UNIVERSITY OF HOUSTON
SCHOOL OF LAW

PAST TAX PROCEDURE EXAMINATIONS

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]

Fall 2001

1. Weight: 30%

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, explain. 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 1998 federal income tax return (Form 1040) on April 1, 1999. 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 1998 expire?

b. Assuming that the IRS sends T a 30-day letter on January 1, 2002, when does the statute of limitations on assessment expire?

c. Assuming that T signs a Form 870, waiver of restrictions on assessment, on February 1, 2002,

    (1) when does the statute of limitations on assessment expire?

    (2) when is the earliest the IRS may assess?

    (3) what happens if the IRS does not assess until April 14, 2002?

    (4) what happens if the IRS does not assess until May 1, 2002?

    After you have answered this subpart, make no further assumption in the future subparts about a Form 870; indeed, assume that the taxpayer did not execute and file a Form 870.

d. Assume that, on January 30, 2002, T executes a Form 872-A. What is the earliest date the IRS may assess?

e. Assume that on April 1, 2002, the IRS issues a notice of deficiency to T. When is the latest and earliest the IRS may assess under the following scenarios:

    (1) T does not petition the Tax Court?

    (2) T does petition the Tax Court?

2. Weight: 15%

Mr. Carl Smith, a new client, consults you for the first time because he has heard that the IRS CID (Criminal Investigation Division) has commenced a criminal investigation against him. He advises that he is a large player in the underground economy and all of his revenue from this activity is cash. He is reluctant at this time to be totally forthcoming about his income producing activity, but you suspect that it may be related to prostitution or drugs. He said that, on his returns for the last 5 years, he had reported only a small amount of sales consulting income on Schedule C from a legitimate business, but that none of his underground economy income had been reported. You advise Mr. Smith that your expertise is representing taxpayers before the IRS, including its Criminal Investigation division. You further advise Mr. Smith that your services are not cheap and that, for this type of representation, you must have a $50,000 retainer that you will bill against and which he must keep replenished monthly (i.e., if you bill $20,000 for the month, you will draw the $20,000 from the retainer in the trust account and he must replenish the retainer in the trust account to bring it back up to $50,000). Mr. Smith promptly gives you $50,000 in $100 bills from his briefcase. You advise Mr. Smith that, because he is paying in cash in excess of $10,000, you must report to the IRS on the currency transaction report ("CTR," Form 8300) the receipt of cash in excess of $10,000. You advise him that the CTR must report his name and taxpayer identification number. He is greatly concerned about reporting to the IRS that he has $50,000 cash, which might be viewed as inconsistent with the amounts of income he reported on his returns. Answer the two questions (and only the questions), citing any authority therefor.

a. Can the law firm assert the attorney-client privilege in the CTR to refuse to provide the name and identifying information of the client?

b. If the law firm does assert the attorney-client privilege, can (and if so, how can) the IRS obtain the information from the law firm?

3. Weight: 25%

Your client 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 it 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, X Co., a very large corporation which is a calendar year taxpayer, manipulated its financial books for 1997 and 1998. As a result of the manipulation, X Co. overreported earnings and thus overreported taxable income and tax on its 1997 and 1998 returns which were timely filed pursuant to extensions on September 15, 1998 and September 15, 1999, respectively. X Co.'s goal in the original manipulations was to pump its stock price which is based on earnings. X Co.'s officers thought that, because of the prospects for the business, real earnings would catch up at some reasonable point in the future. Real earnings did not catch up and, indeed, on October 15, 2001, X Co. determines that it is proper to restate its earnings to show significantly lower financial income for 1997 and 1998. As a result of the proposed restatement of earnings, X Co. believes it is entitled to a federal income tax refund of $20,000,000 for 1997 and $20,000,000 for 1998. Before making the final determination to restate its earnings, on October 20, 2001, X Co. engages your firm to handle all aspects of the restatement, including the securities and tax issues. You are a tax partner with that law firm. X Co.'s officers would like to use any tax refunds to which X Co. may be entitled to offset the negative effect of the earnings restatement.

The corporate lawyers in your firm who have primary responsibility for the engagement have determined that, to the extent X Co. is entitled to a refund, it will reduce the effect of the otherwise negative restatement. On October 22, 2001, they come to you and, after your due diligence, you determine that, indeed, X Co. did overstate its tax by $20,000,000 in each of those two years. Advise X Co. as to the following:

a. Can X Co. obtain a refund of its taxes?

b. Is X Co. entitled to interest on the overpayment? If so, without calculating the dollar amount of interest, advise what Code provisions determine the interest rate and what interest rate (how it is determined) would apply under the Code provisions.

c. What are the administrative and judicial procedures to pursue X Co.'s right to the refund?

 

Fall 2000

1.  35%

Your client ("T"), an individual, is being audited for the tax year 1996. He filed his return on February 1, 1997. On April 1, 2000, he executed a Form 872-A and the IRS signed and returned it to him on April 4, 2000. Your client interviews you on December 2, 2000. 

    a. Advise the client as to the statute of limitations. In answering this question, assume that (i) based on your interview with the client and reviewing the return, you are satisfied that there is no fraud and no substantial omission of income and (ii) neither party has sent the other a Form 872-T and the IRS has not issued a notice of deficiency.

    b. On August 1, 2000, the taxpayer delivered a Form 872-T to the proper office in the IRS and obtained a stamped receipt copy on that date. Nothing has happened since. Advise the client as to when the statute of limitations expires or expired if the IRS does not issue a notice of deficiency within 90 days of August 1, 2000.

    c. How does your answer change if, on October 15, 2000, the IRS issued a notice of deficiency? Address specifically the following scenarios (you may provide the answer in number of days rather than actual dates):

    (1) If T does nothing, when does the statute of limitations expire?

    2) If T files a timely petition for redetermination in the U.S. Tax Court, what rules govern when the statute expires?

    (3) If T then suffers a loss in the Tax Court, the Tax Court enters its decision on June 1, 2001, and the taxpayer does not appeal, when does the statute of limitations on assessment expire and why?

    (4) If, instead of an unfavorable decision, T and the IRS agree to settle the Tax Court case and enter an agreed decision containing language that, upon entry of the decision (done after the Judge signs it), the taxpayer waives the restrictions on assessment, when does the statute of limitations expire? (You can answer this by number of days rather than the specific date.)

    d. Would it make a difference if the IRS executed and returned the Form 872-A to T on May 1, 2001.

2. 25%

You have represented your client in an audit for the year 1996. The taxpayer filed his tax return for that year on April 15, 1997. The statute would have expired for the year on April 15, 2000, but incident to an audit of taxpayer's 1996 return, on January 2, 2000, the taxpayer signed an extension on Form 872-A, titled Special Consent to Extend the Time to Assess Tax, and the IRS signed it on January 15, 2000. On November 25, 2000, the agent sent you, as the taxpayer's representative, a Revenue Agent's Report ("RAR") proposing a deficiency of $100,000, plus a 20% negligence penalty on $50,000 of the deficiency.

    a. The Revenue Agent sends with the RAR a Form 870, titled Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. Your client agrees, based on your advice, that he owes the tax involved and that he will have some difficulty contesting the penalty. He just wants to put the matter behind him.

    (1) Advise your client as to the effect of signing the Form. Although your client is not normally interested in Code sections, in this case DO cite the Code section(s) to which the form is addressed.

    (2) If your client signs the form, what else would you advise your client to do and why?

    b. Assume for this subpart of the question that your client is aware of an additional adjustment (in addition to the one noted above) that the IRS could have made that would increase the proposed deficiency by $200,000 and draw a 20% accuracy related penalty as to which the taxpayer would have no defense. However, as to the adjustment the IRS actually has proposed above in the RAR and Form 870 (both the tax and the penalty), you think that there is a 75% likelihood that the taxpayer could successfully litigate and prevail. Advise your client as to the following:

    (1) If he executes the Form 870, 

        (a) is he admitting that he owes the taxes asserted in the Form; and (b) is the IRS agreeing that it will not assert any more taxes for the year?

        (b) what risks does the taxpayer take now if he does not sign the Form 870, receives a notice of deficiency and litigates in the U.S. Tax Court?

    (2) Could the taxpayer litigate the issues presented by the RAR and Form 870 in a refund suit? If the answer is yes, what are the risks to the taxpayer in doing so and what are the advantages in doing so?

3. 20 %

Your client 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. Assume that a corporate officer has told your client that it 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. 20%

Your client advises that, on March 15, 2000, she filed an income tax return in which she reported $300,000 of gross income but failed to report $140,000 of income from an investment. She advises you that the failure was inadvertent. Upon your diligent inquiry, you advise her that, based on your experience, it is a close case as to whether the IRS would prosecute her for a crime if it became aware of the facts as she presented them. She asks you to answer the following questions (in each case cite the Code Sections, if any, that apply):

a. Is she required by law to file an amended return, reporting the $140,000.

b. If the filing of an amended return is optional (i.e., not required), what are the risks to her if she opts not to file? Stated alternatively, what would be the benefit to her of filing an amended return? 

c. What is the civil statute of limitations if she files no amended return and when does it expire?

d. What civil penalties might she be subject to?

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

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

Fall 1999

TAX PROCEDURE - FALL 1999

UNIVERSITY OF HOUSTON SCHOOL OF LAW

EXAMINATION

Instructions:

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

the case book;
the Code;
the review outline that I provided; and
the student’s personal notes.

The examination is two hours, start to finish.

You may use Code Sections and terms of art so long as you give sufficient indication that you know what you are talking about.

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

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

Good Luck.

Examination:

1. Weight 15%

Your client comes to you with a notice of deficiency for income tax for the tax year 1995. During that year, she received $300,000 from her law practice and reported that income on her return. In the notice of deficiency, the IRS asserts that she had $40,000 additional income from a corporate reorganization in 1995 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 1992. She had been told by her ex-husband, a tax lawyer, that the reorganization qualified for tax free nonrecognition exchange treatment under the reorganization provisions of the Code. You are satisfied that there was no criminality or other fault on her part in omitting the income, and the IRS does not even assert any penalty given the highly technical basis for the reorganization failing to qualify for tax-free nonrecognition treatment. On Saturday, May 1, 1999, she comes to you for advice. She wants to know whether she can obtain relief. You then elicit the following facts:

Return Mailed: 4/15/96 Monday
Return Filing Extension Date: None
Date Return Received by IRS: 4/18/96 Thursday
Notice of Deficiency Date: 4/16/99 Friday
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 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 income from her law practice and 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. 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 Thursday 4/1/99 and delivers it to the IRS on Monday 4/5/99. (For this question alone, assume that the taxpayer does not receive a notice of deficiency because the waiver waives the requirement that the IRS issue the notice of deficiency).

    b. After receiving the notice of deficiency that was mailed by the IRS on 4/16/99, the taxpayer does not petition the United States Tax Court but also does not waive the restrictions on assessment.

    c. The taxpayer timely petitions the United States Tax Court and ultimately gets an unfavorable decision from the Tax Court on July 1, 2000 but does not appeal the decision.

    d. Same as c., except the taxpayer does appeal the decision of the Tax Court to the United States Court of Appeals for the Fifth Circuit and ultimately gets an unfavorable decision on July 1, 2001.

3. Weight 15%

Ms. Johnson comes to you on May 1, 1999 with the following facts: She filed her 1998 return on April 15, 1999. She reported her salary of $50,000 and claimed appropriate deductions. She advises you that she is now concerned that she omitted $100,000 in alimony income. Upon developing the facts, you find that she was divorced in January 1998 and, pursuant to the divorce, began receiving alimony on March 1, 1998 at the rate of $10,000 per month. She says that she did not realize the alimony income was taxable until after she filed the return and then only discovered it in talking with a friend of hers who is an accountant. You do review the divorce settlement agreement which she had signed, and the paragraph of the agreement dealing with alimony 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. Advise her as to the statutes of limitation and what effect an amended return might have on the statutes of limitation.

4. Weight 20 %

You determine from your conversation with Ms. Johnson in question 3 that, despite the provision in the divorce agreement, she really did not know that the $100,000 should have been reported as taxable income. Accordingly, you are not concerned about criminal penalties and so advise her. You are concerned, however, about civil penalties. Advise Ms. Johnson as to any civil penalties to which she may be subject and advise her whether the filing of an amended return might mitigate or eliminate any of the civil penalties for which she might otherwise be liable. Assume for purposes of your answer that the return reporting position (no income from alimony) does not even have a reasonable basis.

5. Weight 20%

Mr. Carl Smith, a new client, consults you for the first time because he has heard that the IRS CID (Criminal Investigation Division) has commenced a criminal investigation against him. He advises that he is a large player in the underground economy and all of his revenue from this activity is cash. He is reluctant at this time to be totally forthcoming about his income producing activity, but you suspect that it may be related to prostitution or drugs. He said that, on his returns for the last 5 years, he had reported only a small amount of sales consulting income on Schedule C from a legitimate business, but that none of his underground economy income had been reported. You advise Mr. Smith that your expertise is representing taxpayers before the IRS, including its CID. You further advise Mr. Smith that your services are not cheap and that, for this type of representation, you must have a $50,000 retainer that you will bill against and which he must keep replenished monthly (i.e., if you bill $20,000 for the month, you will draw the $20,000 from the retainer in the trust account and he must replenish the retainer in the trust account to bring it back up to $50,000). Mr. Smith promptly gives you $50,000 in $100 bills from his briefcase. You advise Mr. Smith that, because he is paying in cash in excess of $10,000, you must report to the IRS on the currency transaction report ("CTR," Form 8300) the receipt of cash in excess of $10,000. You advise him that the CTR must report his name and taxpayer identification number. He is greatly concerned about reporting to the IRS that he has $50,000 cash, which might be viewed as inconsistent with the amounts of income he reported on his returns. Answer the two questions (and only the questions, citing any authority therefor).

    a. Can the law firm assert the attorney-client privilege in the CTR to refuse to provide the name and identifying information of the client?

    b. If the law firm does assert the attorney-client privilege, can (and if so, how can) the IRS obtain the information from the law firm?

6. Weight 15%

Ms. Horowitz has received a notice of tax due of $100,000 dated December 1, 1999, which indicates that the assessment was made on that date, and is currently unable to pay the assessment. She has heard that the IRS has a tax lien upon assessment. She is concerned because, pursuant to a real estate contract entered on November 1, 1999, she is supposed to close on December 20, 1999 a sale of some property she owns in Harris County. The purchaser, of course, has no knowledge of her problems with the IRS and will not in any event buy the property if there is any possibility that the IRS could have a prior interest in the property via the lien. Ms. Horowitz does not want to turn over all of the net sales proceeds to the IRS, preferring instead to use much of the net proceeds for her family (husband and children) and her men friends (she has two). Your experience tells you that, since the assessment has so recently been made, the IRS is some months away from filing the tax lien in the real property records of Harris County, so that it will not appear in a title search of the Harris County records before the sale must be closed. Advise Ms. Horowitz as to the impact, if any, the IRS tax lien has on the sale of the property. Assume that the buyer is unrelated and that a fair price is paid.

 

Fall 1998

EXAMINATION

Instructions:

1. Resource Materials: Students may use only the following in the examination:
    a. the case book;
    b. the Code; and
    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.

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

5. Please read the questions carefully. Some hints or roadmaps may be contained in the question.
6. Good Luck.

Examination:

1. Weight 10%

Your client comes to you with a notice of deficiency for income tax for the tax year 1993. During that year, she received $300,000 from her law practice and reported that income on her return. In the notice of deficiency, the IRS asserts that she had $40,000 additional income from a corporate reorganization in 1993 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 1989. She had been told by her ex-husband, a tax lawyer, that the reorganization qualified for tax free nonrecognition exchange treatment under the reorganization provisions of the Code. You are satisfied that there was no fault on her part, and the IRS does not even assert any penalty given the highly technical basis for the reorganization failing to qualify for tax-free nonrecognition treatment. On Wednesday, December 16, 1998 (this exam date), she comes to you for advice. She wants to know whether she can obtain relief. You then elicit the following facts:

    Return Actually Filed by Mail: 10/14/94 Friday
    Return Filing Extension Date: 10/15/94 Saturday
    Date Return Received by IRS: 10/17/94 Monday
    Notice of Deficiency Date: 10/19/98 Saturday
    Forms 872 or 872-A: Yes - 872 through 10/17/98

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 explain your answer, citing the relevant Code Sections.

    a. Does your client have a defense of limitations to the notice of deficiency? 

    b. Does it make any difference if the taxpayer had only $50,000 in income from her law practice and 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 2, except that the notice of deficiency was sent on September 1, 1998. 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. The taxpayer signs a waiver of the restrictions on assessment (Form 870) on September 2, 1997 and delivers it to the IRS on September 5, 1997.

    b. The taxpayer does not petition the United States Tax Court but also does not waive the restrictions on assessment.

    c. The taxpayer petitions the United States Tax Court and ultimately gets an unfavorable decision from the Tax Court on July 1, 1998 but does not appeal the decision.

    d. Same as c., except the taxpayer does appeal the decision of the Tax Court to the United States Court of Appeals for the Fifth Circuit and ultimately gets an unfavorable decision on July 1, 1999.

3. Weight: 25%

A potential new client calls. The new client is Merrill Lynch, dealing with you through its tax director. You are ecstatic to have a substantial client who, you presume, can pay timely and will not object to high hourly rates (they are used to it). The tax director advises that Merrill Lynch has been selling a sophisticated tax shelter to large corporations. Not liking the name "tax shelter," Merrill Lynch refers to it as a product and when pressed will call it a "tax advantaged opportunity." The product is aggressive, but Merrill Lynch has received an opinion from a reputable tax law firm that the tax benefits touted for the product will more likely than not prevail. Nevertheless, upon questioning, you sense that part of the attraction of the product for large corporations is that the tax benefits will be buried in the mass of detail on and supporting the return and will not easily come to the IRS's attention, particularly because, with the tax opinion, the corporations will not feel that they have to disclose the investment and resulting tax benefits. In "selling" the product to its corporate clients, Merrill Lynch has done so under the oral understanding that the corporate officers reviewing the proposal will not disclose the product to third parties -- particularly Merrill Lynch's competitors -- or attempt to do the deal on their own. Merrill Lynch has made a number of "sales" and earned substantial fees (a high percentage of the projected net tax benefit to the corporations, sort of like the contingency fee earned by the very best plaintiff's lawyers). Merrill Lynch is now being audited. Incident to that audit, the agent has issued an IRS administrative summons under Section 7602 requesting that Merrill Lynch produce all of its files with respect to the tax shelter. Merrill Lynch does not want to do that, for it fears that the IRS will use the information to audit the purchasers of the shelter. Accordingly, Merrill Lynch asked the agent, at least indirectly, what the purpose of the summons was. The agent says he is just checking to make sure that Merrill Lynch has reported all income from this product and says he may check with various of the corporations purchasing the shelter to match their accruals and payments for the product against Merrill Lynch's accruals and receipts. Nevertheless, the tax director is concerned, particularly since he has already provided the agent records that he feels a reasonable agent would accept if his only goal were to insure itself that Merrill Lynch reported its income from the product. He seeks your advice to advise whether he is required to turn over the files to the agent pursuant to the summons.

Please answer the following questions, citing where applicable any Code sections or other applicable authority of which you are aware:

    a. Does the IRS have the right to summons the records under § 7602?

    b. Would your answer be influenced if the tax director could prove, at least to reasonable persons, that the agent's goal was really not to confirm that Merrill Lynch had properly reported its income, but to obtain the names of the corporate investors in the product.

4. Weight: 20%

Your new client, less substantial in this case but clearly able to pay your fees, comes in to advise that, on March 15, 1998, he filed an income tax return in which she reported $300,000 of gross income but failed to report $140,000 of income from an investment. She advises you that the failure was inadvertent. At one level, her explanation seems sincere, but at another you are not sure. She wants you to answer the following questions (in each case cite the Code Sections that apply):

    a. Is she required by law to file an amended return, reporting the $140,000:

    b. If the filing of an amended return is optional (i.e., not required), what are the risks to her if she opts not to file? In answering this question address specifically the following:

        (1) Whether she has a risk of criminal prosecution and, if she has a risk, how she may mitigate or eliminate the risk, identifying at least two specific sections of the Internal Revenue Code under which his filing might be subject to criminal risk;

        (2) If she does have a criminal risk, the statute of limitations for criminal prosecution, identifying specifically the date upon which it expires; 

        (3) What is the civil statute of limitations and when does it expire? ; and

        (4) Which civil penalties might she be subject to (identify by very brief description and Code section/subsection).

5. Weight: 15%

    Your client has been audited for two years and the agent has proposed denying $100,000 in deductions, $50,000 in each year. You have determined that the agent's proposals will not stand up in court and perhaps would not even be sustained by the Appeals Office of the IRS. The agent did not, however, spot another issue as to whether your client had reported all of his income. Your client's business involved receiving checks and cash. Gross revenue was $2,000,000 annually. Cash represented about 15% of the client's gross revenue. The client never reported his cash receipts, thus avoiding tax on $300,000 in each of the two years. You are aware that, during the course of the audit, the agent totaled gross receipts, preparing a spreadsheet identifying each check deposit. Amazingly, the agent did not think to ask about cash revenue. Your client is angry that the agent proposes to disallow $100,000 in deductions to which he is entitled. Advise your client as to how he might proceed and the risks of doing so.

6. Weight 15%

    Incident to an audit, your client has received a Revenue Agent's Report proposing adjustments that are solid. At the same time, he received a form 870, Waiver of the Restrictions on Assessment. Advise the client of the precise legal and practical consequences of signing the waiver, citing the applicable Code Sections.