If It Sounds “Too Good To Be True…”
It usually is….right?
That’s exactly what the Tax Court recently concluded, in the case of the good Doctor Hristov. Seems the Doc was sniffing around for some tax shelter to reduce his tax liabilities, which he found through the good offices of promoter William Alexander, who came up with a whole bunch of ideas related to the use of a Code Section 419 welfare benefit plan.
It turns out that the ideas didn’t fly, and IRS disallowed all of the deductions associated with them. But to add insult to injury, the Revenooers slammed Hristov with the usual accuracy-related penalty which is what really rankled Hristov, who pled mercy on the basis that he had “reasonable cause” for the actions he took relative to the bad advice, and acted in good faith in reliance on his “professional” advisors, one of whom was Alexander!
Nice try, but remember that to claim exemption from penalties on the basis of good faith reliance on a professional, the taxpayer must prove (1) that the adviser was a competent professional who had sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser’s judgment.
So, here we have promoter, Alexander (who had told the taxpayer he was an enrolled agent, but was not), as well as a real enrolled agent who was Hristov’s tax preparer, who had specifically informed the taxpayer that her experience with pension plans was limited to the simplest of those critters, and that she was unfamiliar with and had never worked with Section 419 plans or defined benefit plans. Not a particularly good line up of “competent professionals” on which a taxpayer could reasonably argue good faith reliance.
Not surprising, therefore, that the Tax Court concluded that Dr. Hristov’s reliance on Alexander was unreasonable, because of his basic role in all of this as a promoter of the offensive transactions, thus putting him in an obvious conflict of interest position. And given that the Doc’s tax preparer, though probably a competent advisor, specifically told him of her inexperience with the types of transactions in question, how could he claim to have put all of his faith and confidence in her “advice” in such an instance?
Bottom line – Hristov should have known better, in the circumstances, than to proceed with income sheltering transactions which even promoter Alexander had described as “aggressive,” and of a nature that most accountants and tax lawyers wouldn’t recommend.
Taxpayers beware – and be careful in choosing advisors, lest you too becoming exposed to penalties out of which you may not be able to wiggle.
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He can be reached at 831-7288, welcomes comments at firstname.lastname@example.org, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.