SCOTUS Reports

Tag: Listed Transactions

  • Yari v. Commissioner, 143 T.C. 157 (2014): Calculation of IRC Sec. 6707A Penalty for Non-Disclosure of Listed Transactions

    Yari v. Commissioner, 143 T. C. 157 (2014)

    In Yari v. Commissioner, the U. S. Tax Court ruled on how to calculate the IRC Sec. 6707A penalty for failing to disclose participation in listed transactions. The court held that the penalty must be calculated based on the tax shown on the original return, not on subsequent amended returns, even if they reflect the true tax liability. This decision underscores the strict liability nature of the penalty and its focus on the disclosure obligation rather than actual tax savings.

    Parties

    Steven Yari, the petitioner, challenged the Commissioner of Internal Revenue, the respondent, regarding the calculation of a penalty assessed under IRC Sec. 6707A for the 2004 tax year. The case progressed from the IRS Appeals Office to the U. S. Tax Court.

    Facts

    Steven Yari engaged in a Roth IRA transaction identified by the IRS as a listed transaction. He and his wife filed a joint federal income tax return for 2004, which did not disclose their participation in the transaction. The IRS assessed a $100,000 penalty under IRC Sec. 6707A for the non-disclosure. During the audit, Yari discovered an error on the original return and filed amended returns that included income from the transaction, resulting in a negative taxable income. Despite these amendments, the IRS maintained the original penalty calculation. The Small Business Jobs Act of 2010 retroactively changed the penalty calculation method, but the IRS declined to recalculate Yari’s penalty based on the amended returns.

    Procedural History

    The IRS issued a notice of intent to levy to collect the penalty, prompting Yari to request a collection due process (CDP) hearing. The hearing was suspended when Congress amended IRC Sec. 6707A, and the IRS reconsidered the penalty calculation. The IRS upheld the original penalty, and the Appeals Office affirmed this decision. Yari then petitioned the U. S. Tax Court for review of the notice of determination sustaining the collection action. The Tax Court reviewed the case de novo regarding the penalty amount.

    Issue(s)

    Whether the IRC Sec. 6707A penalty for failing to disclose a listed transaction should be calculated based on the tax shown on the original return or the tax shown on subsequent amended returns?

    Rule(s) of Law

    IRC Sec. 6707A imposes a penalty on any person who fails to include on any return or statement information required under IRC Sec. 6011 about a reportable transaction. The penalty amount for listed transactions is 75% of the decrease in tax shown on the return as a result of such transaction (or which would have resulted if the transaction were respected for federal tax purposes). For individuals, the penalty has a minimum of $5,000 and a maximum of $100,000.

    Holding

    The U. S. Tax Court held that the IRC Sec. 6707A penalty must be calculated using the tax shown on the original return, not on subsequent amended returns. The court rejected Yari’s argument that the penalty should reflect the actual tax savings as shown on the amended returns.

    Reasoning

    The court’s reasoning focused on the plain language of IRC Sec. 6707A, which links the penalty to the tax shown on the return giving rise to the disclosure obligation. The court found the statute clear and unambiguous, emphasizing that the penalty aims to penalize the failure to disclose, not the actual tax savings achieved by the transaction. The court also considered legislative history and the context of the statutory scheme, noting that Congress had the opportunity to link the penalty to the tax required to be shown but chose instead to base it on the tax reported. The court rejected arguments based on the potential harshness of the penalty, affirming that IRC Sec. 6707A imposes a strict liability penalty. The court’s interpretation was further supported by comparing IRC Sec. 6707A with other sections, like IRC Sec. 6651, which explicitly allow for adjustments based on the tax required to be shown.

    Disposition

    The U. S. Tax Court entered a decision for the Commissioner, upholding the $100,000 penalty as calculated based on the tax shown on Yari’s original 2004 tax return.

    Significance/Impact

    This decision clarifies the calculation of the IRC Sec. 6707A penalty, emphasizing that it is based on the tax shown on the original return, not on subsequent amendments. It underscores the strict liability nature of the penalty and its focus on the disclosure obligation. The ruling impacts taxpayers who fail to disclose participation in listed transactions, as it removes the possibility of reducing the penalty through amended returns that reflect true tax liabilities. This case may influence future interpretations and applications of similar penalty provisions in the tax code, emphasizing the importance of timely and accurate disclosure of reportable transactions.

  • Steven Yari v. Commissioner of Internal Revenue, 143 T.C. No. 7 (2014): Calculation of Penalties Under I.R.C. § 6707A

    Steven Yari v. Commissioner of Internal Revenue, 143 T. C. No. 7 (2014)

    In Steven Yari v. Commissioner, the U. S. Tax Court ruled on the calculation of penalties under I. R. C. § 6707A for failure to disclose participation in a listed transaction. The court held that the penalty should be based on the tax reported on the original return, not subsequent amended returns. This decision clarifies the method of penalty calculation under the amended statute, impacting how taxpayers and the IRS assess penalties for undisclosed transactions.

    Parties

    Steven Yari (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner was the appellant at the Tax Court level following a collection due process (CDP) hearing.

    Facts

    Steven Yari formed Topaz Global Holdings, LLC, and Faryar, Inc. , an S corporation, which engaged in a management fee transaction. Yari’s Roth IRA acquired Faryar’s stock, resulting in unreported income. The IRS identified this as an abusive Roth IRA transaction and a listed transaction under Notice 2004-8. Yari and his wife filed a joint 2004 tax return without disclosing the transaction, leading to an audit and subsequent notices of deficiency. They settled the deficiency cases and filed amended returns reflecting changes. The IRS assessed a $100,000 penalty under I. R. C. § 6707A for Yari’s failure to disclose the listed transaction. After Congress amended § 6707A, Yari argued the penalty should be recalculated using the amended returns, reducing it to the statutory minimum of $5,000.

    Procedural History

    The IRS assessed the § 6707A penalty on September 11, 2008, and issued a notice of intent to levy on February 9, 2009. Yari requested a CDP hearing, which was suspended in October 2010 due to legislative changes. After the IRS Appeals Office upheld the penalty calculation, Yari petitioned the Tax Court for review. The court had jurisdiction under I. R. C. § 6330(d)(1) to review the penalty, and the standard of review was de novo as the underlying tax liability was at issue.

    Issue(s)

    Whether the penalty under I. R. C. § 6707A for failing to disclose a listed transaction should be calculated based on the tax shown on the original return or on subsequent amended returns?

    Rule(s) of Law

    I. R. C. § 6707A imposes a penalty on any person who fails to include on any return or statement information required under § 6011 regarding a reportable transaction. The penalty for failing to disclose a listed transaction is “75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes). ” I. R. C. § 6707A(b)(1). The statute prescribes minimum and maximum penalties of $5,000 and $100,000 for individuals, respectively.

    Holding

    The Tax Court held that the penalty under I. R. C. § 6707A must be calculated based on the tax shown on the original return, not subsequent amended returns. The court interpreted the statute to mean that the penalty is linked to the tax shown on the return giving rise to the disclosure obligation.

    Reasoning

    The court’s reasoning was based on the plain and unambiguous language of I. R. C. § 6707A, which refers to “the decrease in tax shown on the return. ” The court rejected Yari’s argument that the penalty should be based on the tax savings produced by the transaction as reflected in amended returns. The court found no legislative intent to the contrary and noted that Congress knew how to link penalties to the tax required to be shown but chose not to do so in § 6707A. The court also considered § 6707A a strict liability penalty, and while the result might be harsh in cases of overstated tax, it adhered to the statutory language. The legislative history and related statutes, such as § 6651(a)(2) and (c)(2), further supported the court’s interpretation. The court concluded that the settlement officer did not err in calculating the penalty based on the original return.

    Disposition

    The Tax Court entered a decision for the respondent, upholding the penalty calculation based on the tax shown on the original return.

    Significance/Impact

    The decision in Steven Yari v. Commissioner clarifies the method of calculating penalties under I. R. C. § 6707A for failing to disclose listed transactions. It establishes that the penalty must be based on the tax reported on the original return, which has significant implications for taxpayers and the IRS in assessing and challenging such penalties. This ruling may influence future cases involving similar penalties and underscores the importance of accurate and timely disclosure of reportable transactions. The decision also highlights the strict liability nature of § 6707A penalties, emphasizing the need for taxpayers to comply with disclosure requirements to avoid potential harsh penalties.

  • Kyle W. Manroe Trust v. Commissioner, 132 T.C. 26 (2009): Statute of Limitations and Listed Transactions under I.R.C. § 6501(c)(10)

    Kyle W. Manroe Trust v. Commissioner, 132 T. C. 26 (2009)

    In a significant tax case, the U. S. Tax Court ruled that the statute of limitations for assessing tax on a listed transaction remains open under I. R. C. § 6501(c)(10) if not disclosed, even if the transaction occurred before the section’s enactment. The case involved the Manroes’ short sale transaction, deemed a listed transaction under IRS Notice 2000-44. The court held that the effective date of § 6501(c)(10) applied to the Manroes’ 2001 tax year, despite their argument that the transaction predated the disclosure requirements, emphasizing the importance of timely disclosure for tax avoidance schemes.

    Parties

    Plaintiff/Petitioner: Kyle W. Manroe Trust, with Robert and Lori Manroe as trustees, tax matters partner of BLAK Investments (the partnership). Defendant/Respondent: Commissioner of Internal Revenue.

    Facts

    In December 2001, Robert and Lori Manroe, as trustees of the Manroe Family Trust, engaged in a transaction involving the short sale of Treasury notes. They borrowed Treasury notes, sold them short, and contributed the proceeds along with the obligation to cover the short sale to BLAK Investments, a California general partnership. The Manroes claimed high bases in their partnership interests without reducing them for the obligation to cover the short sale. They then redeemed their partnership interests, claiming significant tax losses on their 2001 and 2002 tax returns. The transaction was identified as a listed transaction under IRS Notice 2000-44, which described similar tax avoidance schemes involving artificial basis inflation in partnership interests.

    Procedural History

    On October 13, 2006, the Commissioner issued a notice of final partnership administrative adjustment (FPAA) to BLAK Investments, determining that the partnership was a sham and lacked economic substance, thus disallowing the Manroes’ claimed losses and imposing penalties. The tax matters partner timely petitioned the Tax Court for review, asserting that the statute of limitations barred the determination of liability for 2001. The Commissioner moved for partial summary judgment on the statute of limitations issue under I. R. C. § 6501(c)(10), while the Manroes filed a cross-motion arguing the inapplicability of this section to their transaction.

    Issue(s)

    Whether the effective date of I. R. C. § 6707A precludes the application of I. R. C. § 6501(c)(10) to the Manroes’ transaction from 2001?

    Whether the Manroes’ transaction is a listed transaction under I. R. C. § 6707A(c)(2)?

    Whether the period of limitations for assessing tax resulting from the adjustment of partnership items with respect to the Manroes’ transaction is open for 2001 under I. R. C. § 6501(c)(10)?

    Rule(s) of Law

    I. R. C. § 6501(c)(10) provides that if a taxpayer fails to include information about a listed transaction on any return or statement for any taxable year as required under I. R. C. § 6011, the time for assessing any tax imposed by the Code with respect to such transaction does not expire before one year after the earlier of the date the Secretary is furnished the information or the date a material advisor meets the requirements of I. R. C. § 6112. I. R. C. § 6707A(c)(2) defines a “listed transaction” as a transaction that is substantially similar to one identified by the Secretary as a tax avoidance transaction under I. R. C. § 6011.

    Holding

    The Tax Court held that I. R. C. § 6501(c)(10) applied to the Manroes’ 2001 tax year because the period for assessing a deficiency had not expired before the section’s enactment on October 22, 2004. The court further held that the Manroes’ transaction was a listed transaction under IRS Notice 2000-44, and thus subject to the disclosure requirements of I. R. C. § 6011. Consequently, the period of limitations for assessing tax for 2001 remained open under I. R. C. § 6501(c)(10) due to the Manroes’ failure to disclose the transaction as required.

    Reasoning

    The court reasoned that the effective date of I. R. C. § 6501(c)(10) was distinct from that of I. R. C. § 6707A, and its application to tax years for which the period of limitations remained open as of its enactment date was consistent with statutory construction principles. The court rejected the Manroes’ argument that the effective date of I. R. C. § 6707A should limit the application of I. R. C. § 6501(c)(10), noting that such an interpretation would render the latter’s effective date meaningless. The court also found that the Manroes’ transaction was substantially similar to the Son-of-BOSS transactions described in IRS Notice 2000-44, despite involving short sales rather than options, as both shared the common goal of inflating basis in partnership interests. The court emphasized that the legislative history of I. R. C. § 6501(c)(10) supported its application to transactions that became listed after they occurred but before the statute of limitations closed. The court further upheld the validity of the final regulation under I. R. C. § 6011, which required disclosure of the transaction on the Manroes’ next-filed return after it became a listed transaction.

    Disposition

    The Tax Court granted the Commissioner’s motion for partial summary judgment and denied the Manroes’ cross-motion for partial summary judgment, holding that the period of limitations for assessing tax for 2001 remained open under I. R. C. § 6501(c)(10).

    Significance/Impact

    This decision underscores the importance of timely disclosure of participation in listed transactions under I. R. C. § 6011 to prevent the expiration of the statute of limitations under I. R. C. § 6501(c)(10). It clarifies that the effective date of I. R. C. § 6501(c)(10) applies to transactions that occurred before its enactment but for which the period of limitations remained open. The case also demonstrates the broad interpretation of what constitutes a “listed transaction,” extending to transactions substantially similar to those identified by the IRS, even if they involve different financial instruments. This ruling has significant implications for taxpayers engaging in tax avoidance schemes, as it emphasizes the IRS’s ability to challenge such transactions even years after they occur if not properly disclosed.