the deficiency under the following scenarios, in each case explaining your answer (citing in each instance the Code section authority for the answer):

    a. Prior to receiving the notice of deficiency, the taxpayer signs a waiver of the restrictions on assessment (Form 870) on Monday 4/1/02 and delivers it to the IRS on Friday 4/5/02. (For this sub-question a. alone, assume that the IRS does not issue a notice of deficiency.)

    b. Assume that the taxpayer does not file a Form 870, so that the IRS must issue the deficiency and does so, as the facts indicated on Monday 4/15/02. The taxpayer receives the notice of deficiency but does not petition the United States Tax Court.

    c. Same as b., except (i) on Tuesday 6/4/02, the taxpayer timely petitions the United States Tax Court, (ii) on Tuesday 7/1/03, the Tax Court issues its decision sustaining a deficiency, and (iii) taxpayer does not appeal the Tax Court’s decision.

    d. Same as c., except (i) on Tuesday 9/1/03, the taxpayer appeals the decision of the Tax Court to the United States Court of Appeals for the Fifth Circuit and (ii) on Monday 3/1/04, the Fifth Circuit affirms Tax Court’s decision.

3. Weight: 30%

    Your client ("T"), a large corporation, has finally concluded an audit for its calendar year ending in 1999. Since the corporation filed its original return on Wednesday 3/15/00, the normal three-year statute of limitations closes on Saturday 3/15/03, which is extended to the next business day of Monday 3/17/03. On Tuesday 12/10/02, the agent sends the client a "30-day" letter along with the following: (1) his RAR ("revenue agent’s report") indicating the proposed adjustments and proposed deficiency of $10,000,000 and negligence penalty of $1,000,000 (based on a portion of the deficiency); (2) a request that the client waive the restrictions on assessment (Form 870), and (3) a consent to extend the statute of limitations, Form 872-A. In the cover letter, the agent explains that, although you would normally have the right to go to the IRS Appeals Office to see if any differences could be resolved, because of the nature of the matter and the expected time to resolve in appeals, a consent to extend the statute of limitations will be required in order to permit the matter to go to the Appeals Office. The agent advises that, unless he receives the Form 872-A from you by Thursday1/2/03, he will cause the notice of deficiency to issue no later than Friday 2/28/03. You believe that several of the agent's proposed adjustments are wrong but you are also aware of a very large potential adjustment that the agent has not yet spotted. T has (and had) a good return reporting position with respect to the large potential adjustment, as yet unspotted by the agent, but T's tax advisors (i.e., you) are sure that the IRS would contest the issue if it were spotted. You have paid careful attention during the audit and you do not believe that there is anything in the IRS's audit files that would "red flag" the issue to an Appeals Officer, but you also know that a curious and intelligent Appeals Officer might sniff it out. You also know that the Appeals Officers as a group are a lot sharper than this agent and you cannot therefore foreclose the possibility that the Appeals Officer would spot this new issue. Advise the Tax Director and the CFO as to T's alternatives at that point, addressing specifically the following (as well as anything else you feel material to their decision making process).

    a. The effect of the Form 870 if T were to execute and file it with the IRS.

    b. Whether and where T can litigate the adjustments proposed in the RAR and, if so, what are the risks in the various forums for litigation as to the unspotted adjustment? Assume in answering this question that you do not believe that T would obtain any relief in the Appeals Office. In answering this question, advise the client how to best minimize any risk with respect to the unspotted issue.

    c. What are cash flow implications to T of the various forums in which T may litigate? Assume that the interest on the deficiency and penalty through the date of your advice (12/16/02) is approximately $2,500,000.

    d. If T were to choose to litigate in the Tax Court where T is not required to pay first to litigate and payment may await the outcome of the litigation (usually 3 years for litigation of this magnitude), is there any reason that T might consider paying anyway and, if so, when should T pay and how should T pay it?

    e. What would be the effect if your client were to enter a Form 870-AD with the IRS?

4. Weight: 30%

    Mrs. Put Upon (“PU”) has been referred to you by her divorce attorney. PU advises that she regularly signed joint returns with her husband, a dentist, but did not know anything about his business. She thought that the only source of his income was his dental practice, and the returns only reported income from the dental practice. In fact, however, he was also a drug dealer who failed to report the income on their joint returns. She was not aware of that activity or the income from the activity, although in retrospect in going over her expenses for the last several years she now realizes that the couple were spending slightly more than his reported dental income. She did not realize it at the time, however. The IRS recently sent a statement of tax due indicating that she and her husband had been assessed additional income tax for the years 1999 and 2000 aggregating $2,000,000, exclusive of interest. Until she saw this statement, she was unaware of any IRS audit and claims for additional tax. Upon inquiry, you determine that she was not aware that they had received a notice of deficiency. Upon receiving the statement of tax due, she questioned her husband and he came clean, acknowledging his illegal income and that he had spent the part she did not see (the bulk of the illegal income) on a combination of gambling and women, all unknown to her. That drove her to the divorce attorney. She and her husband live together for convenience now, but the marriage and the trust are over. She will follow through with the divorce. She asks for your help with regard to the tax bill she now faces. Advise her as best you can on these facts as to what defenses she may have and what lines of inquiry she might pursue in search of other defenses.

I WISH YOU THE BEST AND HAVE A GREAT NEW YEAR!!!!!!

[ATTACHED COPIES OF FORMS 870, 872, 872-A, and 870-AD]