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Answering Tax Questions with Joshua D. Brinen

Feb 8, 2024 | Tax

How Long Do I Have to Hold My Tax Returns?

Well, like any good tax lawyer, I will answer you with, it depends. The normal statute of limitations to hold a tax return is three years. So for three years from the date of filing, you should hold not only your tax returns, but all backup documentation in case of audit. The IRS has the ability to extend the statute of limitations for an additional three years if it assesses that you have substantially underreported your income or substantially overreported your expenses. The IRS also has the ability to extend the statute of limitations indefinitely for two reasons. The first reason is failure to file a tax return. If you fail to file a tax return, the statute of limitations will not begin to run. Once that tax return is filed, the IRS will set the statute of limitations to three years plus an additional three years. The second more insidious way the IRS can extend the statute of limitations indefinitely is if the IRS accuses you the taxpayer of fraud. In the instance of fraud, there is no statute of limitations to audit your tax return.

What is the Step Transaction Doctrine?

The Step Transaction Doctrine is a legal doctrine utilized by the Internal Revenue Service under federal tax law to disregard the structure of a transaction to increase the tax a taxpayer owes. The Supreme Court has famously said a taxpayer has an obligation to pay their taxes as the price of good government. The second part of that quote is that the taxpayer is not required to pay any more than their fair share of the tax. From the beginning, tax attorneys and accountants have been trying to build a better mousetrap to eliminate income tax or estate tax, and so the IRS has been building better mousetraps or better mice. The first case to discuss the Step Transaction Doctrine was Gregory v. Helvering, where the United States Supreme Court re-characterized a transaction as a dividend rather than a capital gain from a business because the taxpayer was trying to avoid tax.

By doing so, Supreme Court created a tax deficiency that could be collected. In the fifties, in the Kimbell-Diamond Mining case v. Commissioner, the court articulated the Step Transaction Doctrine as without regard to whether the result is imposition or relief from taxation. Courts have recognized that where the essential nature of a transaction is the acquisition of property, it will be viewed as a whole and closely related steps will not be separated either at the instance of the taxpayer or the taxing authority. Therefore, the United States Supreme Court has told the Internal Revenue Service, disregard the steps and figure out what the tax should be. Thus, the Step Transaction Doctrine is a powerful and dangerous tool that must be considered when structuring a transaction.

What is the Economic Substance Doctrine?

The Economic Substance Doctrine is another doctrine often used in conjunction with the Step Transaction Doctrine that the Internal Revenue Service employs to determine whether a tax structure, tax shelter, or tax strategy is abusive. It applies to a transaction to see if there is quote, “Economic substance to the transaction.” Economic substance is found if the transaction changes in a meaningful way apart from federal tax income effects, the taxpayer’s economic position, and that the taxpayer has a substantial purpose apart from federal income tax effects for entering into such transaction. The Economic Substance Doctrine began as case law, but has been codified in 26 USC Section 7701. It is important to note that under the Economic Substance Doctrine, the quote, “Potential for profit of a transaction shall be taken into account in determining whether the requirements of the Economic Substance Doctrine are met with respect to the transaction. Only if the present value of the pre-tax profit from the transaction is substantial in relation to the present value of the expected tax benefits that would be allowed if the transaction was respected.”

Is Economic Substance a Statute or Common Law?

The Economic Substance Doctrine is both common law and a statute. The Economic Substance Doctrine grew out of the Step Transaction Doctrine and was argued in court for many years. Congress, taking hold of these rulings codified it in 26 USC 7701. When defending a Step Transaction Doctrine or an attack with the Economic Substance Doctrine or defending the Step Transaction Doctrine against both or either, you must look at both the common law and the statute. While they are nearly identical, both must be addressed to a taxing authority.

Where Should I Look For Answers to My Tax Questions?

First, I would encourage you to find a competent accountant or tax lawyer to answer your tax questions. The tax law is a large and complicated body of law that requires constant updating and constant research. However, if you want to go to the Google School of Tax Law, you should be aware of what has higher presidential value and lower precedential value. The most binding precedential value is case law followed by the Internal Revenue Code found at 26 USC. The next level is regulations which interpret the statutes found of the Internal Revenue Code. The regulations are grouped into three groups. The most important regulation is the permanent or final regulation. The next most important group is the temporary regulation, and you should be mindful because temporary regulations need to be replaced with permanent or final regulation. The third regulation type is called proposed regulations. Proposed regulations are more persuasive value and the guidance that the Internal Revenue Service wants to use, but has not gone through the public review and comment period or is not finished with that period yet.

After regulations, you have the Internal Revenue Manual. The Internal Revenue Manual and the guidance under the Internal Revenue Bulletin are grouped in the following groups. Most important group under the Internal Revenue Bulletin is the Revenue Ruling, which is actually an Internal Revenue Service’s guidance on the law. Revenue procedures are next, which is an official statement of the procedure, but not the substance of the law that the Internal Revenue Service will use, and will also explain the rights and duties of the taxpayer under the code, related statutes, regulations, and treaties that are a matter of public knowledge. Then there’s the errata of notices and announcements. The Internal Revenue Manual is binding on the Internal Revenue Service and is their playbook. It’s how they must enforce all of the laws and regulations.

Below the Internal Revenue Manual and the Internal Revenue Bulletin are private letter rulings. Private letter rulings are very interesting. They’re very specific and they deal with a certain amount of facts that if you can find a similar one or close to similar are persuasive authority, but private letter rulings are only binding on the individual that asked for the guidance. After a private letter ruling is the technical advice memorandum, which responds to a technical or procedural question that developed during the examination of a taxpayer’s return. The technical advice Memo only addresses issues that are covered by previously published authority. Finally, the Chief Council Advice in which the Chief Council drafts numerous sites of internal advice issued to the attorneys and revenue agents within the Internal Revenue Service. These documents have next to no precedential value and cannot be relied on by taxpayers.

What’s the Penalty for Failing Economic Substance?

The penalty for the underpayment of tax in addition to the tax itself is an amount of 20% of the underpayment under Internal Revenue code 6662A. However, if any portion of this transaction fails the economic substance test and if the relevant facts affecting the tax treatment are not adequately disclosed in the return or in a statement attached to the return, then the penalty jumps to a whopping 40% under Internal Revenue Code 6662I one and two. This is likely intended to increase disclosure and save the IRS time and resources

If you have a tax-related questions, feel free to contact us here.


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I formerly worked as a satellite employee from my home state of New Jersey. I ended my employment with my former employer in 2016. In 2018, I was sued by my former employer for $1.1 million in Illinois State Court. I was referred to Brinen & Associates, LLC by a friend who is a client of the firm. Brinen & Associates, LLC came highly recommended. I contacted Joshua Brinen and then had a consultation at his office with his colleague Mark White. Together, Messrs. Brinen and White explained my options...

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