The IRS is a government body charged with the responsibility of auditing tax responsibilities on individuals and corporate organizations. Within the IRS office, there exists an appeal office which is mandated to deal with cases of appeals from the taxpayers without the need for litigation. This away the government gets public confidence in the integrity and efficiency in tax collection.
In situations when one is not satisfied with the tax report by the local IRS, it is more economical and time saving to appeal to the appeal office instead of prosecuting matters in courts. If the amount of tax including the penalties exceeds $25, 000 it is required that the affected person write an official protest letter for consideration by the appeal office. If the amount of tax is lower than $25, 000 then the taxpayer can write a small case request (Hopkins, 2008).
The appeal office just like the court of appeal is an independent office which concentrates on rendering justice to the cases presented without prejudice of the findings of the local IRS. It is important the taxpayer follow the stipulated procedures during appeal to avoid risking penalties from the appeal office which can go to as high as $5,000.the protest letter should be delivered within 30 bays from the time the IRS audit was submitted. The appeal office does not consider some reasons for noncompliance if they happen to be based on moral values, religion, political and constitutional arguments. The letter should clearly indicate the position of the taxpayer and should include the following information (Daily, 2009).
The name of the complainant and his full address including a day time contact number.
A written statement showing that you had resolved to appeal the report of the IRS.
Copies of letters indicating your proposals and indicating the finding of the IRS you are not comfortable with.
The duration you have been paying the tax in mention.
A list of the items you do not agree with stating the reasons for disagreement.
The facts supporting the issues you disagree.
The authority or legal reference you are quoting to justify your appeal.
A signature indicating that one is aware of the penalties which may arise and a declaration that the information submitted is true.
Our client Mr. Carrot is a renowned businessman across the State Of Michigan. In February 2010, Mr. Carrot formed a Michigan corporation by the name Celery Corporation (hereafter referred as Celery). Few months later celery formed a Michigan partnership under the name Cabbage Investments hereafter referred as Cabbage) with his son Dr. Stephen Bulldog. Cabbage acquired $50,000,000 in long foreign currency options another $50,000,000 option in short foreign currency. In addition, Cabbage invested another $ 10,000,000 in cash to the partnership with his son contributing only a dollar. Two months later, the partnership was liquidated before the calendar year had lapsed. Cabbage distributed foreign currency estimated to be $1,000,000 and another $10,000,000 in cash. Celery thus suffered a huge loss as a result of sale of the contracts.
In the IRS report, the auditors failed to consider the loss suffered by our client, Celery, and dismissed it as a capital loss resulting to huge profit responsibility to Mr. Carrot. In addition a 40% penalty was passed to him. The tax responsibility and the penalty add a lot of burden to Mr. Carrot who is struggling to overcome his recent loss and he feels that your office should consider revising his tax responsibility. Mr. Carrot wants your office to consider the fact that he was the biggest contributor to the partnership and the sale of contracts adversely affected the performance of his business.
Mr. Carrot redeemed only $60,000,000 and left the rest $50,000,000 to his son who was a partner to Cabbage. The auditors attributed his son’s shares to his father and therefore considered the distribution of the redemption as a dividend payment thus treating it as taxable income rather than considering the whole process as a legitimate exchange. Our client wants your office to consider the fact that Mr. Carrot wished to retire from the corporation and leave his son as the manager and proprietor of Cabbage and by so doing took some of the money from the corporation to fund his retirement package and the balance was given to his son Dr. Stephen Bulldog.
Partnership agreement documents, exhibit 1
With reference to the documents signed by Mr. Carrot and other partners during the formation of Cabbage, Mr. Carrot had every right to demand for liquidation of the partnership at any time he felt the need to do so and the partners appended their signature to the agreement (Daily, 2011).
Copies of cash receipts
Enclosed please find the copy of cash receipt which was used to settle the foreign currency contacts to cover for the loss incurred by Cabbage.
Signed documents of foreign currency contract
Enclose please find an attachments of the copies consisting the memorandum of understanding between Mr. Carrot and other parties. The MOU has the details of the contract, the value of the contract and a signed copy of the receipt of
Tax compliance certificate
We have enclosed the IRS compliance certificates belonging to both Celery and Cabbage for the last six years. Note that the latest certificate had all the parties held responsible for tax compliance.
Reasons for appeal
Mr. Carrot feels that the tax responsibility was overestimated and the underpayment amounted to the penalty awarded to him was exaggerated and requests that your office to kindly put the following considerations in his appeal.
The audit report by the IRS agents assumed that the loss incurred by Mr. Carrot was as a result of capital loss and not ordinary income and therefore treated the whole amount including the $11,000,000 which was used to settle contracts. The taxable amount should have excluded the huge loss suffered by the company and translating it to capital loss doubled the tax responsibility (Bell, 2009).
The IRS audit failed to consider that the short foreign currency was subject to ordinary income and thus the tax was supposed to be remitted.
Mr. Carrot had every right to invest in short foreign currencies and the audit report regarded the transaction had no economic substance. This assumption by the agents was prejudiced and treated Mr. Carrot as a schemer who wanted to lower his tax responsibility by way maximizing his short foreign currency options. (David, 2001).
We write to appeal to your office to review the taxable income for our client Mr. Carrot and consider the following
Internal revenue code of 1954
Section 302(b) (3) states that if case a taxpayer terminates the whole of his interest, the transaction is deemed as an exchange or a sale.
When the company was liquidated, Cabbage was not responsible of the operations happening thereafter. The taxable income should only have included the transactions which took place during the time Cabbage had its business. Upon liquidation, charging Mr. Carrot with the responsibility of paying the tax would be violating the above section of the internal code of 1954.we therefore request your office to consider that after liquidation had taken place, Mr. Carrot was no longer obligated to pay tax on behalf Cabbage (Battle, 2006).
Section 302(c) (2) (A) (I)
This section state that in case the majority shareholder decide to quit his interest in an organization, the receiving person or persons takes the full responsibility of the operation and statutory requirements including compliance to the tax laws stipulated by the Internal Revenue Service Cabbage was liquidated before the tax year was over and thus it is the responsibility of the Celery Investment to shoulder the burden of responsibility that was left by Cabbage.
Referring from the internal code of 1986, that is, I.R.C 318 (a) clearly states: if the redeeming shareholder is a registered dealer in securities, then an exchange or any transaction that may suggest a sale amounts to capital gain (I.R.C section 1221) but the in case of dividend distribution within the definition of the I.R.C section 316 as to be taxed as ordinary income. Pursuant to that clause, Mr. Carrot is by no way a dealer in securities and the auditors faulted by treating the transaction as commercialized dealing with securities and thus recommended taxation equivalent of capital gains. Furthermore it would also be wrong to consider the transaction to be a dividend distribution since it would amount to even higher tax figures.
Case of commissioner versus Lynch
On 17th December 1975, Lynch William sold half of his shares to his son and soon after, him and his wife resigned from the board of directors of W. M. Lynch Co. after two weeks the remaining shares were redeemed by Lynch as cash and thus his son was left as the only shareholder. In an effort to retain his father’s exemplary leadership in the company, Lynch signed a five year contract with his son from which he was to get regular payment for his consultancy services.
He was to get $500 every month and was entitled for the corporate health insurance scheme. He resigned in 1979 one year before the end of his contract. After only a year fro the redemption, Lynch only went to the offices twice a week and sometimes he took even longer. After his resignation, he got a payment of $4,487 in net premiums. The tax court ruled that Lynch was not an employee but acted as an independent contractor since the company did not have the powers to control his actions and had no financial interest in the corporation. The conclusion was that Lynch did not retain an interest prohibited by section 302(c) (2) (A) (i).The services rendered by Lynch were based on the consultancy agreement and constituted a prohibited interest and thus relied on the judgment made on Lewis versus commissioner which had stated that ‘when deciding if a prohibited interest have been followed under section 302(c) (2) (A) (i), it must be checked whether a former stockholder had retained a financial interest in the company’s control’
The tax court tried to determine whether a post-redemption employment provided grounds to indicate financial interests in the redeeming company in an effort to interpret section 302(c) (2) (A) (i) but later the ninth circuit judges eventually concluded that the law did protect Lynch from the internal affairs of the corporation.